People without Medicare may decide whether or not to obtain health insurance, and anticipated need is certainly a factor in this choice. However, most non-Medicare individuals do not make a separate decision about whether to obtain coverage specifically for prescription drugs. The vast majority who have insurance are covered through employer plans or Medicaid programs and automatically receive whatever level of drug coverage their insurance provides. The primary exceptions are people whose employers offer cafeteria plans where drugs are an option, and people who have a choice of benefit packages when they seek out individual policies.
The story is similar for those Medicare beneficiaries who have employer-based coverage or Medicaid: they often do not control whether or not drugs are a part of their benefit package. However, a larger proportion of Medicare beneficiaries do not have access to these two sources of coverage. These beneficiaries must decide whether to obtain coverage to supplement their Medicare benefits, and whether that supplemental coverage should include drugs. It would be reasonable to expect that this decision would be influenced by the amount of health and drug spending that the beneficiary expects to incur. However, as Chapter 1 discussed, Medigap rules may make coverage more difficult to obtain for those in poor health. It is also likely that many Medicare beneficiaries who choose to buy supplemental coverage that includes drug coverage do so because they want to insure against the possibility of having high costs, not because they already know that their costs will be high.
Research to date has not focused specifically on the question of adverse selection into prescription coverage by Medicare beneficiaries. There is, however, a substantial body of research on selection into Medicare supplemental policies independent of drug coverage. Recent studies of Medicare HMO enrollment find strong evidence of favorable rather than adverse selection – that is, that enrollees in Medicare HMOs are actually healthier than average.14 Indications of adverse selection in the Medigap market have been found by some researchers but not others.15 Most researchers assume that there is no selection into retiree plans given the nature of plan sponsorship, but one recent work finds evidence of adverse selection in this market.16 These thoroughly mixed findings do little to clarify the issue of possible adverse selection into prescription drug coverage.
As Chapter 1 showed (see Tables 1-8 through 1-11), Medicare beneficiaries are slightly more likely to have coverage if they report poorer health status or more chronic conditions, but many of the differences are not statistically significant. Further analysis is needed to explore whether there is evidence of adverse selection when controlling for other factors.
Given the small differences in health status between beneficiaries with and without coverage, the spending differences between the covered and noncovered cannot be explained by assuming that sick people obtain coverage and healthy people forgo it. Furthermore, data presented earlier in this chapter in Tables 2-7 through 2-11 indicate poor health does not appear to explain the significant differences in utilization and spending among the covered and uncovered.17 This suggests that other factors, such as higher demand by those with coverage and lack of access by those without coverage, are also at work.
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