Working Paper: NBER ID: w15330
Authors: 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.
Keywords: Medicare Part D; drug prices; insurer bargaining; pharmaceutical market
JEL Codes: I11; I18; I01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Insurer Enrollment Increase (G52) | Negotiated Drug Prices Reduction (L42) |
| Insurer Enrollment Increase (G52) | Pharmacy Profits Reduction (L42) |
| Negotiated Drug Prices Reduction (L42) | Lower Premiums for Enrollees (G52) |
| Insurer Enrollment Increase (G52) | Savings for Medicare (H51) |
| Insurer Enrollment Increase (G52) | Enhanced Enrollment Among Seniors (I13) |