The Effect of Medicare Part D on Pharmaceutical Prices and Utilization
On January 1, 2006, the federal government began providing insurance coverage for Medicare recipients' prescription drug expenditures through a new program known as Medicare Part D. Rather than setting pharmaceutical prices itself, the government contracted with private insurance plans to provide this coverage. Enrollment in Part D was voluntary, with each Medicare recipient allowed to choose from one of the private insurers with a contract to offer coverage in her geographic region. This paper evaluates the effect of this program on the price and utilization of pharmaceutical treatments. Theoretically, it is ambiguous whether the expansion in insurance coverage would increase or reduce pharmaceutical prices. Insurance-induced reductions in demand elasticities would predict an increase in pharmaceutical firms' optimal prices. However, Part D plans could potentially negotiate price discounts through their ability to influence the market share of specific treatments. Using data on product-specific prices and quantities sold in each year in the U.S., our findings indicate that Part D substantially lowered the average price and increased the total utilization of prescription drugs by Medicare recipients. Our results further suggest that the magnitude of these average effects varies across drugs as predicted by economic theory.
We thank Abigail Alpert, Tamara Hayford, and Patrick Healy for outstanding research assistance. We are also grateful to Steve Berry, Jay Bhattacharya, Judith Chevalier, Judith Hellerstein, Melissa Kearney, Jeanne Lafortune, and seminar participants at Columbia, Duke, Maryland, Stanford, Syracuse, Toulouse, the NBER, the Centers for Medicare and Medicaid Services, and the 2008 AEA meetings for helpful comments. We are grateful to Merck and Co. for providing us IMS data, and to IMS for giving permission for us to use their data. This project was supported by National Science Foundation Research Grant 0518858 "The Effect of Government Procurement of Pharmaceuticals." The opinions contained herein are those of the authors and not necessarily of any funding agency. Copyright held by Mark Duggan and Fiona Scott Morton. Contact information for authors: firstname.lastname@example.org, email@example.com. All errors are our own. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
- A branded drug sold to an elderly consumer covered by a Medicare Part D plan cost at least 24 percent less than the same drug sold to an...
Mark Duggan & Fiona Scott Morton, 2010. "The Effect of Medicare Part D on Pharmaceutical Prices and Utilization," American Economic Review, American Economic Association, vol. 100(1), pages 590-607, March. citation courtesy of