Prescription Drugs, Medical Care, and Health Outcomes: A Model of Elderly Health Dynamics

Health insurance specific to one type of medical care (e.g., prescription drug coverage) creates a change in medical care consumption behavior, beyond standard moral hazard, arising both from the differential cost-sharing and relative effectiveness of care in producing health. We model the choice of supplemental health insurance among Medicare beneficiaries, their medical care demand, and subsequent health outcomes using a dynamic model. Parameter estimates obtained with longitudinal individuallevel data from the 1992-2001 MCBS allow us to simulate behavior under different drug coverage scenarios. Prescription drug coverage increases drug expenditures by 20% to 35% over a five-year period. While mortality rates fall slightly, the survivors have poorer health, leading to higher total medical expenditures. This research is funded by the National Institute on Aging Grant Number R01-AG16600. We appreciate comments from David Blau, Richard Hirth, Xin Li, Betsy Sleath, Sally Stearns, Morris Weinberger, and seminar and conference participants at the University of North Carolina at Chapel Hill, Michigan State University, the University of Wisconsin, the 4th World Congress of the international Health Economics Association, and the 15th Annual Health Economics Conference. We also acknowledge Tom Mroz for providing the discrete factor random effect subroutine that we adapted for estimation of our model. Comments are welcome at [email protected], donna [email protected], or edward [email protected].