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Demand for prescription drugs under non-linear pricing in Medicare Part D

Author

Listed:
  • Kyoungrae Jung
  • Roger Feldman
  • A. McBean
Abstract
We estimate the price elasticity of prescription drug use in Medicare Part D, which features a non-linear price schedule due to a coverage gap. We analyze patterns of drug utilization prior to the coverage gap, where the “effective price” is higher than the actual copayment for drugs because consumers anticipate that more spending will make them more likely to reach the gap. We find that enrollees’ total pre-gap drug spending is sensitive to their effective prices: the estimated price elasticity of drug spending ranges between $$-$$ - 0.14 and $$-$$ - 0.36. This finding suggests that filling in the coverage gap, as mandated by the health care reform legislation passed in 2010, will influence drug utilization prior to the gap. A simulation analysis indicates that closing the gap could increase Part D spending by a larger amount than projected, with additional pre-gap costs among those who do not hit the gap. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Kyoungrae Jung & Roger Feldman & A. McBean, 2014. "Demand for prescription drugs under non-linear pricing in Medicare Part D," International Journal of Health Economics and Management, Springer, vol. 14(1), pages 19-40, March.
    • Handle: RePEc:kap:ijhcfe:v:14:y:2014:i:1:p:19-40
    DOI: 10.1007/s10754-013-9137-2
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    References listed on IDEAS

    as
    1. Congressional Budget Office, 2012. "Offsetting Effects of Prescription Drug Use on Medicare’s Spending for Medical Services," Reports 43741, Congressional Budget Office.
    2. Aviva Aron-Dine & Liran Einav & Amy Finkelstein & Mark R. Cullen, 2012. "Moral Hazard in Health Insurance: How Important Is Forward Looking Behavior?," NBER Working Papers 17802, National Bureau of Economic Research, Inc.
    3. Congressional Budget Office, 2012. "Offsetting Effects of Prescription Drug Use on Medicare’s Spending for Medical Services," Reports 43741, Congressional Budget Office.
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    8. Congressional Budget Office, 2011. "Spending Patterns for Prescription Drugs Under Medicare Part D," Reports 42692, Congressional Budget Office.
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    10. Liran Einav & Amy Finkelstein & Paul Schrimpf, 2015. "The Response of Drug Expenditure to Nonlinear Contract Design: Evidence from Medicare Part D," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(2), pages 841-899.
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    13. Keeler, Emmett B & Newhouse, Joseph P & Phelps, C E, 1977. "Deductibles and the Demand for Medical Care Services: The Theory of a Consumer Facing a Variable Price Schedule under Uncertainty," Econometrica, Econometric Society, vol. 45(3), pages 641-655, April.
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    Cited by:

    1. 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.
    2. Carey, Colleen, 2021. "Sharing the burden of subsidization: Evidence on pass-through from a subsidy revision in Medicare Part D," Journal of Public Economics, Elsevier, vol. 198(C).

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    More about this item

    Keywords

    Non-linear pricing; Price elasticity; Prescription drug spending; Medicare Part D; D4; D12; I13; I18;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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