The Medium-Term Impact of Medicare Part D on Pharmaceutical Prices

Part D represents the largest expansion of Medicare since the program’s inception in 1965. Though initially projected to cost the federal government $780 billion over its first ten years (2006–2015), it has been running substantially under budget. This is due primarily to three factors. The first is that fewer new branded drugs have been invented and launched in the United States, with the result that an increasing fraction of drugs consumed by the elderly are now available in inexpensive generic forms. Second, enrollees have tended to choose less generous plans than was forecasted by government actuaries. Thirdly, Part D is set up so that the government does not directly purchase drugs, but rather subsidizes participating private prescription drug plans (PDPs), which then negotiate with pharmaceutical companies over drug prices. The evidence provided in our previous work suggests that plans have been successful in negotiating lower prices for branded drugs and that this has also helped to contain the cost of the program (Duggan and Scott Morton 2010). In this paper we explore whether these price reductions persisted in the second, third, and fourth years of the program. The pharmaceutical sales data that we use in this paper indicate that real retail pharmaceutical sales have been growing more slowly in recent years—by just 1.6 percent per year from 2006 to 2009 versus 6.3 percent per year from 2001 The Medium-Term Impact of Medicare Part D on Pharmaceutical Prices