The Effect of Medicare Part D on Pharmaceutical Prices and Utilization

Mark Duggan and Fiona Scott Morton

No 13917, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: H57 I11 I18 L11 L51 (search for similar items in EconPapers)
Date: 2008-04
New Economics Papers: this item is included in nep-ias
Note: EH IO PE
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Citations: View citations in EconPapers (10)

Published as 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.

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Journal Article: The Effect of Medicare Part D on Pharmaceutical Prices and Utilization (2010)
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