How Much Would A Medicare Prescription Drug Benefit Cost? Offsets in Medicare Part A Cost by Increased Drug Use Zhou Yang, Ph.D. Assistant Professor Department of Medicine Michigan State University

Introduction Congress passed Medicare Prescription Drug Bill in Nov, 2003 Still controversial: How much it will cost? What is the health benefit? Cost estimations vary wildly from different sources

Existing Studies Investigating immediate effect of insurance on drug use Predicting static cost of drug benefit General conclusion: Medicare drug bill will increase prescription drugs expenditures

Questions have been ignored Whether? How much? Will higher utilization of prescription drugs affect other Medicare covered services

Related Literature Medicaid prescription cap reduces drug expenditures, increases hospital and nursing home expenditures subsequently (Sourmerai et al., 1991) Higher cost sharing of drug insurance leads to lower drug expenditure, but higher hospital and emergency room expenditures. (Tamblyn et al., 2001) Higher utilization of newer drugs are associated with lower hospital care cost (Lichtenberg, 2003)

Focus of this study Whether there is offset in Medicare inpatient care cost from higher drug use? The magnitude of the offset? The difference in the magnitudes of offsets among high risk subgroups.

Data Cost and Use files of Medicare Current Beneficiary Survey ( ) Survey file: Demographics, Insurance, Health status Events file: Utilization and cost information of medical services, including both outpatient drugs and inpatient care Longitudinal data

Analytical Method Medicare Part A Exp it =  (Prescription drugs Exp i(t-1), Other Health Care Exp i(t-1), Demographics it Insurance it Health Shocks it ) Two Part Model: First Part Predict Probability Second Part Predict Expenditure Conditional on Any

Analytical Method Effect of drug use on subsequent Medicare Part A cost Simultaneous equations Random effect to control for endogeneity

Results Sub Group Coefficient of Logit Coefficient of OLS Offset Rate Entire Sample –0.0401**  ** 4.4% No Disability –0.0380**  ** 4.9% Disabled (ADL, IADL)   % Diabetes –0.0203** –0.0281*  ** 10.9% Heart Attack * 2.5% Income(<$15,000)  **  ** 7.3% Income (  $15,000)   1.3%

Results

Conclusion Drug Bill will lead to small but statistically significant offsets in Medicare Part A cost Savings in inpatient care is hardly a way to save money Offset rate is higher for healthier people than sicker people

Policy Implication In short run: No considering the possible offset in Medicare Part A expenditures may lead to over estimate of the cost of Drug Bill Help high risk people to be less dependent on hospital care and ER visits

Policy Implication In long run: more complicated Lower mortality Larger population size Comparatively higher disability rate Higher Medicare Part A cost in total (Yang, Gillieskie, Norton, 2004)