It pays to price-shop for prescription drug plans. And it may pay even more if insurance companies know that you will.
Those are among the lessons that three economists drew from the experience of New Jerseyans enrolled in Medicare, and detailed in a recent paper.
If more Medicare recipients had chosen their prescription plans based on what would cost them the least, insurers would have made smaller increases in plan premiums in order to keep and attract customers, according to the report. That, in turn, would have saved recipients an estimated $536 over three years, while the federal government would have saved $550 million in subsidies.
The paper, an in-depth look at the New Jersey market published by the National Bureau of Economic Research, could be important to policymakers considering both the future of the Medicare prescription drug benefit — the subject of the study — and other government-sponsored health insurance markets, such as the federally operated marketplace for individual health coverage.
The study focused on Medicare Part D, a prescription drug benefit offered through private insurers. Medicare Part D recipients must choose a plan, and in return for paying a monthly premium, seniors have most of the cost of their prescription drugs covered. They still must pay some out-of-pocket costs to cover a portion of the drug costs. For example, recipients currently must pay a $320 annual deductible, a term for out-of-pocket payments that must be made before insurance kicks in.
The private-insurance basis for Medicare Part D differs from traditional Medicare programs, in which the federal government directly pays for covered medical services. Part of the reason for doing this was the idea that allowing consumers to choose their plans would promote both high quality and lower prices, as insurers competed with each other to offer the most attractive plans.
In some ways, Medicare Part D has been a marked success. More than 22 million seniors participate in it, and the prices paid for the drugs have grown relatively slowly, averaging 1.8 percent annually from 2007 to 2010. But the paper’s authors noted the premiums charged by the insurers grew at a much faster rate, as did plan profits and administrative expenses per beneficiary, which grew 8.6 percent annually over the same period.
This difference prompted the study.
Associate professor Kate Ho of Columbia University, doctoral student Thomas Hogan of Columbia, and professor Fiona M. Scott Morton of Yale University — authors of the report — studied how a sample of New Jersey residents purchased their Medicare Part D benefit in the first three years after it was launched. They chose New Jersey because the sample data for Medicaid recipients was both small enough to be manageable and large enough to be meaningful.
They found that the share of people who switched plans fell from 19.1 percent in the 2007 to 8.2 percent in 2009, with those who switched plans saving more (compared with the cheapest plan) than those who stayed with the same plan.
“This suggests that the failure of consumers to switch plans is one important factor contributing to overspending,” the authors wrote.
They also found that the vast majority of those who switched had experienced a sharp change, or “shock,” in the amount they would have to spend if they kept their current plan. But those who don’t experience these shocks missed out on the potential savings they would experience if they shopped for a lower-cost plan.
They then estimated what would happen if consumers’ pharmacists were allowed to choose the plan each year that would cost the least. This would have saved each recipient at least $200 over the three years, according to the authors. Pharmacists are well positioned to determine which plan would be least expensive for a particular patient, since they know the drugs patients use.
However, even greater savings would occur as a result of insurers adjusting to changing shopping patterns. If the insurers weren’t able to assume that most customers would stick with their plans even if the prices increased, the companies would likely propose smaller increases.
The authors suggest that federal policymakers should consider ways to encourage consumers to move to lower-cost plans, perhaps by changing the default from keeping them in the same plan, or by paying pharmacists to switch to cheaper plans.
They note the importance of well-designed insurance markets, and the implications for the individual insurance marketplace, in which consumers also must decide whether to switch to lower-cost plans annually.
“Indeed, without effective consumer choice that puts market pressure on insurers, a policy of privatizing the delivery of benefits can be very expensive,” they wrote. “This cost of privatization should be taken into account by policymakers.”
An insurance industry representative responded to the paper by noting that many people are choosing to switch plans, while others may not switch based on factors other than premiums.
“Part D sponsors offer a wide range of coverage options so that seniors can pick the policy that best fits their health and financial needs,” said Clare Krusing, press secretary for national trade group America’s Health Insurance Plans, in a statement.