Filed Under:Health Insurance, Medicare

Researcher: Older Medicare drug plans cost more

(AP Photo/FBI, Matthew Coleman)
(AP Photo/FBI, Matthew Coleman)

Insurers in the Medicare Part D prescription drug plan market may be counting on the idea that enrollees who stick with the same plan will put up with higher prices.

A researcher -- Keith Marzilli Ericson of Boston University -- has come to that conclusion in a paper on the Medicare drug plan market. The National Bureau of Economic Research has posted the paper behind a paywall on its website. 

Ericson suggests in the paper that the way the Part D market works could give observers ideas about how the government health insurance exchanges, or Web-based insurance supermarkets that could be created by the Patient Protection and Affordable Care Act (PPACA), would work.

The Part D program has already created a kind of competitive, government-run exchange for private insurers that want to sell drug coverage to Medicare enrollees, Ericson says.

Medicare Part D program rules prohibit insurers from offering introductory discounts to gain market share, but Ericson says an insurer still has an incentive to find ways to use a subtle "invest then harvest" marketing strategy: setting initial rates low to attract first-time enrollees, then raising prices substantially once the insurer has a base of enrollees who are "stuck in place."

An analysis of actual Medicare Part D prices shows that "plans in their fifth year charge an additional 10 percent, or about $50, per year [more] than equivalent, newly introduced plans," Ericson says.

The factors that contribute to consumer inertia include psychological factors, such as procrastination, as well as the time and effort needed to change plans, Ericson says.

If Medicare managers let Part D insurers charge low introductory rates, that could discourage insurers from entering the market, because the insurers that already had built up substantial bases of enrollees using the low introductory rates could count on inertia to help keep most of the initial enrollees stuck in place, Ericson says.

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