The Labor Market Effects of Medicare Part D

Established as part of the Medicare Modernization Act of 2003, Medicare Part D began offering prescription drug coverage to seniors in January 2006. Though participation Medicare Part D is voluntary, the program has seen substantial growth since its inception with nearly three-quarters of Medicare beneficiaries currently enrolled.

Prior evidence suggests that the presence and generosity of health insurance that is not linked to employment can induce changes in labor market behaviors. And while researchers have studied the effect of Medicare Part D on outcomes associated with individual health and financial stability, to our knowledge, there has been no comprehensive examination of the relationship between Medicare Part D and the labor supply decisions of seniors.

The expected effect of Medicare Part D on labor market outcomes is theoretically ambiguous, and is therefore an empirical question. For example, access to prescription drug coverage that is not tied to employment reduces the benefits of continuing to work and could lead to reductions in labor force participation or hours worked. Alternatively, if Medicare Part D improves health and longevity, as some evidence suggests, then seniors may be in a better position to maintain employment as they age or require the extra income from continued employment to finance longer lives.

In this paper, we examine the extent to which the introduction of the Medicare Part D program affected labor market outcomes for seniors, including labor force participation, total hours worked, and movement from full- to part-time employment. Using data from the American Community Survey, we exploit the discontinuity in Medicare eligibility at age 65 before and after the introduction of Medicare Part D to identify relative changes in labor supply associated with gaining Part D eligibility. In effect, we combine elements of regression discontinuity approach and a difference-in-differences method to compare the labor supply decisions of individuals around age 65 from 2001 to 2005 (before the introduction of Medicare Part D) and 2007 to 2009 (after the introduction of Medicare Part D). Our preliminary findings indicate that becoming age-eligible for Medicare Part D coverage reduces labor force participation rates by 1.6 percentage points; a 3.7% reduction compared to those ages 63 and 64. We also find evidence of a reduction in hours worked conditional on continued employment and an increase in the likelihood of working part-time. Notably, this strategy is likely to produce lower-bound estimates of the effect of Part D on labor supply due to the fact that prescription drug coverage rates were relatively high prior to the introduction of the Part D program. To further bolster the credibility of our primary analysis and address this issue of crowd-out, we incorporate data from the Health and Retirement Study, which allows us to focus our analysis on those most likely to gain prescription coverage after the introduction of Part D.