The Effects of Prescription Drug Cost Sharing: Evidence from the Medicare Modernization Act

This study assesses the impact of reductions in cost sharing for prescription drugs on preventable hospitalizations and outpatient care utilization among the elderly in the United States. In addition to affecting demand for drugs, drug cost sharing can also affect the demand for complement services, such as primary or preventive care. In order to evaluate this possibility, I analyze the effects of varying patient cost sharing for prescription drugs on hospitalizations from ambulatory care sensitive conditions (ACSC), which can represent a failure of preventive and outpatient care. To address endogeneity from selection and sorting of individuals into insurance plans, I aggregate data from the 2000-2009 Medical Expenditure Panel Survey (MEPS) to the region-year level, and use an instrumental variables strategy. The analysis exploits exogenous variation in prescription drug cost sharing that occurred as a result of the Medicare Modernization Act of 2003, and therefore plausibly identifies causal effects of cost sharing. Results show that for the elderly in the United States, who have generous insurance coverage for other outpatient services, reductions in prescription drug cost sharing do not have an effect on hospitalizations related to ambulatory care sensitive conditions, or on specific types of preventive care utilization.