Packet - Economics - Johns Hopkins University

Strategic Benefit Design and Drug Prices in Medicare Part D
Colleen Carey
Government Payments and Insurer Benefit Design in Medicare Part D (JMP)
This paper demonstrates health insurers’ incentive to design benefits that differentially appeal
to good risks (the healthy) and deter bad risks (the sick) in Medicare Part D. I extend
prior theory to show that insurers in Part D will cover drugs taken by good risks at high rates
and low copays while covering drugs taken by bad risks at low rates and high copays. Empirical
support for benefit design theory has been lacking due to several econometric challenges, but
special features of Medicare Part D allow me to verify the theoretical predictions. Most importantly,
inaccuracies in Part D’s system of diagnosis-specific payments, which was set using
inaccurate data, define certain diagnoses as good or bad risks. Secondly, because drugs are
closely associated with diagnoses, a Part D insurer’s incentives for a particular drug can be
inferred from the risk type of the diagnosis the drug treats. Finally, insurer incentives should
be strong in Part D because Medicare beneficiaries with highly persistent drug needs choose
plans on the basis of coverage and copay for certain drugs. Using the risk types implied by
the payment system, I show that, consistent with the theory, Part D insurers cover drugs that
treat good risks at higher rates and lower copayments than drugs that treat bad risks. This
effect is strong even for drugs subject to special benefit design regulations.
Drug Price, Bargaining Power, and Risk Type in Medicare Part D (in progress)
According to prior theoretical and empirical evidence, health insurers cover services that
appeal to good risks (the healthy) at high rates and low copays while covering services that
appeal to bad risks (the sick) at low rates and high copays. This paper incorporates an
upstream medical provider from whom the insurer must purchase services at a price set by
Nash bargaining. In this setting, providers of a service that appeals to good risks demand
higher prices while providers of a service that appeals to bad risks accept lower prices. When
provider bargaining power is high, the reaction of service price to risk type is strong, whereas
weak providers lead to a weaker relationship between risk type and service price. I test these
theoretical predictions using Medicare Part D. As in previous work, the risk type of each drug
is derived from Part D’s inaccurate diagnosis-specific payment system.
From the Peaks to the Valleys: Cross-State Evidence on Income Volatility
Over the Business Cycle (joint with Stephen Shore, forthcoming in ReSTAT)
Counter-cyclical variation in idiosyncratic labor income risk could generate substantial
welfare costs. Following past research, we infer income volatility – the variance of permanent
income shocks, a standard proxy for income risk – from the rate at which cross-sectional
variances of income rise over the life-cycle for a given cohort. Our novelty lies in exploiting
cross-state variation in state economic conditions or state sensitivity to national economic
conditions. We find that income volatility is higher in good state times than bad; during good
national times, we find higher volatility in states more sensitive to national conditions.