Does Part D abet advantageous selection in Medicare Advantage?

Area of Science:

• Health Economics
• Public Policy
• Health Insurance Markets

Background:

• Medicare Advantage (MA) risk-adjustment formulae aim to mitigate selection bias by adjusting payments based on enrollee health status.
• However, factors excluded from risk adjustment, such as prescription drug utilization, can create opportunities for advantageous selection.
• The introduction of Medicare Part D (prescription drug benefit) altered the landscape of factors available for plans to exploit.

Purpose of the Study:

• To investigate whether the introduction of Medicare Part D facilitated advantageous selection in Medicare Advantage plans.
• To quantify the impact of advantageous selection, driven by prescription drug utilization, on MA enrollment.
• To assess how consumers responded to new selection incentives created by the interplay of MA and Medicare Part D.

Main Methods:

• Analysis of Medicare beneficiary enrollment data before and after the implementation of Medicare Part D.
• Econometric modeling to estimate the relationship between prescription drug use and MA plan selection.
• Focus on beneficiaries with high prescription drug utilization, identifying potential targets for advantageous selection.

Main Results:

• Evidence suggests that Medicare Part D provided a mechanism for MA plans to increase advantageous selection.
• MA market share increased among beneficiaries taking drugs associated with strong advantageous selection incentives.
• The estimated increase in MA enrollment probability for the average beneficiary due to this selection effect was approximately 7.1%.

Conclusions:

• The exclusion of prescription drug utilization from MA risk adjustment, combined with Medicare Part D, created significant advantageous selection incentives.
• Beneficiary responses indicate a strategic shift in enrollment towards plans that could exploit drug utilization patterns.
• Policy implications include the need to re-evaluate risk-adjustment methodologies to account for all relevant health factors and prevent market distortions.