How Big Is the Government Subsidy for Medicare Part D?

The Medicare Part D program, launched in 2006, extended outpatient prescription drug insurance to almost all Americans over age 65. This expansion of Medicare was a response to the rapid growth of drug costs and the resulting strain on patients’ budgets. Participants in Part D generally pay monthly premiums, face an annual deductible, and make copayments on drug purchases above the deductible. These payments typically are less than the value of the drugs received. Estimating the precise size of this subsidy for any individual depends on many factors. A simpler task is estimating the size of the average subsidy that retirees can expect to receive. This brief calculates the average lifetime Part D subsidy for a typical 65-year-old in 2019. Clarifying the scale of the Part D subsidy is important for individuals, researchers, and policymakers. For individuals, the size of the subsidy that the typical beneficiary can expect to receive from Part D may impact household planning for prescription drug costs in old age. For researchers, understanding the size of the subsidy will provide a basis for assessing the large reported effects of Part D on outcomes as diverse as mortality, mental health, and retirement age. For policymakers, knowing the subsidy amount will help them evaluate reform proposals (e.g., both the Affordable Care Act and the Bipartisan Budget Act of 2018 increased the generosity of the standard Part D benefit design, while current reform proposals would address rising drug costs). The discussion proceeds as follows. The first section describes how Part D works and defines the nature of the subsidy. The second section reports on what is known about the value of Part D from existing literature. The third section presents the methods used in this analysis to calculate the lifetime amount of the Part D subsidy. The fourth section presents estimates of the subsidy under low, intermediate, and high assumptions and discusses some implications. The final section concludes that Part D represents a substantial subsidy in dollar terms for an individual entering retirement.