Researchers Find First Year of Benefit
Resulted in Lower Drug Prices for Enrollees    

The advent of the Medicare drug benefit served to lower the average pharmaceutical price and increase utilization by beneficiaries, according to an economic paper released Aug. 4 by the National Bureau of Economic Research.

"Our paper provides evidence for what we consider a surprising outcome: moving consumers from cash-paying status to insured status lowers optimal prices for branded prescription drugs," according to the paper by Mark Duggan of the University of Maryland Department of Economics and Fiona Scott Morton of the Yale School of Management. NBER is a private nonprofit research organization.

The paper, The Effect of Medicare Part D on Pharmaceutical Prices and Utilization, said the price per dose paid to manufacturers declined for average branded pharmaceuticals as consumers moved to Part D plans. The authors compared costs for Part D in 2006, the first year of the benefit, with 2003, the year the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 was passed.

"Branded pharmaceutical prices on average rose from 2003 to 2006, but those brands with substantial sales moving from cash-paying patients to Medicare Part D patients increased much less than other brands," it said.

The authors estimated that a Part D enrollee who moves from paying cash to buying through a prescription drug plan (PDP) "pays 24 percent less for branded prescriptions before the mechanical effects of the insurance itself are taken into account."

The PDP develops a formulary encouraging enrollees' choice of preferred drugs with incentives, such as lower copays. "A pharmaceutical firm has an incentive to sell its brand at a lower price in exchange for the market share the plan can deliver," the paper said.

Thus, the declines were mostly in categories in which plans could choose favored drugs from a variety of therapeutic substitutes. This suggests that plans' ability to shift sales among products creates price competition. "When bargaining with the seller of a patented product, the ability to shift demand to a substitute drug is a powerful negotiating tool," the researchers found.

"The gains from doing this apparently outweigh the 'classic insurance-induced increases in pharmaceutical prices' and lead to a reduction in overall program expenditures," the researchers concluded.

More information on the working paper (No. 13917) is at http://www.nber.org/papers/w13917.