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

  • Mark Duggan
  • Patrick Healy
  • Fiona Scott Morton

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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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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  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 Aguiar & Erik Hurst, 2005. "Consumption versus Expenditure," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 919-948, October.
  3. 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.
  4. Mark Duggan & Fiona Scott Morton, 2010. "The Effect of Medicare Part D on Pharmaceutical Prices and Utilization," American Economic Review, American Economic Association, vol. 100(1), pages 590-607, March.
  5. 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.
  6. 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.
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