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Providing Prescription Drug Coverage to the Elderly: America's Experiment with Medicare Part D

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  • Mark Duggan
  • Patrick Healy
  • Fiona Scott Morton

Abstract

The federal government's Medicare program did not provide general prescription drug coverage for the first 40 years of its existence. Thus, more than 30 percent of the 44 million elderly and disabled beneficiaries of the program lacked insurance coverage for prescribed medications. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 established a voluntary outpatient prescription drug benefit known as Medicare Part D. This program took effect in 2006 and represents the largest expansion of an entitlement program since the start of Medicare itself. The design of Part D is of particular interest to economists for at least three reasons: First, the program has the potential to affect significantly both the health and the economic well-being of the more than 44 million individuals currently enrolled in Medicare. Second, Part D has substantially increased government spending on health care despite the projections that such spending was already on an unsustainable path. Third, Part D represents an ambitious attempt to use market mechanisms in the delivery of a large-scale entitlement program. Part D has been controversial. In this paper, we aim to shed light on the various issues raised by the Part D program, including the incentives inherent in the competition among plans, the forces that affect drug prices, and the sustainability of Part D in the face of adverse selection and moral hazard. We conclude that Part D has succeeded in a number of important ways, however, substantial room for improvement remains.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.22.4.69
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Bibliographic Info

Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 22 (2008)
Issue (Month): 4 (Fall)
Pages: 69-92

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Handle: RePEc:aea:jecper:v:22:y:2008:i:4:p:69-92

Note: DOI: 10.1257/jep.22.4.69
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References

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  1. James J Choi & David Laibson & Brigitte C Madrian, 2008. "Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds," Levine's Working Paper Archive 122247000000002014, David K. Levine.
  2. Mark Duggan & Fiona Scott Morton, 2008. "The Effect of Medicare Part D on Pharmaceutical Prices and Utilization," NBER Working Papers 13917, National Bureau of Economic Research, Inc.
  3. Amitabh Chandra & Jonathan Gruber & Robin McKnight, 2007. "Patient Cost-Sharing, Hospitalization Offsets, and the Design of Optimal Health Insurance for the Elderly," NBER Working Papers 12972, National Bureau of Economic Research, Inc.
  4. Mark Aguiar & Erik Hurst, 2005. "Consumption versus Expenditure," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 919-948, October.
  5. Mark Duggan & Fiona Scott Morton, 2004. "The Distortionary Effects of Government Procurement: Evidence from Medicaid Prescription Drug Purchasing," NBER Working Papers 10930, National Bureau of Economic Research, Inc.
  6. Alan T. Sorensen, 2000. "Equilibrium Price Dispersion in Retail Markets for Prescription Drugs," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 833-862, August.
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Citations

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Cited by:
  1. Keith M. Marzilli Ericson, 2014. "Consumer Inertia and Firm Pricing in the Medicare Part D Prescription Drug Insurance Exchange," American Economic Journal: Economic Policy, American Economic Association, vol. 6(1), pages 38-64, February.
  2. Ernst R. Berndt & Thomas G. McGuire & Joseph P. Newhouse, 2011. "A Primer on the Economics of Prescription Pharmaceutical Pricing in Health Insurance Markets," NBER Working Papers 16879, National Bureau of Economic Research, Inc.
  3. Florian Heiss & Adam Leive & Daniel McFadden & Joachim Winter, 2012. "Plan Selection in Medicare Part D: Evidence from Administrative Data," NBER Working Papers 18166, National Bureau of Economic Research, Inc.
  4. Ketcham, Jonathan D. & Lucarelli, Claudio & Miravete, Eugenio J & Roebuck, M Christopher, 2011. "Sinking, Swimming, or Learning to Swim in Medicare Part D," CEPR Discussion Papers 8585, C.E.P.R. Discussion Papers.
  5. Vetter, Stefan & Heiss, Florian & McFadden, Daniel & Winter, Joachim, 2012. "Risk attitudes and Medicare Part D enrollment decisions," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 373, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  6. Keith M. Marzilli Ericson, 2014. "When Consumers Do Not Make an Active Decision: Dynamic Default Rules and their Equilibrium Effects," NBER Working Papers 20127, National Bureau of Economic Research, Inc.
  7. Kesternich, Iris & Heiss, Florian & McFadden, Daniel L. & Winter, Joachim, 2013. "Suit the action to the word, the word to the action: Hypothetical choices and real decisions in Medicare Part D," Munich Reprints in Economics 19474, University of Munich, Department of Economics.
  8. Florian Heiss & Daniel McFadden & Joachim Winter, 2011. "The Demand for Medicare Part D Prescription Drug Coverage: Evidence from Four Waves of the Retirement Perspectives Survey," NBER Chapters, in: Explorations in the Economics of Aging, pages 159-182 National Bureau of Economic Research, Inc.
  9. Helen Levy & David Weir, 2009. "Take-Up of Medicare Part D: Results from the Health and Retirement Study," NBER Working Papers 14692, National Bureau of Economic Research, Inc.
  10. Song, Zirui & Landrum, Mary Beth & Chernew, Michael E., 2013. "Competitive bidding in Medicare Advantage: Effect of benchmark changes on plan bids," Journal of Health Economics, Elsevier, vol. 32(6), pages 1301-1312.

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