The Cost and Health Effects of Prescription Drug Coverage and Utilization in the Medicare Population

by Baoping Shang

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The Medicare Prescription Drug, Improvement and Modernization Act of 2003 provides prescription drug coverage for virtually all seniors. The cost estimates for the Medicare prescription drug coverage are based on the expected per beneficiary utilization but do not take into account the potential offset by savings on other medical services. To estimate these savings, the author examines the effects of Medigap prescription drug benefit on elderly prescription drug spending, Medicare Part A spending, and Medicare Part B spending. It compares spending and service use for beneficiaries who have Medigap insurance, which may or may not cover prescription drugs, and uses variation in state regulations of the individual insurance market-including guaranteed issues and community rating-as instruments for prescription drug coverage. The author estimates that Medigap prescription drug coverage significantly increases drug spending by 22% and reduces Medicare Part A spending by 10–13%. Medicare Part B spending is reduced by an insignificant amount. The results imply that a $1 increase in prescription drug spending is associated with $1.63–$2.05 reduction in Medicare spending. The dissertation also considers the lifetime effects of anti-hypertensives on health outcomes and healthcare expenditures. The results suggest that controlling hypertension in the elderly could be very cost-effective.

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This document was submitted as a dissertation in October, 2005 in partial fulfillment of the requirements of the doctoral degree in public policy analysis at the Pardee RAND Graduate School. The faculty committee that supervised and approved the dissertation consisted of Dana Goldman (Chair), Geoffrey Joyce, and Darius Lakdawalla.

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