Mergers in Medicare Part D: Decomposing Market Power, Cost Efficiencies, and Bargaining Power

Abstract

We examine horizontal mergers amongst Part D insurers with the aim of decomposing market power, cost efficiency, and bargaining power effects. We apply a differences-in-differences identification strategy to panel data on plans offered between 2006 and 2012 to analyze the effects of mergers on plan premiums and coverage characteristics related to drug access and drug pricing. The results reveal significant market power raising premiums, but only in markets where the merging firms overlap. Mergers alter the bargaining process with drug suppliers, invoking a tradeoff between drug access and drug pricing. Large, across-the-board bargaining gains only occur when the merging firms consolidate their existing plans. Plan consolidation also stimulates cost efficiencies, even when carried out organically by non-merging insurers. Otherwise, mergers have no cost efficiency effects.