Yang, Zhou, Donna B. Gilleskie, and Edward C. Norton. 2009. “Health Insurance, Medical Care, and Health Outcomes: A Model of Elderly Health Dynamics.” Journal of Human Resources 44(1): 47–114.
Prescription drug coverage creates a change in medical care consumption, beyond standard moral hazard, arising both from the differential cost-sharing and the relative effectiveness of different types of care. We model the dynamic supplemental health insurance decisions of Medicare beneficiaries, their medical care demand, and subsequent health outcomes over time. Using parameter estimates obtained with longitudinal individual-level data, we simulate behavior under different drug coverage scenarios. Prescription drug coverage increases drug expenditures by 7 percent to 27 percent over a five-year period. While mortality rates fall slightly, the survivors have poorer health, leading to higher total medical expenditures.
Zhou Yang is assistant professor of health economics at Emory University. Donna B. Gilleskie is an associate professor of economics at the University of North Carolina at Chapel Hill. Edward C. Norton is a professor of health management and policy and a professor of economics at the University of Michigan. This research is funded by the National Institute on Aging Grant Number R01-AG16600. The authors appreciate comments from David Blau, Richard Hirth, Xin Li, Tom Mroz, 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, Yale University, the 4th World Congress of the international Health Economics Association, and the 15th Annual Health Economics Conference. The data used in this article were acquired through a restricted use agreement with the Centers for Medicare and Medicaid Services and can only be obtained through the Centers for Medicare and Medicaid Services. The authors are willing to help other scholars through this process.