The Response of Drug Expenditure to Nonlinear Contract Design: Evidence from Medicare Part D *
We study the demand response to nonlinear price schedules using data on insurance contracts and prescription drug purchases in Medicare Part D. We exploit the kink in individuals' budgets set created by the famous "donut hole," where insurance becomes discontinuously much less generou...
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| Format: | Article |
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Oxford University Press (OUP)
2018
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| Online Access: | http://hdl.handle.net/1721.1/113885 https://orcid.org/0000-0002-9941-6684 |
| _version_ | 1811077937490821120 |
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| author | Einav, Liran Finkelstein, Amy Schrimpf, Paul |
| author2 | Massachusetts Institute of Technology. Department of Economics |
| author_facet | Massachusetts Institute of Technology. Department of Economics Einav, Liran Finkelstein, Amy Schrimpf, Paul |
| author_sort | Einav, Liran |
| collection | MIT |
| description | We study the demand response to nonlinear price schedules using data on insurance contracts and prescription drug purchases in Medicare Part D. We exploit the kink in individuals' budgets set created by the famous "donut hole," where insurance becomes discontinuously much less generous on the margin, to provide descriptive evidence of the drug purchase response to a price increase. We then specify and estimate a simple dynamic model of drug use that allows us to quantify the spending response along the entire nonlinear budget set. We use the model for counterfactual analysis of the increase in spending from "filling" the donut hole, as will be required by 2020 under the Affordable Care Act. In our baseline model, which considers spending decisions within a single year, we estimate that filling the donut hole will increase annual drug spending by about $150, or about 8 percent. About one-quarter of this spending increase reflects anticipatory behavior, coming from beneficiaries whose spending prior to the policy change would leave them short of reaching the donut hole. We also present descriptive evidence of cross-year substitution of spending by individuals who reach the kink, which motivates a simple extension to our baseline model that allows-in a highly stylized way-for individuals to engage in such cross-year substitution. Our estimates from this extension suggest that a large share of the $150 drug spending increase could be attributed to cross-year substitution, and the net increase could be as little as $45 a year. |
| first_indexed | 2024-09-23T10:50:40Z |
| format | Article |
| id | mit-1721.1/113885 |
| institution | Massachusetts Institute of Technology |
| last_indexed | 2024-09-23T10:50:40Z |
| publishDate | 2018 |
| publisher | Oxford University Press (OUP) |
| record_format | dspace |
| spelling | mit-1721.1/1138852022-09-27T15:25:43Z The Response of Drug Expenditure to Nonlinear Contract Design: Evidence from Medicare Part D * Einav, Liran Finkelstein, Amy Schrimpf, Paul Massachusetts Institute of Technology. Department of Economics Finkelstein, Amy We study the demand response to nonlinear price schedules using data on insurance contracts and prescription drug purchases in Medicare Part D. We exploit the kink in individuals' budgets set created by the famous "donut hole," where insurance becomes discontinuously much less generous on the margin, to provide descriptive evidence of the drug purchase response to a price increase. We then specify and estimate a simple dynamic model of drug use that allows us to quantify the spending response along the entire nonlinear budget set. We use the model for counterfactual analysis of the increase in spending from "filling" the donut hole, as will be required by 2020 under the Affordable Care Act. In our baseline model, which considers spending decisions within a single year, we estimate that filling the donut hole will increase annual drug spending by about $150, or about 8 percent. About one-quarter of this spending increase reflects anticipatory behavior, coming from beneficiaries whose spending prior to the policy change would leave them short of reaching the donut hole. We also present descriptive evidence of cross-year substitution of spending by individuals who reach the kink, which motivates a simple extension to our baseline model that allows-in a highly stylized way-for individuals to engage in such cross-year substitution. Our estimates from this extension suggest that a large share of the $150 drug spending increase could be attributed to cross-year substitution, and the net increase could be as little as $45 a year. National Institute on Aging (R01 AG032449) 2018-02-26T16:28:16Z 2018-02-26T16:28:16Z 2015-02 2018-02-21T18:45:39Z Article http://purl.org/eprint/type/JournalArticle 0033-5533 1531-4650 http://hdl.handle.net/1721.1/113885 Einav, Liran, Amy Finkelstein, and Paul Schrimpf. “The Response of Drug Expenditure to Nonlinear Contract Design: Evidence from Medicare Part D *.” The Quarterly Journal of Economics 130, no. 2 (February 8, 2015): 841–899. https://orcid.org/0000-0002-9941-6684 http://dx.doi.org/10.1093/QJE/QJV005 The Quarterly Journal of Economics Creative Commons Attribution-Noncommercial-Share Alike http://creativecommons.org/licenses/by-nc-sa/4.0/ application/pdf Oxford University Press (OUP) PMC |
| spellingShingle | Einav, Liran Finkelstein, Amy Schrimpf, Paul The Response of Drug Expenditure to Nonlinear Contract Design: Evidence from Medicare Part D * |
| title | The Response of Drug Expenditure to Nonlinear Contract Design: Evidence from Medicare Part D * |
| title_full | The Response of Drug Expenditure to Nonlinear Contract Design: Evidence from Medicare Part D * |
| title_fullStr | The Response of Drug Expenditure to Nonlinear Contract Design: Evidence from Medicare Part D * |
| title_full_unstemmed | The Response of Drug Expenditure to Nonlinear Contract Design: Evidence from Medicare Part D * |
| title_short | The Response of Drug Expenditure to Nonlinear Contract Design: Evidence from Medicare Part D * |
| title_sort | response of drug expenditure to nonlinear contract design evidence from medicare part d |
| url | http://hdl.handle.net/1721.1/113885 https://orcid.org/0000-0002-9941-6684 |
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