Does Medicare Part D Protect the Elderly from Financial Risk?

The Medicare Modernization Act of 2003 added the Part D prescription drug benefit to the Medicare program. This addition, which became effective in 2006, increased Medicare program costs by more than 10 percent in order to provide, for the first time, prescription drug coverage to enrollees. Part D has since enrolled a sizeable share of elders and now pays for a large percentage of their prescriptions. Despite the program’s size and importance, however, little is known about its effectiveness. One way to measure its success is to determine to what extent it provides financial security to elders. If Part D covers prescription drug spending that was putting older Americans at financial risk, it may result in large social gains. If it simply substitutes for – or “crowds out” – existing insurance arrangements, the social gains may be much smaller. Beyond a crowd-out analysis, a full evaluation of Part D also needs to consider other social benefits and costs, such as the potential health benefits and the efficiency costs of subsidizing drug coverage. The study summarized in this brief evaluates Part D’s impact using the 2002-5 and 2007 waves of the Medical Expenditure Panel Survey (MEPS) before and right after the program’s implementation. The brief is organized as follows. The first section presents background on Part D. The second section describes the MEPS data. The third section presents the results of Part D’s effect on prescription drug coverage and expenditures and offers a tentative assessment of the program’s overall social impact. The final section concludes that Part D has resulted in substantial crowd out of both coverage and expenditures and, as of 2007, has produced only modest benefits.