Insurance coverage for prescription drugs - Effects on use and expenditures in the Medicare population

BACKGROUND. Although most of the elderly are covered by Medicare, they pote ntially face large out-of-pocket costs for their health care because of exc luded services. Aside from nursing home care, the exclusion of prescription drugs is one of the most significant. Several earlier policy initiatives h ave proposed adding prescription drug coverage to the Medicare program. To determine the effects of such an expansion, one must account for the potent ial increase in the demand for prescription drugs from providing insurance coverage. METHODS. The study uses a new data source, the RAND Elderly Health Suppleme nt to the 1990 Panel Study of Income Dynamics (PSID). The endogenity of ins urance coverage is tested using instruments that exploit the longitudinal n ature of the data. Equations are estimated on 910 persons (greater than or equal to 66 years) using a two-part model. RESULTS. Insurance coverage for prescription drugs significantly increases the probability of use, but not of total expenditures, among those who use prescription drugs. However, insurance coverage significantly lowers out-of -pocket expenditures, thereby decreasing the financial burden on elderly ho useholds associated with prescription drug use. Medicaid coverage has effec ts that are smaller than those for private insurance, but the magnitude is less precisely estimated. These findings imply that if prescription drug coverage were added to Medic are, expected expenditures on drugs would rise by on average $83 for each e lderly Medicare beneficiary (in 1990 dollars), although this increase is si gnificant only at the 90% level. If the benefit had been included under Med icare, expected spending on prescription drugs by the elderly would have ri sen by approximately 20%, or $2.6 billion in 1990.