Reflecting on the Impact of Financial Incentives in Drug Plans

How do financial incentives in drug plans affect prices and expenditures?

Would prices and expenditures increase slower or more rapidly without the financial incentive that beneficiaries have to choose among competing drug plans?

Answer:

Financial incentives in drug plans encourage competition and potentially slow the increase in prices and expenditures. If these incentives were removed, it could lead to less competition and subsequently, more rapid increases in prices and expenditures. Governmental programs also play a key role in maintaining these incentives.

Whether prices and expenditures would increase slower or more rapidly without the financial incentive that beneficiaries have to choose among competing drug plans essentially depends on the beneficiaries' behavior and their sensitivity to price changes. When there are financial incentives to choose from competing drug plans, this typically induces competition, which can play a role in controlling prices and potentially slowing the rate of increase in expenditures.

For example, the Medicare prescription drug benefit plan passed by Congress in 2003, cost the Federal government about $40 billion in 2006, with projected annual costs rising to $121 billion by 2016.

However, if these incentives were removed, beneficiaries might not shop around for the most cost-effective plan. This could lead to less competition and potentially higher prices and rapid increase in expenditures, as there would be less pressure on drug plan providers to keep prices low.

It's important to note as well part of the role of governmental programs like antipoverty program. While they might cost more money as the government phases out its support payments more slowly, but these programs retain a greater incentive to work.