Former President Bush discussing Medicare Part D in 2006. Image: Wikimedia Commons.
For half a century, Medicare has helped seniors and other participants cover the costs of their healthcare. Over that time, the program has gone through many changes, among them, adding prescription drug coverage under Medicare Part D beginning in 2006. Its purpose was to reduce drug costs, thus limiting the growth in the overall healthcare expenses of seniors. Yet the results of a recent working paper from the Center for Retirement Research at Boston College show that some beneficiaries have seen far more dramatic reductions in their healthcare costs than others as a result of Medicare Part D. Let's take a closer look at what the working paper said about who is saving the most from the program.
The decline in out-of-pocket spending on prescription drugs
Before Medicare Part D took effect, prescription drugs often represented a huge portion of what seniors spent on healthcare. Those who could afford supplemental insurance coverage typically got some relief from the high out-of-pocket costs of prescription drugs, but many participants weren't able to take advantage of supplemental coverage. The introduction of Medicare Part D made drug coverage available to all participants, with low-income participants getting to take advantage of some of the program's cost-sharing provisions.
Overall, the impact of the Medicare Part D reforms on healthcare costs for the typical American was fairly muted. In 2005, before the program took effect, median spending on healthcare premiums and out-of-pocket costs on health services and prescription drugs was 11.8%. By 2010, that amount was down to 11.6%. As you'd expect, Part D added to participants' premium costs, but reduced out-of-pocket expenses. Viewed broadly, the net effect was nearly a wash.
Yet the working paper's results show just how important the reforms were for those whose healthcare expenses were highest relative to their incomes. In 2005, the top 5% of participants spent more than half of their incomes on healthcare costs, yet by 2010, those expenses had fallen by more than eight percentage points to 42.2% of income. The decline in spending on prescription drugs was a huge factor in that drop. And at the other end of the spending spectrum, among the 5% whose healthcare spending was the lowest proportion of income, the decline during the five-year period was more than six percentage points to 8.6%.
Income's role in healthcare costs
Part D was also of key importance for Medicare's lowest-income participants, who tend to spend a much greater percentage of their money on healthcare overall, and on prescription drug costs in particular. The paper broke down the population into five groups based on income. For those in the bottom fifth of the income spectrum, total median healthcare costs fell by more than four percentage points to 17.9% from 2005 to 2010. Prescription drug costs for that income cohort fell from 3.6% in 2005 to just 2% five years later.
Data from the Center for Retirement Research at Boston College.
By contrast, higher-income Medicare participants didn't benefit nearly as much from the reforms. In fact, the second-lowest income group saw total healthcare costs rise slightly, as big jumps in premiums offset the declines in out-of-pocket drug expenses. Those in the upper three quintiles also saw higher premiums eat up more of their drug cost savings, but changes in overall spending were relatively small.
Did Medicare Part D work for the typical American?
The working paper offered mixed conclusions on the success of Medicare Part D. On one hand, the researchers noted that healthcare costs fell overall, especially for those who are most vulnerable to the hardships caused by high medical expenses. Yet they also acknowledged that some might see the benefit as "unremarkable" compared to how big the reforms were. Moreover, the vulnerability of what the paper calls the "near-poor" showed up in the results. Many subsidies and cost-sharing provisions are aimed squarely at the lowest-income population, leaving those who earn just a bit more without any assistance.
Medicare Part D has had a big impact on drug coverage in America. The cost savings have largely gone to those with the least capacity to pay, which was one of the main objectives policymakers had in implementing the reforms in the first place. Nevertheless, it leaves some people still struggling to cover the burdensome costs of healthcare in retirement.
