Providing Prescription Drug Coverage to the Elderly: America's Experiment with Medicare Part D

The federal government's Medicare program did not provide general prescription drug coverage for the first 40 years of its existence. Thus, more than 30 percent of the 44 million elderly and disabled beneficiaries of the program lacked insurance coverage for prescribed medications. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 established a voluntary outpatient prescription drug benefit known as Medicare Part D. This program took effect in 2006 and represents the largest expansion of an entitlement program since the start of Medicare itself. The design of Part D is of particular interest to economists for at least three reasons: First, the program has the potential to affect significantly both the health and the economic well-being of the more than 44 million individuals currently enrolled in Medicare. Second, Part D has substantially increased government spending on health care despite the projections that such spending was already on an unsustainable path. Third, Part D represents an ambitious attempt to use market mechanisms in the delivery of a large-scale entitlement program. Part D has been controversial. In this paper, we aim to shed light on the various issues raised by the Part D program, including the incentives inherent in the competition among plans, the forces that affect drug prices, and the sustainability of Part D in the face of adverse selection and moral hazard. We conclude that Part D has succeeded in a number of important ways, however, substantial room for improvement remains.