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The Welfare Impact of Reducing Choice in Medicare Part D: A Comparison of Two Regulation Strategies

Claudio Lucarelli, Jeffrey Prince () and Kosali Simon ()
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Claudio Lucarelli: Cornell University

No 2010-14, Working Papers from Indiana University, Kelley School of Business, Department of Business Economics and Public Policy

Abstract: Medicare’s prescription drug benefit (Part D) has been its largest expansion of benefits since 1965. Since the implementation of Part D, many regulatory proposals have been advanced in order to improve this government-created market. Among the most debated are proposals to limit the number of options, in response to concerns that there are “too many” plans. In this paper we study the welfare impact of two feasible approaches (of similar magnitude) toward limiting the number of Part D plans: reducing the maximum number of plans each firm can offer per region and removing plans that provide doughnut hole coverage. To this end, we propose and estimate a model of market equilibrium, which we later use to evaluate the impact of regulating down the number of Part D plans. Our counterfactuals provide an important assessment of the losses to consumers (and producers) resulting from government limitations on choice. These losses must be weighed against the widely discussed expected gains due to reduced search costs from limiting options. We find that the annual search costs should be at least two thirds of the average monthly premium in order to justify a regulation that allows only two plans per firm. However, this number would be substantially lower if the limitation in the number of plans is coupled with a decrease in product differentiation (e.g., by removing plans that cover the doughnut hole). For validation purposes, we also assess the impact of a recent major merger, and find that our model performs very well out of sample.

Keywords: Medicare Part D; regulation; number of plans; product differentiation; discrete choice (search for similar items in EconPapers)
JEL-codes: H42 H51 I11 I18 L13 L51 L88 (search for similar items in EconPapers)
Date: 2009-10
New Economics Papers: this item is included in nep-reg
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http://kelley.iu.edu/riharbau/RePEc/iuk/wpaper/bep ... lli-prince-simon.pdf (application/pdf)

Related works:
Journal Article: THE WELFARE IMPACT OF REDUCING CHOICE IN MEDICARE PART D: A COMPARISON OF TWO REGULATION STRATEGIES (2012) Downloads
Working Paper: The Welfare Impact of Reducing Choice in Medicare Part D: A Comparison of Two Regulation Strategies (2008) Downloads
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