Price Spillovers of Social Insurance Expansion: Impacts on Drug Demand and Welfare Among the Uninsured

Abstract

Despite growing evidence of social insurance spillovers, their impact on the uninsured remains unexplored. Given the uninsured’s heightened vulnerability to health shocks, understanding their response to these spillovers is essential for promoting equitable healthcare access and outcomes. This paper examines how expanding social health insurance influences pharmaceutical pricing, demand, and welfare, specifically among the untargeted uninsured. Using Medicare Part D as a case study, I conceptually and empirically demonstrate that drug price declines for US individuals below 65s who do not have prescription drug coverage. Such a reduction is majorly driven by increased consumer concentration due to Part D and competition among alternative drugs. I estimate a demand framework that differentiates between the decision to use prescriptions (extensive margin) and the quantity consumed (intensive margin), facilitating the analysis of welfare and demand across both margins. To address endogeneity issues with existing instrumental variables (IV) in estimating drug demand, I propose a new IV leveraging manufacturer-level supply shocks across therapeutic markets. My estimates show a price elasticity of -1.38 for uninsured individuals under 65, aligning with demand elasticity estimates in other contexts. The resulting welfare gains, primarily driven by the intensive-margin consumption, account for approximately 8% of annual per capita drug spending. Notably, lower-income individuals benefit more from Part D than their wealthier counterparts. The benefits occur without any observable increase in opioid or antibiotic overuse.

Note:
Funding Information: : This work was supported by the 2024 BA/Leverhulme Small Research Grants Scheme [grant numbers SRG24\241753].

Conflict of Interests: Chuanzi Yue reports financial support was provided by The British Academy. If there are other authors, they declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

Keywords: Health insurance spillovers, Competition and pricing, Consumer welfare, Demand estimation, Healthcare inequality, Antimicrobial resistance, Opioid crisis