There are a number of reasons why people with prescription drug coverage might have higher utilization and spending than people without coverage:
- People who anticipate large drug expenditures might be more likely to seek drug coverage than people who do not expect to spend much on drugs. This phenomenon is known as adverse selection or self-selection.
- More prescriptions, or prescriptions for more costly drugs, might be written for people with coverage. This could be because physicians consider a patient’s coverage when deciding on appropriate treatment. People with coverage may also be more likely to request drug therapies, especially more costly therapies. Higher demand by the consumer in these situations is also known as moral hazard.
- People without coverage may be less likely to fill the prescriptions they receive, or they may make a prescription last longer by not taking the recommended dosage. Those who have no health insurance at all (a large share of the nonelderly without drug coverage) may never visit a physician to obtain a prescription in the first place. These problems will be referred to here as lack of access.
All of these factors probably play a part in the observed utilization and expenditure differences. They are notoriously difficult to disentangle, both for drugs and for medical care in general. Distinguishing between self-selection, moral hazard, and lack of access requires information about the relative quantity of drugs actually needed by people with and without coverage. This would require a much higher level of clinical detail than is available in the data used for this report. Some factors will be presented here to highlight fruitful areas for further analysis, not necessarily to resolve the issues. The emphasis will be on the Medicare population.
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Adverse Selection
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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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Moral Hazard and Barriers to Access
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The RAND Health Insurance Experiment of the late 1970’s and early 1980’s found that even in the absence of adverse selection, insurance can lead to higher rates of use.18 In the experiment, higher cost-sharing deterred people from obtaining both necessary and unnecessary care.19 Several studies focusing on drug use by Medicare beneficiaries reach the same basic conclusion — drug coverage increases the probability of drug use. The empirical estimates of insurance effects produced by the studies vary within a relatively narrow range. The addition of drug coverage is estimated to increase the probability of any prescription being filled by between 4 and 16 percent, depending on population subgroup and generosity of drug coverage.20 In a study of Pennsylvania elderly, prescription coverage increased drug use by approximately 3 percent for every 10 percent reduction in out-of-pocket cost to beneficiaries, all else being equal.21
It is difficult to separate whether these effects are due to higher demand by people with coverage, or lack of access for people without coverage. If two people have similar characteristics, and the one with coverage receives more drugs than the one without coverage, is this because the one with coverage is receiving the appropriate drugs and the one without coverage is not? Or is it because the person with coverage is encouraged to receive excessive or unnecessary treatments and the one without coverage is thriftily purchasing only the care he or she needs? Both answers could be correct. Many people without coverage report difficulty in obtaining needed medications; data on the extent of this problem will be presented in the next section of this chapter. At the same time, however, studies have shown that some elderly people receive inappropriate drugs or inappropriately large dosages, with potential adverse effects.22
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