Medicare drug coverage and moral hazard

This paper explores the effect of more extensive drug coverage in Medicare on the use of and spending for prescription drugs and considers whether any additional use is likely to represent satisfaction of previously unmet needs or whether it represents yet more overuse. Reasonable estimates of the effect on spending strongly suggest that the spending increase will be small and that some of it will go to beneficiaries who do not face high financial barriers at present. Thus, from the viewpoint of improvements in health, national spending on drugs, or pharmaceutical firm revenues, effects are small. The effects of such programs on Medicare's fiscal future are much more important.