Medicare enrollees can purchase prescription drug coverage through the Medicare Part D program. Prior to passage of the Affordable Care Act (ACA), the coinsurance structure of Medicare Part D was as follows:

There was an initial $295 out of pocket deductible before insurance began to pay anything

Between $295 and $2,700 in total costs ($970 out of pocket), the coinsurance rate was 25%

After $2,700 in total costs, the coinsurance rate increased to 100%

Once total costs reached $6,153 ($4,350 out of pocket), the coinsurance rate fell to 5%

a) Use the specifics of the Medicare Part D prescription drug plan and graph a seniors out of pocket expenses for prescription drugs (vertical axis) versus the total expenditures on prescription drugs (horizontal axis). Hint: your graph should look similar to the one on slide 9 of the Supply and Demand of Health Insurance Part II slides (i.e., the Cost sharing under indemnity insurance graph from Cutler and Zeckhauser (2000).

b) Does the structure of this cost sharing arrangements make sense from an economic point of view? Why or why not?

c) Draw the same graph using the changes to Medicare Part D implemented under the ACA (the new rates are listed in the Medicare lecture notes; use the coinsurance rate for generic drugs). How do you expect that this change will affect spending on prescription drugs by the elderly?