Participation and crowd-out in a Medicare drug benefit: simulation estimates

Health Care Financing Review, Winter, 2003 by Dennis G. Shea, Bruce C. Stuart, Becky Briesacher

INTRODUCTION

Numerous studies have examined the total costs of a Medicare prescription drug benefit, however, few have focused on the expected participation of beneficiaries under a voluntary plan or the extent that the new offering will crowd-out existing forms of coverage. This information is important for three reasons. First, identifying who is likely to enroll in the Medicare drug plan provides important insights into who is likely to benefit and who is likely to be left behind. It is currently unclear how much a Medicare drug plan would assist key groups with few current opportunities for coverage, such as beneficiaries living in rural areas, near-poor households, and those with significant chronic health problems. Second, understanding crowd-out is essential if the intention of the Medicare drug benefit is to increase overall insurance coverage rather than merely replace private drug coverage. Concerns about the possibility that employers would drop prescription drug coverage, evident in an early U.S. Congressional Budget Office assumption that three-quarters of persons currently covered by retiree health insurance prescription drug plans would drop their plans, grew during policy discussions (Crippen, 2000). The final bill includes subsidies to employers to maintain their prescription drug coverage for retirees. Clearly, the cost of and participation in the Medicare drug plan will depend on the degree that existing forms of drug coverage are maintained.

BACKGROUND

Nearly all research into crowd-out examines the relationship between private health insurance and Medicaid eligibility expansions for children and pregnant women. The work characterizing employer responses to the public program expansions is particularly relevant. Medicare drug benefit proposals have provided incentives to prevent employers from reducing retiree drug coverage, although that process is already underway (Stuart et al., 2003). Cutler and Gruber (1996b) found no evidence of employers choosing to forego offering insurance benefits resulting from eligibility expansions. Rather, crowd-out resulted from enrollees' dropping private coverage to take up public coverage. A more recent study assessed the effect of the Medicaid expansions on the offer decisions by small firms. Shore-Sheppard, Buchmueller, and Jensen (2000) used a two-stage estimation technique to assess how the availability of Medicaid coverage affects the firm decision to offer health insurance to workers, plan generosity, and the take-up decision by workers who are offered health insurance benefits. They find that Medicaid eligibility expansions did not affect the insurance offer decision by small (up to 100 employees) firms. However, the authors do find evidence of crowd out occurring at the level of plan generosity. Finally, Dubay and Kenney (1997) highlight the important fact that crowd-out varies among the different subgroups of the population. They obtained crowd-out estimates of 27 percent for pregnant women with incomes between 100-133 percent of the Federal poverty level (FPL), but estimates of 59 percent for pregnant women with incomes between 134-185 percent of the FPL. These results suggest that crowd-out effects increase significantly with income. Rask and Rask (2000) also find evidence of crowd-out of private insurance where the magnitude of crowd-out varies in relation to income level.

Thus, research on Medicaid and crowd-out suggests that some collapsing of the private insurance market is likely and that a primary source may be the response of individual Medicare beneficiaries, rather than their employers. Research also suggests that crowd-out will vary among different population groups.

DATA AND METHODS

Our study differs from the previous Medicaid studies (Cutler and Gruber, 1996a and 1996b; Shore-Sheppard et al., 2000; Dubay and Kenney, 1997; Dubay, 1999; Rask and Rask, 2000; Blumberg, Dubay, and Norton, 2000) since we are examining a policy not yet in effect, rather than analyzing one already in place. In this section we provide an overview of our model, followed by details on the simulation of plan participation. The other components of the model are then described.

Model Overview

The basic components of our model include a base case data set, a spending model, and a participation model. The base case data is a relatively simple inflation of data from the 1999 MCBS to the year 2004 (1) based on trends in income, population, and spending. The spending model estimates the impact of a given prescription drug plan on each individual's drug spending. Those estimates depend on the features of the plan (e.g., deductibles, coinsurance) as well as behavioral assumptions about the impact of drug coverage on drug spending.

The participation model estimates whether an individual decides to participate in a Medicare drug benefit. Those estimates depend on estimated out-of-pocket drug spending with and without the Medicare plan, estimated drug plan premiums with and without the Medicare plan, estimated benefits from reduced drug costs risk, and assumptions of individual's preferences for avoiding risk.