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

11 th Annual Retirement Research Conference, August 10, 2009 Medicare Part D and the Financial Protection of the Elderly Gary V. EngelhardtGary V. Engelhardt and Jonathan Gruber 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

11 th Annual Retirement Research Conference, August 10, 2009 Medicare Part D and the Financial Protection of the Elderly Gary V. EngelhardtGary V. Engelhardt and Jonathan Gruber 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

11 th Annual Retirement Research Conference, August 10, 2009 Medicare Part D and the Financial Protection of the Elderly Gary V. EngelhardtGary V. Engelhardt and Jonathan Gruber 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

11 th Annual Retirement Research Conference, August 10, 2009 Medicare Part D and the Financial Protection of the Elderly Gary V. EngelhardtGary V. Engelhardt and Jonathan Gruber 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

11 th Annual Retirement Research Conference, August 10, 2009 Medicare Part D and the Financial Protection of the Elderly Gary V. EngelhardtGary V. Engelhardt and Jonathan Gruber 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 waves of the Medical Expenditure Panel Survey (MEPS) »Right before and after the implementation of Part D »Compare behavior of years vs year olds (or 65 and older) »Difference-in-difference and instrumental variable (IV) estimation »Data for 2007 are not yet available

11 th Annual Retirement Research Conference, August 10, 2009 Medicare Part D and the Financial Protection of the Elderly Gary V. EngelhardtGary V. Engelhardt and Jonathan Gruber 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)

11 th Annual Retirement Research Conference, August 10, 2009 Medicare Part D and the Financial Protection of the Elderly Gary V. EngelhardtGary V. Engelhardt and Jonathan Gruber 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

11 th Annual Retirement Research Conference, August 10, 2009 Medicare Part D and the Financial Protection of the Elderly Gary V. EngelhardtGary V. Engelhardt and Jonathan Gruber 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

11 th Annual Retirement Research Conference, August 10, 2009 Medicare Part D and the Financial Protection of the Elderly Gary V. EngelhardtGary V. Engelhardt and Jonathan Gruber 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 th Annual Retirement Research Conference, August 10, 2009 Medicare Part D and the Financial Protection of the Elderly Gary V. EngelhardtGary V. Engelhardt and Jonathan Gruber 1. Did Part D Increase Prescription Drug Coverage Among the Elderly?

11 th Annual Retirement Research Conference, August 10, 2009 Medicare Part D and the Financial Protection of the Elderly Gary V. EngelhardtGary V. Engelhardt and Jonathan Gruber 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)

11 th Annual Retirement Research Conference, August 10, 2009 Medicare Part D and the Financial Protection of the Elderly Gary V. EngelhardtGary V. Engelhardt and Jonathan Gruber 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)

11 th Annual Retirement Research Conference, August 10, 2009 Medicare Part D and the Financial Protection of the Elderly Gary V. EngelhardtGary V. Engelhardt and Jonathan Gruber 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 80 th percentile and higher in the distribution Much of the mean reduction only occurs in the very top of the OOP expenditure distribution

11 th Annual Retirement Research Conference, August 10, 2009 Medicare Part D and the Financial Protection of the Elderly Gary V. EngelhardtGary V. Engelhardt and Jonathan Gruber 3. What was Impact of Part D on the Distribution of Out-of-Pocket Spending?

11 th Annual Retirement Research Conference, August 10, 2009 Medicare Part D and the Financial Protection of the Elderly Gary V. EngelhardtGary V. Engelhardt and Jonathan Gruber 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

11 th Annual Retirement Research Conference, August 10, 2009 Medicare Part D and the Financial Protection of the Elderly Gary V. EngelhardtGary V. Engelhardt and Jonathan Gruber 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

11 th Annual Retirement Research Conference, August 10, 2009 Medicare Part D and the Financial Protection of the Elderly Gary V. EngelhardtGary V. Engelhardt and Jonathan Gruber 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