Predicting risk selection following major changes in Medicare

The Medicare Modernization Act of 2003 created several new types of private insurance plans within Medicare, starting in 2006. Some of these plan types previously did not exist in the commercial market and there was great uncertainty about their prospects. In this paper, we show that statistical models and historical data from the Medicare Current Beneficiary Survey can be used to predict the experience of new plan types with reasonable accuracy. This lays the foundation for the analysis of program modifications currently under consideration. We predict market share, risk selection, and stability for the most prominent new plan type, the stand-alone Medicare prescription drug plan (PDP). First, we estimate a model of consumer choice across Medicare insurance plans available in the data. Next, we modify the data to include PDPs and use the model to predict the probability of enrollment for each beneficiary in each plan type. Finally, we calculate mean-adjusted actual spending by plan type. We predict that adverse selection into PDPs will be substantial, but that enrollment and premiums will be stable. Our predictions correspond well to actual experience in 2006.