Effects of Prescription Drug Insurance on Hospitalization and Mortality: Evidence from Medicare Part D

• Author: G. Caleb Alexander,Cuping Schiman,Robert Kaestner
• DOI: http://doi.org/10.1111/jori.12229
• Date: 01 September 2019
• Published date: 01 September 2019

EFFECTS OF PRESCRIPTION DRUG INSURANCE ON

HOSPITALIZATION AND MORTALITY:EVIDENCE FROM

MEDICARE PART D

Robert Kaestner

Cuping Schiman

G. Caleb Alexander

ABSTRACT

We used Medicare administrative data (2002–2009) and an instrumental

variables design that exploits the natural experiment created by the

implementation of Medicare Part D to estimate the effect of prescription

drug coverage insurance on the use and costs of inpatient services. We find

that gaining prescription drug insurance through Part D caused approxi-

mately a 4 percent decrease in hospital admission rate, a 2–5 percent decrease

in Medicare inpatient payments per person, and a 10–15 percent decrease in

inpatient charges. Among specific types of admissions, gaining insurance

was associated with significant decreases in admissions for CHF and COPD.

INTRODUCTION

Congress created the Medicare Part D program to provide subsidized prescription

drug insurance for Medicare recipients. The creation of Part D was motivated, in part,

by the growing importance of prescription drugs in preventing and treating diseases,

and the growing costs of buying prescription drugs.

1

As a result of Part D, the

proportion of elderly with prescription drug insurance increased from approximately

66 to 90 percent (Kaiser Family Foundation, 2010; Levy and Weir, 2010; Engelhardt

and Gruber, 2011; Kaestner and Khan, 2012; Zimmer, 2012).

Robert Kaestner is at the Institute of Government and Public Affairs, University of Illinois,

Chicago, IL, USA. Kaestner can be contacted via e-mail: kaestner.robert@gmail.com. Cuping

Schiman is at the Feinberg School of Medicine, Northwestern University, Chicago, IL, USA.

Schiman can be contacted via e-mail: cuiping.schiman@gmail.com. G. Caleb Alexander is at the

Departments of Epidemiology and Medicine, Johns Hopkins Bloomberg School of Public

Health. Alexander can be contacted via e-mail: galexand@jhsph.edu.

1

For the 20 years prior to passage of Medicare Part D, prescription drug use was growing faster

than the population and prescription drug spending was growing faster than overall spending

on health care. See “Prescription Drug Trends,” Kaiser Family Foundation (2010), http://

www.kff.org/rxdrugs/upload/3057-08.pdf (accessed April 2, 2013).

© 2017 The Journal of Risk and Insurance (2017).

DOI: 10.1111/jori.12229

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595

. Vol. 86, No. 3, 595–628 (2019).

The cost of Medicare Part D is substantial. Federal and State expenditures on Part

Dwere$83.8 billion in 2014.

2

Moreover, the Congressional Budget Office (CBO)

forecasted that expenditures on Part D will increase by $51 billion from 2013 to

2022 because of the expansion of the generosity of Medicare Part D contained in

the Affordable Care Act that will gradually eliminate the gap in coverage

popularly referred to as the doughnut hole (CBO, 2012). Notably, the CBO

forecast was net of $35 billion in savings (“offsets”) from Part D due to reductions

intheuseofothermedicalservicesbecauseofgreateruseofprescriptiondrugs.

Without this offset, the forecasted increase in spending on Medicare Part D would

have been $86 billion, or 68 percent greater. Indeed, during the debate over Part

D, many legislators made statements reflecting the notion that obtaining

prescription drug insurance will reduce other types of health care spending.

Typical of such statements are the following taken from the Congressional Record

June 17, 2003.

3

Now we find through research funded by Government, through research

funded by the drug companies, and products that have emerged from that

research, that many of the sicknesses you used to go to the hospital for and

stayed for 3 or 4 days can be taken care of by taking a pill. Yet Medicare

says if you go to the hospital and run up a bill of however many tens of

thousands of dollars to stay that many days, we will pay for it. But if you

take the pill that makes the hospital visit unnecessary, we will not. That

clearly doesn’t make sense. There is the need for the benefit of prescription

drugs, and the Medicare system needs to catch up to circumstance.

(Senator Robert Bennett, Republican, Utah)

There is a dramatic change in the pattern and practice of medicine. Perhaps

no better example is what happens with stomach illness. Twenty years

ago, there was not much one could do for somebody who suffered from

ulcers other than to have surgery. But now with prescription drugs that

address the underlying causes, stomach surgery has been reduced by two-

thirds. Yet, in Medicare there is no coverage for those prescription drugs.

You can’t have a modern Medicare without a prescription drug

component. (Senator Kent Conrad, Democrat, North Dakota)

While Senators Bennett and Conrad, among others, believed that a prescription drug

benefit would reduce spending on nonpharmacy services and improve health, the

evidence at the time to support their statements was, at best, sparse. Moreover, there

2

“2015 Annual Report of the Board of Trustees,” Federal Hospital Insurance and Federal

Supplementary Medical Insurance Trust Funds, https://www.cms.gov/Research-Statistics-

Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/TR2015.

pdf (accessed February 10, 2016).

3

See http://thomas.loc.gov/cgi-in/query/D?r108:12:./temp/~r108FHAhy2::.

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are plausible reasons to expect that prescription drug coverage would have little

effect on nonpharmacy spending, for example, because of the possibility that much of

the additional prescription drug use that comes with insurance may be marginal in

terms of health benefits. The relative dearth of evidence on whether prescription

drugs are substitutes for other medical spending persists today and is reflected in the

recent CBO (2012) report, which relied on a limited number of studies to draw its

conclusions about offsetting effects of Part D on spending on other medical services.

4

In this article, we examine whether obtaining prescription drug coverage through the

Medicare Part D program affected hospital admissions and inpatient expenditures

associated with those admissions for a variety of illnesses such as congestive heart

failure (CHF), stroke, dehydration, and chronic obstructive pulmonary disease

(COPD). We also assess whether gaining Medicare Part D coverage affected all-cause

mortality. Data for the analysis are drawn primarily from Medicare claims for

inpatient services (Medicare Provider Analysis and Review, MEDPAR) from 2002 to

2009, thus spanning the implementation of Medicare Part D in 2006. We also use data

from the Medicare Current Beneficiary Survey (MCBS) over the same period to obtain

information about prescription drug insurance of Medicare beneficiaries because

such information is not available in the data on inpatient claims. With these data, we

compare hospital admissions, inpatient spending, and mortality before and after

implementation of Medicare Part D for elderly who were more or less likely to gain

prescription drug insurance through Medicare Part D.

We find that obtaining prescription drug insurance through Medicare Part D

significantly reduced hospital admissions and Medicare expenditures for those

admissions. Overall, gaining prescription drug insurance through Medicare Part

D caused approximately a 4 percent decrease in the number of hospital

admissions per 1,000 people, a 2 percent (full sample) to 5 percent (white-only

sample) decrease in Medicare payments per person for hospital admissions, and a

10 percent (full sample) to 15 percent (white-only sample) decrease in inpatient

charges. Among specific types of admissions, prescription drug insurance was

associated with significant decreases in admissions for CHF, COPD, and diabetes.

Associations between prescription drug insurance and resource use (i.e., hospital

charges) were usually larger than associations between prescription drug

coverage and the number of admissions, which implies that gaining prescription

drug insurance affected resource-intensive admissions more than low-cost

admissions. Gaining prescription drug coverage through Medicare Part D did

not affect all-cause mortality. Given that approximately 11 million persons gained

prescription drug insurance through Medicare Part D, mostly through stand-

alone Part D plans, we estimate that reduced hospital expenditures associated

with increased prescription drug coverage produced aggregate savings of

approximately $500 million per year.

4

The applicability of some of the studies reviewed in the CBO report to Medicare Part D is

debatable. For example, Gaynor, Li, and Vogt (2007) examine nonelderly, and Stuart, Doshi,

and Terza (2009) treat prescription drug coverage as exogenous. We review most of the other

studies contained in CBO report below.

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