PRELIMINARY AND INCOMPLETE PLEASE DO NOT CITE OR CIRCULATE Nothing for Something: Paying Twice for Medicare Drug Benefits

The Medicare Modernization Act of 2003 added a new outpatient prescription drug benefit to Medicare and increased payments to private plans to induce more plan participation in Medicare. We formalize the benefits from these two expansion paths and then estimate a statistical model of plan choice that enables us to quantify these benefits. We find that expansion of drug benefits produced nearly six times as much value per government dollar as expansion of plan choices. Approximately $43 billion will be spent over the next ten years to expand plan choices with little value to beneficiaries. We suggest that modified bidding procedures could reduce this spending. a Department of Veterans' Affairs b Boston University c University of Minnesota Correspondence to: Steven D. Pizer Health Care Financing & Economics, VA Boston Health Care System 150 South Huntington Ave. (152H), Boston, MA 02130 USA Tel: (857) 364-6061; Fax: (857) 364-4511; e-mail: [email protected]