The Impact of Medicare Part D onPharmaceutical Prices and Utilization

Mark Duggan

University of Maryland, MPRC, and NBER

Fiona Scott Morton

Yale University and NBER

February 2008

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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.

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
        -  ag and gg likely to change with switch from cash to Part D

Theoretical Framework (continued)
        - Part D likely to reduce ag and increase gg (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

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 $

Empirical Framework
        - Exploit variation across drugs in the Medicare market share
        - Consider change from 2003 to 2006

Differences out time-invariant omitted factors
        - MMSj,2003 represents potential  Part D enrollment
        - Impact of Part D modeled here as common effect b

DPj,2003-06 = a + bMMSj,2003 + gDPj,2001-02 + mXj,2003 + ej,2006 
        - Key assumption: MMSj,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

DYj,2006 = a + b1MMS_Selfj,2003 + b2MMS_Insj,2003 + gDYj,2003 + mYrsj,2003 + ej,2003 
        - Expect larger estimate, in terms of magnitude, for b1
        - 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 (s positive)?
        - Similar if just 1 or 2 treatments in a category

Plans required to cover one or both
        - Estimate specifications of following type

DYj,2006 = a + bMMSj,2003 + lProtj + sMMSj,2003 * Protj + gDYj,2003 + ej,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?