Technological Change and Risk Adjustment: Benefit Design Incentives in Medicare Part D

Subsidized health insurance markets use diagnosis-based risk adjustment to induce insurers to offer an equitable benefit to individuals of varying expected cost. I demonstrate that technological change after risk adjustment calibration—new drug entry and the onset of generic competition—made certain diagnoses profitable or unprofitable in Medicare Part D. I then exploit variation in diagnoses' profitability driven by technological change to show insurers designed more favorable benefits for drugs that treat profitable diagnoses as compared to unprofitable diagnoses. In the presence of technological change, risk adjustment may not fully neutralize insurers' incentives to select through benefit designs. (JEL G22, H51, I13, I18, L65, O33)