Government Payments and Insurer Benefit Design in Medicare Part D

This paper demonstrates health insurers’ incentives to design benefits that differentially appeal to profitable enrollees and deter unprofitable enrollees in Medicare Part D. A system of diagnosis-specific payments was meant to neutralize insurer benefit design incentives by paying insurers more for the sick than for the healthy. These diagnosis-specific payments were held steady even as treatment costs for diagnoses rose or fell with the entry of new drugs or the onset of generic competition. As a result, some diagnoses were clearly profitable for insurers, while others were clearly unprofitable. I show that Part D insurers covered drugs that treat the profitable at higher rates and lower copayments than drugs that treat the unprofitable. ∗The author gratefully acknowledges the advising of Joseph Harrington, Elena Krasnokutskaya, Stephen Shore, Thomas Buchmueller, Richard Spady, and Tiemen Woutersen. Gerard Anderson, Jonathan Weiner, Brian Pinto, and staff at Thomson Reuters assisted in accessing the data. This paper benefited from the editorial assistance of Varanya Chaubey.