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Insurer Bargaining and Negotiated Drug Prices in Medicare Part D

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  • Darius Lakdawalla
  • Wesley Yin

Abstract

A controversial feature of Medicare Part D is its reliance on private insurers to negotiate drug prices and rebates with retail pharmacies and drug manufacturers. Central to this controversy is whether increases in market power—an undesirable feature in most settings—confer benefits in health insurance markets, where larger buyers may obtain better prices for their members. We test whether insurers that experience larger enrollment increases due to Part D negotiate lower drug prices with pharmacies. Overall, we find that 100,000 additional insureds lead to 2.5-percent lower pharmacy prices negotiated by the insurer, and 5-percent reductions in pharmacy profits earned on prescriptions filled by enrollees of that insurer. Estimated enrollment effects are much larger for drugs with therapeutic substitutes, and virtually zero for branded drugs without therapeutic substitutes. We also present evidence that most insurer savings are, on the margin, passed on as lower premiums. Out-of-sample estimation suggests that modest insurer consolidation would generate significant savings to Medicare, along with premium reductions and enrollment increases. Finally, we find that greater enrollment leads to lower pharmacy prices negotiated by insurers for their non-Part D market—an external benefit to the commercially enrolled associated with administering Part D through private insurers.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15330.

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Date of creation: Sep 2009
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Handle: RePEc:nbr:nberwo:15330

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  1. Sara Fisher Ellison & Christopher M. Snyder, 2010. "COUNTERVAILING POWER IN WHOLESALE PHARMACEUTICALS -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 58(1), pages 32-53, 03.
  2. Alexander Raskovich, 2003. "Pivotal Buyers and Bargaining Position," Journal of Industrial Economics, Wiley Blackwell, vol. 51(4), pages 405-426, December.
  3. Jonathan D. Ketcham & Kosali Simon, 2008. "Medicare Part D's Effects on Elderly Drug Costs and Utilization," NBER Working Papers 14326, National Bureau of Economic Research, Inc.
  4. Jason T. Abaluck & Jonathan Gruber, 2009. "Choice Inconsistencies Among the Elderly: Evidence from Plan Choice in the Medicare Part D Program," NBER Working Papers 14759, National Bureau of Economic Research, Inc.
  5. Stole, Lars A & Zwiebel, Jeffrey, 1996. "Organizational Design and Technology Choice under Intrafirm Bargaining," American Economic Review, American Economic Association, vol. 86(1), pages 195-222, March.
  6. Claudio Lucarelli & Jeffrey T. Prince & Kosali Simon, 2009. "The Welfare Impact of Reducing Choice in Medicare Part D: A Comparison of Two Regulation Strategies," Working Papers 2010-14, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  7. Katherine Ho, 2005. "Insurer-Provider Networks in the Medical Care Market," NBER Working Papers 11822, National Bureau of Economic Research, Inc.
  8. Tasneem Chipty & Christopher M. Snyder, 1999. "The Role Of Firm Size In Bilateral Bargaining: A Study Of The Cable Television Industry," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 326-340, May.
  9. Richard T. Carson & Yixiao Sun, 2007. "The Tobit model with a non-zero threshold," Econometrics Journal, Royal Economic Society, vol. 10(3), pages 488-502, November.
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