Working Paper: NBER ID: w19393
Authors: Liran Einav; Amy Finkelstein; Paul Schrimpf
Abstract: We study the demand response to non-linear price schedules using data on insurance contracts and prescription drug purchases in Medicare Part D. Consistent with a static response of drug use to price, we document bunching of annual drug spending as individuals enter the famous "donut hole," where insurance becomes discontinuously much less generous on the margin. Consistent with a dynamic response to price, we document a response of drug use to the future out-of-pocket price by using variation in beneficiary birth month which generates variation in contract duration during the first year of eligibility. Motivated by these two facts, we develop and estimate a dynamic model of drug use during the coverage year that allows us to quantify and explore the effects of alternative contract designs on drug expenditures. For example, our estimates suggest that "filling" the donut hole, as required under the Affordable Care Act, will increase annual drug spending by $180 per beneficiary, or about 10%. Moreover, almost half of this increase is "anticipatory," coming from beneficiaries whose spending prior to the policy change would leave them short of reaching the donut hole. We also describe the nature of the utilization response and its heterogeneity across individuals and types of drugs.
Keywords: Medicare Part D; nonlinear pricing; drug expenditures; demand response
JEL Codes: D12; G22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Variation in beneficiaries' birth months (H55) | differential contract durations (C41) |
| Differential contract durations (C41) | associated future prices (G13) |
| Entering the donut hole (Y60) | annual drug spending (H51) |
| Increase in out-of-pocket price (D49) | adjustment in drug purchasing behavior (D12) |
| Filling the donut hole (Y60) | annual drug spending (H51) |
| Anticipatory responses (D84) | annual drug spending (H51) |
| Nonlinear pricing structures (D49) | spending behavior (D12) |