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

77 Pages Posted: 30 Aug 2013

See all articles by Liran Einav

Liran Einav

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

Amy Finkelstein

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Paul Schrimpf

Massachusetts Institute of Technology (MIT); University of British Columbia (UBC) - Vancouver School of Economics

Date Written: August 2013

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.

Suggested Citation

Einav, Liran and Finkelstein, Amy and Schrimpf, Paul, The Response of Drug Expenditures to Non-Linear Contract Design: Evidence from Medicare Part D (August 2013). NBER Working Paper No. w19393. Available at SSRN: https://ssrn.com/abstract=2318294

Liran Einav (Contact Author)

Stanford University - Department of Economics ( email )

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Amy Finkelstein

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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Paul Schrimpf

Massachusetts Institute of Technology (MIT) ( email )

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University of British Columbia (UBC) - Vancouver School of Economics ( email )

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Canada

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