The Effect of Medicare Part D on Pharmaceutical Prices and Utilization

48 Pages Posted: 4 Apr 2008 Last revised: 13 Jul 2022

See all articles by Mark Duggan

Mark Duggan

University of Maryland - Department of Economics; National Bureau of Economic Research (NBER)

Fiona M. Scott Morton

Yale School of Management; National Bureau of Economic Research (NBER)

Date Written: April 2008

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.

Suggested Citation

Duggan, Mark G. and Scott Morton, Fiona M., The Effect of Medicare Part D on Pharmaceutical Prices and Utilization (April 2008). NBER Working Paper No. w13917, Available at SSRN: https://ssrn.com/abstract=1116593

Mark G. Duggan (Contact Author)

University of Maryland - Department of Economics ( email )

3115C Tydings Hall
College Park, MD 20742
United States

National Bureau of Economic Research (NBER)

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Fiona M. Scott Morton

Yale School of Management ( email )

493 College St
New Haven, CT CT 06520
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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