Payment policy and inefficient benefits in the Medicare+Choice program.

We investigated whether constraints on premium rebates by health plans in the Medicare+Choice program result in inefficient benefits. Since relationships between revenue and benefits could be confounded by unobserved variation in the cost of coverage, we took advantage of natural experiment that occurred following passage of the Benefits Improvement and Protection Act of 2000. Our findings indicate that benefits in zero premium plans were more sensitive to changes in payment rates than were benefits in plans that charged nonzero premiums. These results strongly suggest that current Medicare policy induces plans to offer benefits that are not valued by enrollees at or above their cost.