"Private provision of social insurance: drug-specific price elasticities and pricing in Medicare Part D"
Please note: All research in progress seminars are off-the-record. Any information about methodology and/or results is embargoed until publication.
Although optimal social insurance theory suggests that consumer cost-sharing should increase in a drug's elasticity of demand, publicly provided drug coverage typically involves uniform cost-sharing across drugs. Does the private market behave differently? We examine this question in the context of Medicare Part D. To do so, we first exploit the famous donut hole – at which insurance becomes discontinuously generous at the margin – together with detailed claim-level data for about 2 million beneficiaries to estimate price elasticities of demand for almost 200 different common drugs and 80 different common therapeutic classes. We document substantial heterogeneity in the price elasticity of demand across drugs and diseases, with an average elasticity estimate across drugs of -0.22 and a standard deviation of 0.5. Drawing on additional detail on the contract design of hundreds of Medicare Part D private plans, we document - in contrast to pricing in public prescription drug plans - substantial heterogeneity in the cost-sharing rate private plans charge for different drugs. We find that private plans vary cost-sharing in the direction of the social optimum: charging higher consumer coinsurance for drugs and classes with more elastic demand. Results from a highly stylized model are consistent with the empirical findings: profit maximizing private firms have incentives to vary cost-sharing across drugs in the socially efficient direction. Our findings suggest that benefit design may be more efficient in privately rather than publicly provided insurance.