The majority of Medicare beneficiaries with supplemental insurance provided by a third-party have some prescription drug (Rx) coverage. For those who purchase insurance individually, Rx coverage is highly unlikely. This presents a conundrum: why do third-party plans overwhelmingly include Rx coverage, while individually purchased plans do not? One possibility is that risk adjustment in the individual market increases the premium for high-risk individuals so that they decide not to purchase drug coverage. This study assesses the role of Rx premium risk adjustment in access to supplemental drug coverage. Insurance plan choice was modeled using a multinomial logit. Premiums were modeled using OLS. Predicted premiums were corrected for unobserved selection with a Heckman Two-Step. Data was drawn from the 1995 Medicare Current Beneficiary Survey. Those who buy individual supplemental insurance policies with a Rx benefit are younger with better self-rated health and fewer ADLs. Predicted premiums for the drug group for a policy with a Rx benefit ($1,415) was significantly less than for the non-drug group ($1,599). The mean predicted increase in premium associated with a drug benefit for the purchasers ($280) is significantly lower than for those who opted not to purchase drug coverage ($472). In the individual supplemental insurance market, insurers are generally free to experience rate policies. As a result, relatively unhealthy Medicare beneficiaries forgo prescription drug coverage due to high, though perhaps actuarially fair, premiums. This analysis suggests several possible methods for extending a prescription drug benefit through the existing Medicare structure, including the use of subsidies.
Learning Objectives: Understand how risk adjustment of Medigap plans with prescription drug benefits leads to reduced coverage.
Keywords: Insurance, Access to Care
Presenting author's disclosure statement:
Organization/institution whose products or services will be discussed: None
I do not have any significant financial interest/arrangement or affiliation with any organization/institution whose products or services are being discussed in this session.