Introduction of Medicare Part D
Introduction
Wettstein (2020) calculates the MVPF for the introduction of Medicare Part D. The Medicare Part D program first took effect in 2006 and provided a subsidy for prescription drug insurance plans for individuals over age 65. Such a subsidy was not part of the health care coverage provided by Medicare before 2006, effectively limiting prescription drug insurance to individuals with employer-sponsored insurance. Using a triple-differences approach, the paper estimates a 24% decrease in the rate of full-time employment among individuals who, prior to 2006, would have been dependent on their employer-sponsored insurance for prescription drug insurance after age 65.
MVPF = 2.0
Net Cost
The total costs are the sum of the direct cost and the fiscal externality. The paper calculates these at the population level. The direct cost is the additional dollar given to all individuals who were already retired. The paper estimates this to be 0.65 when averaged over the whole population (retired or not). There are three components to the fiscal externality. First: the entire value of the subsidy must be given to individuals who choose to retire as a result of the increase in the subsidy. This is estimated as 0.084 per individual. The second component accounts for the fact that the entire subsidy is given to additional units of insurance that retirees purchase because of the lower price. This is equal to the share of the population receiving the subsidy multiplied by an estimate of how much demand for insurance changes with a change in the subsidy: 0.15 x 0.65 = 0.0975. The third component of the fiscal externality is the reduction income tax revenue as a result of decreased labor supply. This is estimated as the change in income per additional dollar of subsidy multiplied by the amount of the subsidy (1,477), divided by the net subsidy per capital (1,588) multiplied by the estimated average income tax rate of (0.28): 0.28 x (1,477 / 1,588) = 0.26. The sum of the cost components is 0.65 + 0.084 + 0.0975 + 0.26 = 1.09. To calculate the final total cost, the paper normalizes this sum by the share of the population receiving the subsidy: 1.09 / 0.65 = 1.68.
Willingness to Pay
The paper divides the population into two populations: full-time workers who have employer coverage and retirees who benefit from the policy. The first group accounts for 35% of the relevant population; the paper assumes their willingness to pay is 0.
The second group accounts for 65% of the relevant population. The paper estimates the willingness to pay for this population as follows. Gelber et al. (2016) find that a $6,126 increase in Social Security leds to a decline in participation of 0.004. This paper finds that the introduction of Medicare Part D led to a 0.0836 decline in the full-time working population. Applying the ratio of the estimates from Gelber et al. (2016), the paper estimates that Medicare Part D is valued the same as $128,000 of lifetime Social Security wealth (discounted annually at 3%). The paper also estimates that the present value of the subsidy to a 65-year-old in 2006 was approximately $25,000. This yields a willingness to pay of $128,000 / $25,000 = 5.12 per dollar of subsidy.
The overall willingness to pay is then estimated as (0.35 x 0) + (0.65 x 5.12) = 3.33.
MVPF Summary
The MVPF of the introduction of Medicare Part D is then MVPF = 3.33 / 1.68 = 1.98.
References
Gelber, Alexander, Adam Isen, and Jae Song. 2016. “The Effect of Pension Income on Elderly Earnings: Evidence from Social Security and Full Population Data.” Goldman School of Public Policy, University of California Berkeley Working Paper. https://gspp.berkeley.edu/assets/uploads/research/pdf/gelberisensong051716.pdf
Wettstein, Gal. 2020. “Retirement Lock and Prescription Drug Insurance: Evidence from Medicare Part D.” American Economic Journal: Economic Policy, 12 (1): 389-417. https://doi.org/10.1257/pol.20160560
Policy Features
- Category
- Social Insurance
- Sub-Category
- Health Adult
- Beneficiary Type(s)
- Seniors (65+)
- Country of Implementation
- United States
- Year of Implementation
- 2006
- Empirical Method
- Difference in Differences
- Research Type
- Primary
- Peer Reviewed
- No
- MVPF Publication Link
- doi.org/10.1257/pol.20160560