How Big Is the Government Subsidy for Medicare Part D?

Publication Date: January 2020

Publisher: Center for Retirement Research at Boston College

Author(s): Alicia H. Munnell; Gal Wettstein; Wenliang Hou

Research Area: Health

Keywords: Financing Retirement

Type: Report

Coverage: United States

Abstract:

The Medicare Part D program, launched in 2006,
extended outpatient prescription drug insurance
to almost all Americans over age 65. This expansion of Medicare was a response to the rapid growth
of drug costs and the resulting strain on patients’
budgets. Participants in Part D generally pay monthly
premiums, face an annual deductible, and make
copayments on drug purchases above the deductible.
These payments typically are less than the value of
the drugs received. Estimating the precise size of this
subsidy for any individual depends on many factors.
A simpler task is estimating the size of the average
subsidy that retirees can expect to receive. This brief
calculates the average lifetime Part D subsidy for a
typical 65-year-old in 2019.
Clarifying the scale of the Part D subsidy is important for individuals, researchers, and policymakers. For individuals, the size of the subsidy that the
typical beneficiary can expect to receive from Part D
may impact household planning for prescription drug
costs in old age. For researchers, understanding the
size of the subsidy will provide a basis for assessing
the large reported effects of Part D on outcomes as diverse as mortality, mental health, and retirement age.
For policymakers, knowing the subsidy amount will
help them evaluate reform proposals (e.g., both the
Affordable Care Act and the Bipartisan Budget Act of
2018 increased the generosity of the standard Part D
benefit design, while current reform proposals would
address rising drug costs).
The discussion proceeds as follows. The first
section describes how Part D works and defines the
nature of the subsidy. The second section reports on
what is known about the value of Part D from existing
literature. The third section presents the methods
used in this analysis to calculate the lifetime amount
of the Part D subsidy. The fourth section presents
estimates of the subsidy under low, intermediate, and
high assumptions and discusses some implications.
The final section concludes that Part D represents a
substantial subsidy in dollar terms for an individual
entering retirement