Medicare Part D and the Financial Protection of the Elderly

1. Medicare Part D and the Financial Protection of the Elderly Gary V. Engelhardt Syracuse University Jonathan Gruber MIT

2. Overview • Medicare Modernization Act of 2003 added Part D prescription drug benefits • Most significant expansion of public insurance in last 40 years • Expanded Medicare program cost by 10%, roughly $40 billion per year • Despite size of program, we know little yet about its effectiveness because the program is so new

3. Overview • A key dimension of effectiveness is the financial protection of the elderly • Protection from the risk of out-of-pocket (OOP) prescription drug expenditures • This is the insurance value of the program • There may have been large gains in economic welfare from consumption smoothing, or • Part D may have “crowded out” existing prescription drug insurance arrangements • Implying smaller gains in economic welfare • We evaluate the gain in financial protection provided by Part D

4. Design of Part D • Available to 3 groups • Medicare beneficiaries 65 and older (voluntary) • Medicare-eligible DI beneficiaries under 65 (voluntary) • Medicaid-Medicare dual eligibles (automatically enrolled) • Available directly through 2 types of plans • Stand-alone prescription drug plans (PDPs) • Medicare Advantage (MA) plans, packaged with other Medicare benefits in an HMO, PPO, or private FFS plan

5. Design of Part D • Premiums vary by plan, but limited and possibly subsidized for low-income persons • Restrictions on formularies • Coverage of costs for “standard” benefit design • None of first $250 • 75% of next $2250 • None of next $3600 (donut hole) • 95% above $5100

6. Data and Methods • In principle, three sources of variation from Part D expansion • Age • Calendar year • Spending level (very non-linear) • We rely only on variation in eligibility for Part D by age and calendar year • 2002-6 waves of the Medical Expenditure Panel Survey (MEPS) • Right before and after the implementation of Part D • Compare behavior of 60-64 years vs. 65-70 year olds (or 65 and older) • Difference-in-difference and instrumental variable (IV) estimation • Data for 2007 are not yet available

7. Data and Methods • MEPS provides high-quality data • MEPS is used to construct national health accounts • Representative subsample of the National Health Interview Survey (NHIS) • Two-year overlapping panel; 3 interviews per year • We use data from the end of the calendar year (Full-Year Consolidated Data Files)

8. Data and Methods • MEPS data on prescription drugs • Prescription drug insurance coverage, utilization, usual third-party payer for those with Rx • Prescription drug expenditures by source of payment • Out-of-pocket • Type of plan (Medicare, Medicaid, Tricare, VA, private, etc.) • No other source has this detail • Much of the information on expenditures is based on pharmacy records

9. Data and Methods • We do not use variation by drug spending level • Only 10% of enrollees choose standard design • 90% are in actuarially equivalent plans, of which there are typically very many offered • We do not have information on actual plan chosen • We address four questions

10. 1. Did Part D Increase Prescription Drug Coverage Among the Elderly? • We compare changes in any coverage vs. “public” coverage • “Public” coverage defined as • Prescription drug coverage through Medicare in 2006 (either stand-alone PDP or MA-PDP) • Coverage through Medicaid in any year • Avoids mechanical crowd-out from re-labeling • Coverage through Medicare Advantage prior to 2006 treated as private • We use all sources in the MEPS to measure any and public coverage

11. 1. Did Part D Increase Prescription Drug Coverage Among the Elderly?

12. 1. Did Part D Increase Prescription Drug Coverage Among the Elderly? • We find • Any coverage rose 12 percentage points for those over vs. under 65 (reduced-form estimate) • But public coverage rose around 50 percentage points for those over vs. under 65 (first-stage estimate) • Implies 75% crowd-out of coverage (IV estimate)

13. 2. What was Impact of Part D on Prescription Drug Spending by Payment Source? • Public prescription drug expenditure rose by $1000 per Part D recipient • But total expenditure (across all payment sources) rose by only $500 • Implying 50% crowd-out of expenditures (IV estimates) • A little over half of crowd-out is reduction in payments from private plans • Remainder is reduction in out-of-pocket (OOP) • On average, OOP fell $230 per Part D recipient • Increase in expenditure occurred on the intensive margin of utilization • 30% increase in prescriptions filled per year for Part D recipients • Little impact on the extensive margin (the number of elderly taking Rx)

14. 3. What was Impact of Part D on the Distribution of Out-of-Pocket Spending? • Only a modest decline in out-of-pocket spending • Mean reduction of $230 per Part D recipient (IV estimate) • We use IV quantile regression (IVQR) to examine impacts of Part D at all points of the distribution • Median reduction of only $100 • $500-$1000 reduction in the 80th percentile and higher in the distribution • Much of the mean reduction only occurs in the very top of the OOP expenditure distribution

15. 3. What was Impact of Part D on the Distribution of Out-of-Pocket Spending?

16. 4. What is the Insurance Value of Part D? • Part D lowered both the mean and the variance of OOP drug expenditures • The mean reduction of $230 per Part D recipient is small and a form of income transfer • Aside from this transfer, what is the value of the OOP risk reduction? • We calculate this value for each person who took-up Part D • Using our IVQR estimates of the impact of Part D to construct an OOP spending distribution for each person • We take independent draws from the distribution • Assume a constant relative risk aversion utility function, where utility is a function of income net of out-of-pocket spending • A range of assumptions about the level of risk aversion • We find that the gain in economic welfare from the reduction in risk from Part D insurance is between $10-$150 per Part D recipient

17. Summary • Overall, our results suggest that Part D resulted in • A small direct income transfer • Substantial crowd-out of existing insurance arrangements • The gain in economic welfare from the OOP risk reduction in Part D was small • In absolute terms • And relative to inefficiencies in the program • There are 2 sources of inefficiencies • DWL from raising the roughly $40B in annual expenditure • We calculate this DWL to be $400/recipient • Moral hazard cost from excess medical consumption from Part D • The size of this effect depends on what the health impacts are of the additional spending under Part D • If none of this spending is health-effective, we calculate an upper bound on the moral hazard cost of $500 per recipient. • So, estimated gains: $10-$150 vs. costs of inefficiencies: $400-$900

18. Caveats • Welfare calculations assumed individuals care about income net of out-of-pocket prescription drug spending • Is that the right concept? • Broader definition would include total OOP medical spending • Allows for substitution between prescription drug and other medical spending • We find no impact of Part D on other medical spending • Our calculations understate value of Part D if overall increased prescription drug spending improved elderly health • Impact of Part D on morbidity and mortality is an important direction for future research