By Andrew Stocking (CBO), James Baumgardner (CBO), Melinda Buntin (Vanderbilt University), and Anna Cook (CBO)
The structure of the Medicare Part D prescription drug program generally encourages plan sponsors to submit low bids. However, rules in the program relating to low-income beneficiaries generate a different set of incentives for plans seeking to serve those beneficiaries.
We find that over the first five years of the Part D program, two types of plans emerged—those that catered primarily to beneficiaries receiving low-income subsidies (LIS plans) and those that catered primarily to standard beneficiaries (non-LIS plans). For each additional plan sponsor that entered the market, non-LIS basic plans reduced their bids by a statistically significant $0.40 to $0.70 (or 0.5 percent to 0.8 percent) per month of coverage, on average, while the bids of LIS plans did not respond in a statistically significant way, falling by $0.03 to $0.22 (or 0.03 percent to 0.2 percent) per month of coverage, on average.
In addition, LIS plans were more likely to increase their bids so that their premiums approached the maximum premium subsidy, called the low-income benchmark. Finally, LIS plans appeared to recognize their own market power with respect to increasing the low-income benchmark, leading them to raise their bids more.