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Does Medicare Reimbursement Drive Up Drug Launch Prices?

Author

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  • David B. Ridley

    (Duke University)

  • Chung-Ying Lee

    (National Taiwan University)

Abstract

Medicare reimburses health care providers for the drugs they administer. Since 2005, it has reimbursed based on the past price of the drug. Reimbursement on past prices could motivate manufacturers to set higher launch prices because providers become less sensitive to price and because provider reimbursement is higher if past prices were higher. Using data on drug launch prices between 1999 and 2010, we estimate that reimbursement based on past prices caused launch prices to rise dramatically. The evidence is consistent with the 2018 claim from Medicare's administrator that it “creates a perverse incentive for manufacturers to set higher prices.”

Suggested Citation

  • 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.
    • Handle: RePEc:tpr:restat:v:102:y:2020:i:5:p:980-993
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    References listed on IDEAS

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    Cited by:

    1. Vasudha Wattal, 2022. "Pricing of new pharmaceuticals and price regulation in India," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2022-02, Centre for Competition Policy, University of East Anglia, Norwich, UK..
    2. Judith Liu & Yuting Zhang & Cameron M. Kaplan, 2023. "Effects of Medicare Part D coverage gap closure on utilization of branded and generic drugs," Health Economics, John Wiley & Sons, Ltd., vol. 32(3), pages 639-653, March.
    3. Lin Lin & Bo Wang, 2025. "Marketing Status and Brand‐Name Drug Prices: Evidence From Rx‐To‐OTC Switch," Health Economics, John Wiley & Sons, Ltd., vol. 34(6), pages 1064-1084, June.
    4. Andrew L. Hicks & Ernst R. Berndt & Richard G. Frank, 2024. "Auditing the prescription drug consumer price index in a changing marketplace," Health Economics, John Wiley & Sons, Ltd., vol. 33(8), pages 1793-1810, August.

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