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Prescription Drug Coverage and Elderly Medicare Spending

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  • Baoping Shang
  • Dana P. Goldman

Abstract

The introduction of Medicare Part D has generated interest in the cost of providing drug coverage to the elderly. Of paramount importance -- often unaccounted for in budget estimates -- are the salutary effects that increased prescription drug use might have on other Medicare spending. This paper uses longitudinal data from the Medicare Current Beneficiary Survey (MCBS) to estimate how prescription drug benefits affect Medicare spending. We compare spending and service use for Medigap enrollees with and without drug coverage. Because of concerns about selection, we use variation in supply-side regulations of the individual insurance market -- including guaranteed issue and community rating -- as instruments for prescription drug coverage. We employ a discrete factor model to control for individual-level heterogeneity that might induce bias in the effects of drug coverage. Medigap prescription drug coverage increases drug spending by $170 or 22%, and reduces Medicare Part A spending by $350 or 13% (in 2000 dollars). Medigap prescription drug coverage reduces Medicare Part B spending, but the estimates are not statistically significant. Overall, a $1 increase in prescription drug spending is associated with a $2.06 reduction in Medicare spending. Furthermore, the substitution effect decreases as income rises, and thus provides support for the low-income assistance program of Medicare Part D.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13358.

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Date of creation: Sep 2007
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Handle: RePEc:nbr:nberwo:13358

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Cited by:
  1. Glazer, Jacob & McGuire, Thomas G., 2012. "A welfare measure of “offset effects” in health insurance," Journal of Public Economics, Elsevier, Elsevier, vol. 96(5), pages 520-523.
  2. Florian Heiss & Daniel McFadden & Joachim Winter, 2010. "Mind the Gap! Consumer Perceptions and Choices of Medicare Part D Prescription Drug Plans," NBER Chapters, in: Research Findings in the Economics of Aging, pages 413-481 National Bureau of Economic Research, Inc.
  3. Sara Allin & Jeremiah Hurley, 2008. "Inequity in Publicly Funded Physician Care: What Is The Role Of Private Prescription Drug Insurance?," Centre for Health Economics and Policy Analysis Working Paper Series, Centre for Health Economics and Policy Analysis (CHEPA), McMaster University, Hamilton, Canada 2008-02, Centre for Health Economics and Policy Analysis (CHEPA), McMaster University, Hamilton, Canada.
  4. William Encinosa & Didem Bernard & Avi Dor, 2010. "Does Prescription Drug Adherence Reduce Hospitalizations and Costs?," NBER Working Papers 15691, National Bureau of Economic Research, Inc.
  5. Melissa Boyle, 2008. "Costs and Benefits of Elderly Prescription Drug Coverage: Evidence from Veterans’ Health Care," Working Papers, College of the Holy Cross, Department of Economics 0803, College of the Holy Cross, Department of Economics.
  6. Claude Montmarquette & Stéphanie Boulenger & Joanne Castonguay, 2014. "Les risques liés à la création de PHARMA-QUEBEC," CIRANO Project Reports 2014rp-05, CIRANO.
  7. Abdülkad&idot;r C&idot;van & Bülent Köksal, 2010. "The effect of newer drugs on health spending: do they really increase the costs?," Health Economics, John Wiley & Sons, Ltd., vol. 19(5), pages 581-595.
  8. Lambrelli D & O’Donnell O, 2009. "Why Does the Utilization of Pharmaceuticals Vary So Much Across Europe? Evidence from Micro Data on Older Europeans," Health, Econometrics and Data Group (HEDG) Working Papers, HEDG, c/o Department of Economics, University of York 09/06, HEDG, c/o Department of Economics, University of York.
  9. Deb P & Trivedi PK & Zimmer DM, 2009. "Dynamic Cost-offsets of Prescription Drug Expenditures: Panel Data Analysis Using a Copula-based Hurdle Model," Health, Econometrics and Data Group (HEDG) Working Papers, HEDG, c/o Department of Economics, University of York 09/15, HEDG, c/o Department of Economics, University of York.
  10. Florian Heiss & Daniel McFadden & Joachim Winter, 2008. "Mind the Gap! Consumer Perceptions and Choices," MEA discussion paper series, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy 08156, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  11. Munkin M & Trivedi P. K, 2009. "Incentives and Selection Effects of Drug Coverage on Total Drug Expenditure: a Finite Mixture Approach," Health, Econometrics and Data Group (HEDG) Working Papers, HEDG, c/o Department of Economics, University of York 09/22, HEDG, c/o Department of Economics, University of York.

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