Demand for a Medicare prescription drug benefit: Exploring consumer preferences under a managed competition framework

Several proposals for adding a prescription drug benefit to the Medicare program rely on consumer choice and market forces to promote efficiency. However, little information exists regarding: 1) the extent of price sensitivity for such plans among Medicare beneficiaries, or 2) the extent to which drug-only insurance plans using various cost-control mechanisms might experience adverse selection. Using data from a survey of elderly Wisconsin residents regarding their likely choices from a menu of hypothetical drug plans, we show that respondents are likely to be price sensitive with respect to both premiums and out-of-pocket costs but that selection problems may arise in these markets. Outside intervention may be necessary to ensure the feasibility of a market-based approach to a Medicare drug benefit.