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The Effect of Medicare Part D on Pharmaceutical Prices and Utilization

Author

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  • Mark Duggan
  • Fiona Scott Morton

Abstract

Medicare Part D began coverage of prescription drugs in 2006. Rather than setting pharmaceutical prices, the government contracted with private insurers to provide drug coverage. Theory suggests that additional insured consumers will raise the optimal price of a branded drug, while the insurer's ability to move demand to substitute treatments may lower prices. We estimate the program's effect on the price and utilization of pharmaceutical treatments. We find that Part D enrollees paid substantially lower prices than while uninsured, and increased their utilization of prescription drugs. We find relative price declines only for drugs with significant therapeutic competition. (L18, L11, L65)

Suggested Citation

  • Mark Duggan & Fiona Scott Morton, 2010. "The Effect of Medicare Part D on Pharmaceutical Prices and Utilization," American Economic Review, American Economic Association, vol. 100(1), pages 590-607, March.
  • Handle: RePEc:aea:aecrev:v:100:y:2010:i:1:p:590-607 Note: DOI: 10.1257/aer.100.1.590
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    References listed on IDEAS

    as
    1. Daron Acemoglu & David Cutler & Amy Finkelstein & Joshua Linn, 2006. "Did Medicare Induce Pharmaceutical Innovation?," American Economic Review, American Economic Association, pages 103-107.
    2. Mark Duggan & Fiona M. Scott Morton, 2006. "The Distortionary Effects of Government Procurement: Evidence from Medicaid Prescription Drug Purchasing," The Quarterly Journal of Economics, Oxford University Press, vol. 121(1), pages 1-30.
    3. Richard G. Frank & David S. Salkever, 1997. "Generic Entry and the Pricing of Pharmaceuticals," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 75-90, March.
    4. Duggan, Mark, 2005. "Do new prescription drugs pay for themselves?: The case of second-generation antipsychotics," Journal of Health Economics, Elsevier, vol. 24(1), pages 1-31, January.
    5. David Card & Carlos Dobkin & Nicole Maestas, 2008. "The Impact of Nearly Universal Insurance Coverage on Health Care Utilization: Evidence from Medicare," American Economic Review, American Economic Association, pages 2242-2258.
    6. Manning, Willard G, et al, 1987. "Health Insurance and the Demand for Medical Care: Evidence from a Randomized Experiment," American Economic Review, American Economic Association, pages 251-277.
    7. Nina Pavcnik, 2002. "Do Pharmaceutical Prices Respond to Potential Patient Out-of-Pocket Expenses?," RAND Journal of Economics, The RAND Corporation, pages 469-487.
    8. Amy Finkelstein, 2007. "The Aggregate Effects of Health Insurance: Evidence from the Introduction of Medicare," The Quarterly Journal of Economics, Oxford University Press, vol. 122(1), pages 1-37.
    9. Leemore S. Dafny, 2005. "How Do Hospitals Respond to Price Changes?," American Economic Review, American Economic Association, pages 1525-1547.
    10. DiMasi, Joseph A. & Hansen, Ronald W. & Grabowski, Henry G., 2003. "The price of innovation: new estimates of drug development costs," Journal of Health Economics, Elsevier, vol. 22(2), pages 151-185, March.
    11. Raymond Deneckere & Carl Davidson, 1985. "Incentives to Form Coalitions with Bertrand Competition," RAND Journal of Economics, The RAND Corporation, pages 473-486.
    12. Fiona Scott Morton, 1997. "The Strategic Response by Pharmaceutical Firms to the Medicaid Most-Favored-Customer Rules," RAND Journal of Economics, The RAND Corporation, pages 269-290.
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    More about this item

    JEL classification:

    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics

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