The Impact of Consumer Inattention on Insurance Plan Generosity: Evidence from Medicare Part D

Previous work has documented that consumers choosing insurance plans are relatively inattentive to the amount of coverage offered relative to premiums and especially inattentive to coverage for acute drugs.  We investigate how this impacts the types of coverage that plans offer in Medicare Part D.  Plans are required to offer coverage which is actuarially equivalent to a standard plan, but the actuarial equivalence requirements leave a great deal of leeway for plans to satisfy the requirements while nonetheless paying out benefits which are a small fraction of net drug costs.  This is because, among other reasons: 1) the actuarial equivalence requirements are defined with respect to gross price, rather than price net of rebates and insurers often receive substantial rebates from pharmaceutical companies; 2) plans can receive a large subsidy from the government which does not count against actuarial equivalence if they understate the amount of coverage they plan to offer for the highest spending beneficiaries.  We use data from IMS sales combined with pharmaceutical SEC filings to back out estimates of the rebates that insurers receive.  Given these estimates and the Part D claims data from CMS, we compute the actual generosity of Part D plans as a function of net drug costs given rebates and subsidies.  We then ask: a) how would plan generosity differ given an alternative regulatory environment which fixed the aforementioned distortions? and b) how would plan generosity differ if consumers were better informed, and thus more sensitive in their plan choices to differences in the types of coverage plans offer?