Insurer Bargaining and Negotiated Drug Prices in Medicare Part D

Published in: NBER Working Papers / (Cambridge, MA: National Bureau of Economic Research, Sep. 2009), p. 1-35, 1-14

Posted on RAND.org on January 01, 2009

by Darius N. Lakdawalla, Wesley Yin

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A controversial feature of Medicare Part D is its reliance on private insurers to negotiate drug prices and rebates with retail pharmacies and drug manufacturers. Central to this controversy is whether increases in market power-an undesirable feature in most settings-confer benefits in health insurance markets, where larger buyers may obtain better prices for their members. The authors test whether insurers that experience larger enrollment increases due to Part D negotiate lower drug prices with pharmacies. Overall, the authors find that 100,000 additional insureds lead to 2.5-percent lower pharmacy prices negotiated by the insurer, and 5-percent reductions in pharmacy profits earned on prescriptions filled by enrollees of that insurer. Estimated enrollment effects are much larger for drugs with therapeutic substitutes, and virtually zero for branded drugs without therapeutic substitutes. The authors also present evidence that most insurer savings are, on the margin, passed on as lower premiums. Out-of-sample estimation suggests that modest insurer consolidation would generate significant savings to Medicare, along with premium reductions and enrollment increases. Finally, the authors find that greater enrollment leads to lower pharmacy prices negotiated by insurers for their non-Part D market-an external benefit to the commercially enrolled associated with administering Part D through private insurers.

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