Coverage under Medicare Part D

Part D erased socioeconomic gradients in drug coverage among the elderly. Before Part D, individuals in the highest education or income category were significantly less likely to lack coverage than their less-advantaged counterparts.

Fifty to sixty percent of senior citizens who did not have drug coverage in 2004 took advantage of Medicare Part D, Medicare's prescription drug benefit, when it took effect in 2006. As a result, the share of seniors without drug coverage went from 24 percent in 2004 to 7 percent in 2006, according to Take-Up of Medicare Part D: Results from the Health and Retirement Study (NBER Working Paper No. 14692) by Helen Levy and David Weir.

The most important determinant of the decision to enroll in Part D among those with no prior drug coverage was the demand for prescription drugs, they find. Many who remained without drug coverage report not using prescribed medicines and having relatively low out-of-pocket spending. For the most part, Medicare beneficiaries seem to have been able to make economically rational decisions about Part D enrollment. Levy and Weir find little circumstantial evidence that Part D crowded out private coverage in the short run. The persistence of employer coverage was only slightly lower in 2004-6 than in 2002-4.

The data for this study are drawn from the 2004 and 2006 waves of the Health and Retirement Study (HRS), a longitudinal study conducted since 1992. Analysis of the HRS data shows that seniors who decided to enroll in Part D were slightly younger and slightly more likely to be married than those who remained without coverage; the older elderly were less likely to sign up, and unmarried men were significantly more likely to be without coverage from any source. The main differences between Part D enrollees and non-enrollees were that those who signed up were sicker, were more likely to use prescription drugs, and had higher out-of-pocket spending.

The HRS data also show that Part D erased socioeconomic gradients in drug coverage among the elderly. Before Part D, individuals in the highest education or income category were significantly less likely to lack coverage than their less-advantaged counterparts. After 2006, take-up of Part D was high for all racial and ethnic groups, and rates of seniors lacking coverage dropped for all groups. Coverage gains were larger for low socioeconomic groups.

Unlike Medicare Parts A and B, take-up of which is close to universal among eligible individuals as a result of essentially automatic enrollment, Part D requires most beneficiaries to make an active decision about whether to participate. Understanding take-up is important for at least three reasons. First, it reveals whether benefits are reaching the individuals they are intended to help. Second, low rates of take-up may indicate that the costs of enrolling -- such as how time-consuming or cognitively challenging applications are -- discourage some from enrolling and reduce the value of the program even for those who do enroll. Third, the underlying "managed competition" framework of the Part D program, in which individuals choose among private insurance plans in a regulated and subsidized market, forms the basis for many proposals to expand health insurance coverage in the under-65 population as well. The success or failure of Part D becomes, in effect, an important test case for the potential of market-based reforms relying on private plans and individual choices to expand insurance coverage.

-- Sarah H. Wright