Adverse Selection and the Challenges to Stand-Alone Prescription Drug Insurance

Mark V. Pauly and Yuhui Zeng

No 9919, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper investigates a possible predictor of adverse selection problems in unsubsidized stand-alone' prescription drug insurance: the persistence of an individual's high spending over multiple years. Using MEDSTAT claims data and data from the Medicare Survey of Current Beneficiaries, we find that persistence is much higher for outpatient drug expenses than for other categories of medical expenses. We then use these estimates to develop a simple and intuitive model of adverse selection in competitive insurance markets and show that this high relative persistence makes it unlikely that unsubsidized drug insurance can be offered for sale, even with premiums partially risk adjusted, without a probable adverse selection death spiral. We show that this outcome can be avoided if drug coverage is bundled with other coverage, and briefly discuss the need either for comprehensive coverage or generous subsidies if adverse selection is to be avoided in private and Medicare insurance markets.

JEL-codes: G22 I18 (search for similar items in EconPapers)
Date: 2003-08
New Economics Papers: this item is included in nep-edu and nep-hea
Note: EH PE
References: View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Published as Pauly, Mark V. and Yuhui Zeng. "Adverse Selection And The Challenges To Stand-Alone Prescription Drug Insurance," Forum for Health Economics and Policy, 2004, v7, Article 3.
Published as Adverse Selection and the Challenges to Stand-Alone Prescription Drug Insurance , Mark V. Pauly, Yuhui Zeng. in Frontiers in Health Policy Research, Volume 7 , Cutler and Garber. 2004

Downloads: (external link)
http://www.nber.org/papers/w9919.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:9919

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w9919

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().