The Response of Drug Expenditures to Non-Linear Contract Design: Evidence from Medicare Part D

Liran Einav, Amy Finkelstein and Paul Schrimpf

No 19393, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the demand response to non-linear price schedules using data on insurance contracts and prescription drug purchases in Medicare Part D. Consistent with a static response of drug use to price, we document bunching of annual drug spending as individuals enter the famous "donut hole," where insurance becomes discontinuously much less generous on the margin. Consistent with a dynamic response to price, we document a response of drug use to the future out-of-pocket price by using variation in beneficiary birth month which generates variation in contract duration during the first year of eligibility. Motivated by these two facts, we develop and estimate a dynamic model of drug use during the coverage year that allows us to quantify and explore the effects of alternative contract designs on drug expenditures. For example, our estimates suggest that "filling" the donut hole, as required under the Affordable Care Act, will increase annual drug spending by $180 per beneficiary, or about 10%. Moreover, almost half of this increase is "anticipatory," coming from beneficiaries whose spending prior to the policy change would leave them short of reaching the donut hole. We also describe the nature of the utilization response and its heterogeneity across individuals and types of drugs.

JEL-codes: D12 G22 (search for similar items in EconPapers)
Date: 2013-08
Note: AG EH IO PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Published as The Response of Drug Expenditure to Nonlinear Contract Design: Evidence from Medicare Part D* Liran Einav, Amy Finkelstein and Paul Schrimpf The Quarterly Journal of Economics (2015) 130 (2): 841-899.

Downloads: (external link)
http://www.nber.org/papers/w19393.pdf (application/pdf)

Related works:
Journal Article: The Response of Drug Expenditure to Nonlinear Contract Design: Evidence from Medicare Part D (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:19393

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w19393

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().