TY  - JOUR
AU  - Pauly,Mark V.
AU  - Zeng,Yuhui
TI  - Adverse Selection and the Challenges to Stand-Alone Prescription Drug Insurance
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9919
PY  - 2003
Y2  - August 2003
UR  - http://www.nber.org/papers/w9919
L1  - http://www.nber.org/papers/w9919.pdf
N1  - Author contact info:
Mark Pauly
 Department of Health Care Management
University of Pennsylvania
208 Colonial Penn Center
3641 Locust Walk
Philadelphia, PA  19104-6218
Tel: NA
Fax: NA
E-Mail: pauly@wharton.upenn.edu

Yuhui Zeng
E-Mail: yuhui72@wharton.upenn.edu
M1  - published as Mark V. Pauly, Yuhui Zeng. "Adverse Selection and the Challenges to Stand-Alone Prescription Drug Insurance," in David M. Cutler and Alan M. Garber, editors, "Frontiers in Health Policy Research, Volume 7" MIT Press (2004)

AB  - This paper investigates a possible predictor of adverse selection problems in unsubsidized  stand-alone' prescription drug insurance: the persistence of an individual's high spending over multiple years. Using MEDSTAT claims data and data from the Medicare Survey of Current Beneficiaries, we find that persistence is much higher for outpatient drug expenses than for other categories of medical expenses. We then use these estimates to develop a simple and intuitive model of adverse selection in competitive insurance markets and show that this high relative persistence makes it unlikely that unsubsidized drug insurance can be offered for sale, even with premiums partially risk adjusted, without a probable adverse selection death spiral. We show that this outcome can be avoided if drug coverage is bundled with other coverage, and briefly discuss the need either for comprehensive coverage or generous subsidies if adverse selection is to be avoided in private and Medicare insurance markets.
ER  -