Prescription drug coverage and elderly medicare spending

Baoping Shang

"The introduction of Medicare Part D has generated interest in the cost of providing drug coverage to the elderly. Of paramount importance -- often unaccounted for in budget estimates -- are the salutary effects that increased prescription drug use might have on other Medicare spending. This paper uses longitudinal data from the Medicare Current Beneficiary Survey (MCBS) to estimate how prescription drug benefits affect Medicare spending. We compare spending and service use for Medigap enrollees with and without drug coverage. Because of concerns about selection, we use variation in supply-side regulations of the individual insurance market -- including guaranteed issue and community rating -- as instruments for prescription drug coverage. We employ a discrete factor model to control for individual-level heterogeneity that might induce bias in the effects of drug coverage. ...