Medicare Part D: An Institutional Analysis

Carl Johnston

Advisor: Daniel Houser

Committee Members: Alexander Tabarrok, R. Rassenti

Truland Building, 400
July 30, 2007, 08:00 PM to 07:00 PM


We use standard analysis techniques, computer simulations and laboratory experiments to explore aspects of subsidized, competitive insurance markets modeled on the private/public government program called the Medicare Part D Prescription Drug Benefit. We examine various potential reforms of the program, which provides prescription drug insurance to seniors, including relaxing government-set minimum standards and the ban on buyer incentives in the Part D program. We discuss evidence showing that minimum standards may enhance the efficiency and stability of insurance coverage for most insurance recipients. However, it may force insurers to involuntarily absorb extra costs and exclude some clients from insurance compared to systems where incentives are permitted and mandatory minimum values are relaxed. Evidence also suggests that the minimum standards themselves do not affect the value of insurance sold in the program. We also use an Agent-Based Simulation to observe how insurers change price policies in response to competitive pressures and clients? health costs. We provide a test of the theory that insurers suffer from adverse selection and find that perfectly rational insurers with the ability to update their beliefs in response to profit are able to price their products in a way that eliminates the negative selection bias.