The Unintended Effects of the Medicare Part D Low Income Subsidy

Abstract

Objectives: Medicare Part D is the voluntary program that provides insurance for prescription drugs to 37 million US elderly. This form of public insurance is delivered exclusively through a choice-based private insurance market, where Medicare pays various types of subsidies. The objective of this paper is to analyze how the subsidy paid to low income enrollees induces insurers to distort their plan premiums. Methods: Combining both an analysis of the incentives created by the different regulations and empirical evidence obtained from plan level data for the years between 2006 and 2013, the paper evaluates the presence of premium distortions associated with insurers response to the low income subsidy. Results: The findings indicate that insurers cluster premiums at the value that maximizes the rents they earn on enrollees receiving the low income subsidies. Moreover, insurers use the possibility of offering multiple insurance plans to manipulate the amount of the subsidy and increase further their rents. Conclusions: This study indicates the need to reform the subsidy system in Medicare Part D and offers guidance on the essential elements of the low income subsidy reform.