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Keywords:

  • insurance benefit design;
  • non-linear pricing;
  • medicare;
  • pharmaceuticals

ABSTRACT

The Medicare prescription drug program (Part D) standard benefit includes deductible, initial coverage, coverage gap and catastrophic coverage phases. As beneficiaries enter each phase, their out-of-pocket medication costs change discontinuously. The benefit cycle restarts on 1 January of the next year. Taking advantage of variation in drug coverage, we study how individuals reinitiate discontinued medications in response to the non-linear price schedule. Because some beneficiaries who receive low-income subsidies (LIS) have zero or fixed small copayments throughout the year, we perform a difference-in-difference analysis by using the LIS group as a comparison. We find that individuals delay reinitiating important medications in December and are significantly more likely to reinitiate in January than in other months. Although we find some evidence that reinitiation is lower in the final months of the year, it is mostly driven by those who face higher prices due to the coverage gap. Our study suggests that individuals respond more to the current price of medications and do not anticipate future prices as well as theory would suggest. Copyright © 2013 John Wiley & Sons, Ltd.