Stocking Under the Influence: Spillovers from Commercial Drug Coverage to Medicare Utilization

Abstract

We show that variation in state-level commercial coverage of physician-administered drugs impacts Medicare patients' utilization: a 10pp increase in commercial exclusion rates leads to a 0.9-1.7pp reduction in share among Part B beneficiaries. Facilities, rather than physicians, drive prescribing variation, likely through the preferred stocking of products with better commercial coverage. Motivated by these findings, we calibrate a model of manufacturer competition over insurance coverage and facility stocking, and find that the stocking channel weakens the government's ability to influence Medicare utilization and that manufacturers can strategically use formulary coverage to soften price competition over facility stocking.

Keywords: Drug pricing, Medicare, Insurance, Healthcare Facilities

JEL Classification: L65, I11, I13