# Presentation: 772198

## The Impact of Medicare Part D onPharmaceutical Prices and Utilization

**Mark Duggan**
- University of Maryland, MPRC, and NBER
**Fiona Scott Morton**
- Yale University and NBER
- February 2008

## Introduction

**Medicare created in 1965 and now insures 43+ million**
**Insurance for most health care services**
- Part A: hospital inpatient care and some long term care
- Part B: hospital outpatient care and physician services
**Most (85%) Medicare recipients in fee-for-service**
- Thousands of FFS prices set and updated periodically
**For first 40 yrs – most prescription drug expenses uncovered**
- Certain physician-administered drugs the exception
**Changed in Jan 2006 with enactment of Medicare Part D**
- Largest expansion of Medicare since its inception
- Projected to cost $780 billion in first ten years (2006-15)
**This paper: estimate impact on RX prices and utilization**

## Medicare Before Part D

**Created for those 65+ by Soc Sec Amendments of 1965**
- Provides insurance for most health care expenditures
- By 1967 19 million elderly individuals enrolled
- Expanded to include Social Security Disability recipients in 1973
- Currently insures 43 million U.S. residents
**Two main components – Part A and Part B**
- Hospital Insurance - deductible of $900
- Supplementary Medical Insurance - monthly premium, 20% copay
**Fee-for-service reimbursement**
- Thousands of prices set and updated periodically
**Essentially no coverage for prescription drugs**
- Physician-administered drugs the one exception

## Medicare Part D

**Medicare Modernization Act passed in December 2003**
- Part D took effect January 1, 2006
**Several key features**
- Private insurance plans compete for enrollees
- Medicare recipients have option to enroll and pay monthly premium
- Premiums subsidized by the federal government (~70 percent)
- Out-of-pocket costs a non-linear function of RX spending
- Premiums increase for those who delay enrollment
**Plan instruments**
- Formulary (list of covered drugs) - need 2+ in each of 146 categories
- Prices in the “donut hole” and co-pays in the coverage areas
- Degree to which enrollees are steered to certain drugs

## Medicare Part D (continued)

**Two Part D plan types**
- Prescription Drug Plans (PDPs) – stand-alone plans
- Medicare Advantage Drug Plans (MA-PD) – all services incl. drugs
**Low-income Medicare recipients**
- Dual eligibles (also on Medicaid) required to enroll in a plan
- Subsidies if not on Medicaid but income below 135% of poverty line
**Firms subsidized to continue providing own coverage**
- Included to reduce crowd-out of existing insurance
- Equal to 28 percent of cost to employer
**Six protected therapeutic classes – includes HIV ARVs**
**Plans submit bids – cost over average borne by recipient**
- Can serve one or more of the 34 coverage regions in U.S.

## Slide 6

## Medicare Part D Enrollment as of January, 2007

## Part D Plan Market Characteristics in 2006

**226 organizations offered plans by end of 2006**
- Top two (UHC-Pacificare and Humana, Inc.) had 44 percent
- Next eight had 28 percent
**Total of 3873 region-plan combinations in 2006**
- 1678 PDPs and 2195 MA-PDs
- Firm can offer several in each region
**Just 14 percent of enrollees in plans with standard benefit**
- 51 percent in actuarially equivalent and rest in enhanced plans
**80 percent of enrollees have no coverage in “donut hole”**
- 94 percent if restrict to PDPs
- 9-10 million dual eligible / low-income subsidy have full coverage by the federal government

## Related Literature

**Medicare Part D**
- Lichtenberg (2007) and Simon and Lucarelli (2007)
**Drug procurement (Medicaid)**
- Duggan and Scott Morton (2006) and Scott Morton (1997)
**Impact of Medicare**
- Acemoglu et al (2006), Card et al (2006), and Finkelstein (2007)
**Prescription Drug Cost Sharing and Out-of-Pocket Costs**
- Gibson et al (2005) and Pavcnik (2002)
**Crowdout of Private Insurance**
- Cutler and Gruber (1996) on Medicaid eligibility expansions
**Contracting out to private insurers**
- Duggan (2004) on Medicaid HMOs

## Theoretical Framework

**Part D may affect firm’s profit-maximizing price**
- Our measure will be average product-specific price
**Two key forces– theoretically ambiguous which dominates**
- More insurance => lower demand elasticity => higher price
- Plans compare price/efficacy => negotiate discounts => lower price
**Consider linear differentiated products demand curve**
- Similar to Deneckere and Davidson (1985) or Shubik (1980)
**i indexes drugs and N is number of therapeutic substitutes**
** ********g**** and ********g**** likely to change with switch from cash to Part D**

## Theoretical Framework (continued)

**Part D likely to reduce ********g**** and increase ********g**** (substitutability)**
- This will influence prices as follows:
**Change in avg price will be linear function of MMS**
- Change allows us to difference out time invariant omitted factors
- Should see bigger effects for uninsured Medicare recipients
- Protected versus all other therapeutic categories
- Determining substitutes – still in progress
**Do prices change differentially for Medicare-intensive drugs?**

## IMS Data on U.S. Sales and Quantity

**Total sales in the U.S. for all pharmaceutical products**
- Annual data from 2001 to 2006
- Sales increased from $162.6 billion to $223.9 billion (2006 $)
**Also includes utilization data**
- Total standardized units and units per daily dose
**Divided into therapeutic categories and subcategories**
- 14 therapeutic categories (e.g. cardiovascular)
- 260 subcategories (e.g. cholesterol reducers)
**Aggregate different versions of the same product**
- Example: Prozac and Prozac Weekly
- Do not include generic versions when doing this – different firm

## Medical Expenditure Panel Survey

**Publicly available constructed by AHRQ**
**Detailed information on health care utilization**
- For nationally representative sample of U.S. pop (using weights)
**Prescribed Medicines file in 2003**
- 304,324 prescriptions for 20,475 individuals
- Lines up reasonably well with IMS rankings (Table 1)
**Consolidated Data File (CDF)**
- Data on age, gender, health insurance coverage, etc.
- There are 34,215 people in 2003 MEPS
- Can be linked to Prescribed Medicines file
**Fraction on Medicare increases sharply at 65 (Figure 2)**
- 15 percent at 64 to 96 percent at 65

## Medicare Recipients in the MEPS

**Medicare recipients have much greater RX utilization**
- Average of 28.0 prescriptions filled and $1789 in spending
- Compare to 6.5 and $412 for those not on Medicare
- 14.4 percent of pop but 40.3 percent of prescriptions
**Source of payment in 2003 also differs (Table 1)**
- Larger share out-of-pocket for Medicare recipients
- Medicare recipients less private but more public insurance
- Just 8 percent paid for by Medicare prior to MMA
**Substantial variation in Medicare market share**
- Anti-depressant Zoloft (ranked #5 in sales) at 27.1 percent
- Heart treatment Plavix (#16) at 72.9 percent

## Slide 15

## Medicare vs. All Other RX Spending: 2003 MEPS

## Constructing the Analysis Sample

**Consider price and utilization changes from 2003 to 2006**
- Medicare Modernization Act passed in Dec 2003
- Part D does not take effect until 2006
**Focus on top 1000 drugs in IMS data by 2003 sales**
- 97.2 percent of the $196.0 billion in sales
**Use 2002 and 2003 MEPS to increase accuracy of MMS**
**Sample restrictions**
- Drop 113 over-the-counter drugs – not covered by Part D
- Drop 194 generic drugs – difficult to measure accurately in MEPS
- Drop 125 products not in MEPS
- Drop 20 products with no sales in 2002 or 2003 or missing FDA year
**Final sample of 548 drugs – accounts for 78 percent of 2003 $**

## Slide 18

## Empirical Framework

**Exploit variation across drugs in the Medicare market share**
**Consider change from 2003 to 2006**
- Differences out time-invariant omitted factors
**MMS****j,2003**** represents *****potential*****  Part D enrollment**
**Impact of Part D modeled here as common effect ******
******P****j,2003-06**** = ******** + ********MMS****j,2003**** + ********P****j,2001-02**** + ********X****j,2003**** + ********j,2006**** **
**Key assumption: MMS****j,2003**** is orthogonal to other unobserved determinants of average price changes**
- Also assumes no “spillover effect” to non-Medicare recipients
**Use log instead of level in prices**
- Reduces skewness and proportional impacts more plausible

## Level of and Change in Price is Highly Skewed

## Average Price of Medicare-Intensive Drugs Declines

## Robust to Excluding Cancer Drugs and Restricting to Top 200

## Interpretation of Baseline Price Results

**Estimates imply 12% decline in prices for Medicare recipients**
**If driven by Part D – actual effects nearly twice as large**
- Slightly more than half enroll in a Part D plan
**Assumes no “spillover effect” to non-Medicare prices**
**Out-of-pocket costs would have declined even more**
- 25 percent co-pay from $250 to $2250
- 100 percent co-pay from $2250 to $5100
- 5 percent co-pay past $5100
**Next test for corresponding effect on utilization**
- Recent work examines impact of Part D on utilization at one large pharmacy chain (Lichtenberg, 2007)
- Complicated due to variation in co-pay with RX spending

## Utilization Estimates Less Precise & Suggest Large Impact

## Main Utilization Results (continued)

## Summary of Main Results

**Decline of 12% in average prices for Medicare recipients**
**Impact of Part D likely greater**
- Many do not enroll or stick with existing coverage
**Out-of-pocket prices not observable in our data**
- Large declines in coverage areas from 250-2250 and 5100+
**Back-of-the-envelope estimate suggests elasticity ~0.5**
- Out-of-pocket price change depends on where in coverage gap
**Limitations**
- Aggregate rather than individual-level data
- Do not observe drug-specific Part D enrollment
**Have assumed common impact**
- Next explore how effect varies

## Insured and Uninsured Medicare Recipients

**Do not observe drug-specific Part D enrollment**
**Likely to be larger for those uninsured in 2003**
- Many retained existing coverage with past or current employer, etc.
**Use MEPS to differentiate Medicare uninsured & insured %**
- Averages of .249 and .152 for 548 sample drugs
******Y****j,2006**** = ******** + ********1****MMS_Self****j,2003**** + ********2****MMS_Ins****j,2003**** + ********Y****j,2003**** + ********Yrs****j,2003**** + ********j,2003**** **
**Expect larger estimate, in terms of magnitude, for ********1**
**Also explore effects for dual (Medicaid-Medicare) share**
- Dual eligibles shifted from Medicaid RX coverage to Medicare plans
- Reduces Medicaid market share - Duggan and Scott Morton (2006)

## Price effects driven by impact on the uninsured

## Utilization Estimates also Larger for Uninsured

## Protected and “Small” Therapeutic Categories

**CMS requires plans to cover all drugs in these 6 categories:**
- Anti-depressant, anti-psychotic, HIV anti-retroviral, anti-convulsant, immunosuppressant, anti-cancer
**Main motivation: to reduce ability to cream skim**
**Less ability to “move market share” in these categories**
- Do we see smaller price declines ( positive)?
**Similar if just 1 or 2 treatments in a category**
- Plans required to cover one or both
**Estimate specifications of following type**
******Y****j,2006**** = ******** + ********MMS****j,2003**** + ********Prot****j**** + ********MMS****j,2003**** * Prot****j**** + ********DY****j,2003**** + ********j,2003**** **

## Less Price Reduction in Protected and Small Categories

## Utilization Shifting Away from “Small” Categories

## Summary / Conclusions

**Medicare Part D reduced pharmaceutical prices and increased utilization of prescription drugs**
- Partially explains why spending much lower than anticipated
- Elasticity estimates of approximately 0.5 after accounting for mechanical effect of insurance
**Effects driven by uninsured Medicare recipients**
- Imprecise estimates for those shifted from Medicaid
**Suggestive evidence of no price decline for protected drugs**
**Price increase for treatments in “small” categories**
- Consistent with plan’s financial incentives
**Utilization shifts away from treatments in small categories**

## Limitations

**Aggregate sales and utilization data**
**Drug-specific Part D enrollment unobserved**
**Just one year of post-program data**
**Omitted factors correlated with Medicare market share?**
**Spillover effects may be present – especially for Medicaid**
**Behavior of pharmacies and wholesalers not considered**
**Effect on new drugs, generic use, shifting across categories**

## Future Research Possibilities

**Do effects persist in subsequent years?**
**Individual-level data on RX utilization**
**Effects on private (and other public?) insurance coverage**
**Effects on use of other health care**
**Effects on health outcomes**
**Variation in effects with plan market power**
**Do Medicare recipients optimize plan choices?**