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The Role of Government Reimbursement in Drug Shortages

Author

Listed:
  • Ali Yurukoglu
  • Eli Liebman
  • David B. Ridley

Abstract

Beginning in the mid-2000s, the incidence of drug shortages rose, especially for generic injectable drugs such as anesthetics and chemotherapy treatments. We examine whether reimbursement changes contributed to the shortages, focusing on a reduction in Medicare Part B reimbursement to providers for drugs. We hypothesize that lower reimbursement put downward pressure on manufacturers' prices, which reduced manufacturers' incentives to invest in capacity, reliability, and new launches. We show that after the policy change, shortages rose more for drugs with higher shares of patients insured by Medicare, greater decreases in provider reimbursement, and greater decreases in manufacturer prices.

Suggested Citation

  • Ali Yurukoglu & Eli Liebman & David B. Ridley, 2017. "The Role of Government Reimbursement in Drug Shortages," American Economic Journal: Economic Policy, American Economic Association, vol. 9(2), pages 348-382, May.
    • Handle: RePEc:aea:aejpol:v:9:y:2017:i:2:p:348-82
    Note: DOI: 10.1257/pol.20160035
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    Citations

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    Cited by:

    1. Lee, Chung-Ying, 2020. "Pricing strategy and moral hazard: Copay coupons in pharmaceuticals," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    2. Pierre Dubois, 2025. "Pharmaceutical Regulation and Incentives for Innovation in an International Perspective," Working Papers hal-05310888, HAL.
    3. Jeffrey Clemens & Joshua D. Gottlieb, 2014. "Do Physicians' Financial Incentives Affect Medical Treatment and Patient Health?," American Economic Review, American Economic Association, vol. 104(4), pages 1320-1349, April.
    4. He, Huan & Zhan, Yuanzhu & Huo, Baofeng & Zhang, Yufeng & Shi, Xiaojie, 2025. "The impact of national centralized drug procurement policy on firm performance: Evidence from Chinese pharmaceutical firms," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 200(C).
    5. Alpert, Abby & Duggan, Mark & Hellerstein, Judith K., 2013. "Perverse reverse price competition: Average wholesale prices and Medicaid pharmaceutical spending," Journal of Public Economics, Elsevier, vol. 108(C), pages 44-62.
    6. Geruso, Michael & Richards, Michael R., 2022. "Trading spaces: Medicare's regulatory spillovers on treatment setting for non-Medicare patients," Journal of Health Economics, Elsevier, vol. 84(C).
    7. Ernst R. Berndt & Rena M. Conti & Stephen J. Murphy, 2017. "The Landscape of US Generic Prescription Drug Markets, 2004-2016," NBER Working Papers 23640, National Bureau of Economic Research, Inc.
    8. Kortelainen, Mika & Markkanen, Jaakko & Toivanen, Otto & Siikanen, Markku, 2023. "The Effects of Price Regulation on Pharmaceutical Expenditure and Availability," CEPR Discussion Papers 18497, C.E.P.R. Discussion Papers.
    9. Dubois, Pierre & Majewska, Gosia & Reig, Valentina, 2023. "Drug Shortages: Empirical Evidence from France," TSE Working Papers 23-1417, Toulouse School of Economics (TSE).
    10. Jeffrey Clemens & Joshua D. Gottlieb, 2017. "In the Shadow of a Giant: Medicare’s Influence on Private Physician Payments," Journal of Political Economy, University of Chicago Press, vol. 125(1), pages 1-39.
    11. David B. Ridley & Chung-Ying Lee, 2020. "Does Medicare Reimbursement Drive Up Drug Launch Prices?," The Review of Economics and Statistics, MIT Press, vol. 102(5), pages 980-993, December.
    12. Dubois, P.; & Majewska, G.; & Reig, V.;, 2023. "Drug Shortages: Empirical Evidence from France," Health, Econometrics and Data Group (HEDG) Working Papers 23/07, HEDG, c/o Department of Economics, University of York.
    13. Andy Ye Yuan & Bernard Black & Timea Viragh & David J. Magid & Qian Luo & Ali Moghtaderi, 2023. "Effect of financial incentives on hospital‐cardiologist integration and cardiac test location," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 20(3), pages 570-608, September.
    14. Casey B. Mulligan & Kevin K. Tsui, 2016. "The Upside-down Economics of Regulated and Otherwise Rigid Prices," NBER Working Papers 22305, National Bureau of Economic Research, Inc.
    15. Liebman, Eli & Lawler, Emily C. & Dunn, Abe & Ridley, David B., 2023. "Consequences of a shortage and rationing: Evidence from a pediatric vaccine," Journal of Health Economics, Elsevier, vol. 92(C).

    More about this item

    JEL classification:

    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics

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