A Medicare Drug Incentive That Leads to Greater Hospitalizations


Many studies have demonstrated what economics theory tells us must be true: When consumers have to pay more for their prescriptions, they take fewer drugs. That can be a big problem.

For some conditions — diabetes and asthma, to name a few — certain drugs are necessary to avoid more costly care, like hospitalizations. This simple principle gives rise to a little-recognized problem with Medicare’s prescription drug benefit.

For sicker Medicare beneficiaries, the Harvard economist Amitabh Chandra and colleagues found, increased Medicare hospital spending exceeded any savings from reduced drug prescriptions and doctor’s visits. Consider patients who need a drug but skip it because they feel the co-payment is too high. This could increase hospitalizations and their costs, which would make them worse off than if they’d selected a higher-premium plan with a lower co-payment.

Though just a simplified example, this is analogous to what Medicare stand-alone prescription drug plans do. They achieve lower premiums by raising co-payments. This acts to discourage the use of drugs that would help protect against other, more disruptive and serious health care use, like hospitalization.

Studies show that insurers, many of which are for-profit companies after all, are using such incentives to dissuade high-cost patients from enrolling or using the benefit. There’s evidence this occurs for Medicare’s drug benefit, as well as in the Affordable Care Act’s marketplaces.

 The most popular type of Medicare drug coverage is through a stand-alone prescription drug plan. A stand-alone plan never has to pay for hospital or physician visits — those are covered by traditional Medicare. Another way to get drug benefits from Medicare is through a Medicare Advantage plan that also covers those other forms of health care and is subsidized by the government to do so.

Because of this difference, stand-alone drug plans are less invested than Medicare Advantage plans in keeping people healthy enough to avoid some hospital visits.

A study by the economists Kurt Lavetti, of Ohio State University, and Kosali Simon, of Indiana University, quantifies the cost. Compared with Medicare Advantage plans, stand-alone drug plans charge enrollees about 13 percent more in cost sharing for drugs that are highly likely to help patients avoid an adverse health event within two months. They charge up to 6 percent more for drugs that help avoid adverse health events within a year.

Of course, people have choices about plans. Those who have selected a stand-alone drug plan, as opposed to a Medicare Advantage plan, have done so voluntarily. Why do some make this choice?

One answer is that some people are not comfortable with the more narrow networks Medicare Advantage plans offer, with their fewer choices of doctors and hospitals. By choosing a stand-alone drug plan, they can remain in traditional Medicare, which has an open network.

In addition, consumers are generally more attracted to lower-premium plans than higher ones, even if the difference is exactly made up in co-payments. This may be because premiums are easier to understand than cost sharing. Moreover, premiums reflect a sure loss — you must pay the premium to remain in the plan. A higher co-payment, on the other hand, won’t necessarily lead to a loss because you may not use a service.

The appeal of lower premiums is an incentive for stand-alone drug plans to reduce them and increase co-payments. But that can dissuade those who need medications from filling prescriptions and taking them.

Part of the purpose of Medicare’s drug benefit is to encourage enrollees to take prescription drugs that can keep them out of the hospital. In July 2003, promoting the legislation that created Medicare’s drug benefit, President George W. Bush articulated this point. “Drug coverage under Medicare will allow seniors to replace more expensive surgeries and hospitalizations with less expensive prescription medicine,” he said.

But the design of Medicare’s drug benefit includes stand-alone plans that aren’t liable for hospital costs, so they don’t work as hard to avoid them. Encouraging more beneficiaries into comprehensive plans — through Medicare Advantage — or offering a drug plan as part of traditional Medicare itself would address this limitation.

 

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s