Medicare Part D and the Financial Protection of the Elderly

Much of the new coverage and spending under Medicare Part D served to crowd out previous private insurance coverage.

In 2003, Medicare recipients spent an average of $2,500 on prescription drugs, more than twice what the average American spent on all health care in 1965. Most of the nation's elderly had some form of private insurance to cover the costs of prescription drugs, but many did not. The Medicare Modernization Act of 2003, known as Medicare Part D, addressed this coverage shortfall by adding a prescription drug benefit to the government's health insurance options for the elderly.

In Medicare Part D and the Financial Protection of the Elderly (NBER Working Paper No. 16155), authors Gary Engelhardt and Jonathan Gruber analyze data from the 2002-7 waves of the Medical Expenditure Panel Survey (MEPS) to estimate some of the effects of the new drug coverage. The authors conclude that much of the new coverage and spending under Medicare Part D served to crowd out previous private insurance coverage: about 80 percent of Medicare's spending on this program simply displaced private spending.

Much of this displacement was from private insurance expenditures, but some did come from patient out-of-pocket spending. The latter was a consequence of the protection that Part D was designed to bring to uninsured drug expenditures. Engelhardt and Gruber conclude, however, that the gains to consumers from reduced expenditure risk were smaller than the cost to the government of raising the funds to finance this program.

-- Matt Nesvisky