Medicare and prescription drug coverage: Impacts on medical spending and disability

Prescription drug coverage is a central issue in the policy debate over Medicare reform. Proponents of a Medicare drug benefit have argued that drug coverage increases use of essential medicines, which may increase quality of life and offset related non-drug medical spending by reducing the risk of hospitalization and nursing home stays. Evidence on the costs and benefits of expanding drug coverage remains limited. This study examines the impact of insurance coverage for prescription drugs on medical spending and functional disability in the elderly Medicare population.; Most elderly Medicare beneficiaries have one or more chronic conditions that often require long-term compliance with prescription drug therapy. Thus, understanding the implications of drug coverage motivates a theoretical model of how chronic illness affects the demand for medical care. Chronic illness usually implies a permanent, degenerative condition with non-pecuniary disability loss. The key characteristic of chronic illness is endogenous severity: the risk of complications and decline in functional status may be influenced by the consumer's choice of the level of preventive effort. In the case of prescription drugs, insurance coverage lowers the marginal cost of drugs which induces greater drug utilization and use of more costly drugs. The potential benefits are a reduction in non-drug medical spending and lower level of functional disability.; Using the Medicare Current Beneficiary Survey, the effect of drug coverage on drug spending, non-drug spending, and functional disability is estimated for elderly Medicare beneficiaries continuously enrolled in supplemental insurance from employers, Medigap, and Medicare HMOs. Drug coverage is specified as an endogenous treatment effect, and selection bias is addressed using propensity score matching and selection models.; The study finds that drug coverage increases the probability of any prescription and aggregate drug spending. Moral hazard induces a greater number of prescriptions filled as well as a higher average cost per prescription. Although no conclusive evidence of a cost-offset to aggregate non-drug medical spending was found, some savings to acute medical care are suggested. Drug coverage may increase spending on ambulatory medical care. Some evidence of a link between drug coverage and declining disability was found.