“For the vast majority of seniors, the new benefit is working.”

1. “For the vast majority of seniors, the new benefit is working.” -Mark McClellan, CMS, February 2006 "It's a disaster, Medicare Part D - D is unfortunately for disaster." - Sen. Chris Van Hollen (D-Md.), March 2006

2. Medicare Drug Plan Premiums Questions: 1)What is the relationship between premiums and generosity? 2)How has it changed 2006-2007? Kosali Simon Assistant Professor, Department of Policy Analysis and Management Cornell University and NBER

3. Wide Variation in Premiums for “Actuarially Identical” Plans Variation in Premiums for Actuarially Identical Plans 2006: Mean $33, Standard Deviation $11

4. 2007: Mean $29, Standard Deviation $7

5. Wide Variation in Plan Generosity (Out of Pocket Spending, 2006)

6. 12 Minute Plan • Basics of the market • Hypotheses • Why premiums (dictated by CMS) are reflective of prices set by firms • Method • Dataset • Results

7. Medicare PDPs- Basics • Many plans (1,429 in 2006 and 1,875 in 2007) • 34 regional markets • Many enrollees (16.5 M, including duals) • Annual open enrollment • Several comprehensive reviews • Eg Gold (2006), Hoadley et al (2006), MedPAC (2006, 2007)

8. The Standard Design of Part D Drug Coverage Catastrophic coverage DH Plans with gap coverage ICZ Deductible Premium

9. Sources of Variation in Plan Generosity • Reduction in out of pocket costs for known and unknown drug needs • Plans vary in base prices for drugs, extent of formulary coverage, tiering, gap coverage • Non price features • (observed to some degree) step therapy, prior authorization, quantity limits • (unobserved) customer service, reputation Expect a tradeoff between generosity and premium in equilibrium

10. Premiums • Premiums for consumers determined after a subsidy process (average subsidy 75%, additional subsidies to low-income beneficiaries) (Firm’s objective function is complex, SR and LR profits, eye to MA market, regional differences etc) • Step 1: firm submits bid stating expected cost of insuring a beneficiary (with CMS ‘reinsurance’ covering 80% of catastrophic costs) • Step 2: Also tell CMS the full cost had CMS not paid 80% of the catastrophic zone • CMS will make sure that average subsidy is 74.5% of total premium • Step 3: Determine the beneficiary premium for that plan by formula =>Premium will be bid minus constant, under certain assumptions

11. Method & Data • Measuring generosity • Calculate an average out of pocket measure, 10 lists for 2006, 34 for 2007 • Non price: include measures of utilization hurdles, insurer f.e. • LHS variable: Monthly premium • Since premiums are fixed within a region, control for regional characteristics or f.e. Correlate standard errors by insurer • Dataset is at insurer by plan by region (1,429 observations in 2006, 1,875 in 2007)

12. Results First, regressing premiums on each OOP measure, one at a time, yields positive coefficients, implying generosity and premiums negatively correlated 2007 results similar (out of 34 lists, 18 +***, 2-**, 10+, 4-)

13. Second, regressions separating sample by type of plan, including utilization hurdles, regional characteristics. Premium-generosity relationship seen on previous slide persists. Results when measures other than OOP costs are used

14. Third set of models includes fixed effects (region, insurer) or clusters standard errors by insurer -Region f.e. do not change results qualitatively -Insurer f.e. reverse sign significantly on most OOP measures (but not the average OOP measure)

15. Discussion and Conclusions • Using several different measures of OOP drug costs generosity is initially not positively related to premiums • Models estimated using within-insurer variation shows expected tradeoff • Possible reasons • Risk reduction mechanisms, ulterior motives, complex long run objective functions • Implications • Are plans that cost more relative to generosity driven out of the market? • What is the generosity-premium relationship when taking enrollment into account?