The Incidence of the Medicare Prescription Drug Benefit: Using Asset Prices to Assess its Impact on Drug Makers∗ JOB MARKET PAPER

In 2003, Congress introduced new legislation to subsidize prescription drug insurance for Medicare recipients; Medicare “Part D” will cost nearly $1 trillion over the next ten years. In this paper, I analyze the incidence of this subsidy by inferring producer surplus from the stock market returns to pharmaceutical firms. I first obtain a measure of the profitability of each brand-name drug from a stock market event study around FDA approval of that drug. Then, extending the event study methodology, I estimate the impact of Part D on profits by comparing the profitability of drugs with high and low Medicare market shares, before and after the passage of the law. I find that expected profitability increases sharply for those drugs with a high Medicare market share in 2003. Structural estimates also imply that Medicare Part D significantly expanded the profits from the Medicare-eligible prescription drug market. Combining these results with other studies implies that the market estimated that pharmaceutical firms would, in expectation, receive 36% of total surplus over the next ten years, or $205B, relative to 56% for consumers.