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Purpose – To evaluate the efficiency consequences of the Medicare Part D program.

Methods – We develop and empirically calibrate a simple theoretical model to examine the static and the dynamic welfare effects of Medicare Part D.

Findings – We show that Medicare Part D can simultaneously reduce static deadweight loss from monopoly pricing of drugs and improve incentives for innovation. We estimate that even after excluding the insurance value of the program, the welfare gain of Medicare Part D roughly equals its social costs. The program generates $5.11 billion of annual static deadweight loss reduction and at least $3.0 billion of annual value from extra innovation.

Implications – Medicare Part D and other public prescription drug programs can be welfare-improving, even for risk-neutral and purely self-interested consumers. Furthermore, negotiation for lower branded drug prices may further increase the social return to the program.

Originality – This study demonstrates that pure efficiency motives, which do not even surface in the policy debate over Medicare Part D, can nearly justify the program on their own merits.

Purpose – As Medicare Part D enters its fifth year, we assess how the supply side of the market has evolved and what research has shown about how Medicare drug coverage has affected consumers.

Methods – We conduct descriptive data analyses to explore the varied nature of Medicare standalone prescription drug plans (in terms of both price and non-price features), examine features associated with high enrollment, and show trends over time in both plan design and enrollment patterns from 2006 to 2010. We also review existing evidence about Part D's effects on drug access for beneficiaries and conclude with a discussion of current policy concerns.

Findings – Medicare Part D has been successful in certain ways, but several areas of concern remain. Although it is a measure of success that 90% of Medicare beneficiaries now have drug coverage, efforts continue to reach the vulnerable populations who are not yet signed up. Use of medications (and relative use of generics) has increased under the program, while out of pocket costs have fallen. Policymakers continue to question government's role in areas such as negotiating prices directly with pharmaceutical manufacturers and limiting the number of plans offered. Results from data analysis indicate, among other things, high growth in premiums, whereas plans have become less generous by certain measures.

Originality – This chapter brings together data on all plans offered in Medicare Part D standalone drug coverage market and shows new evidence on the landscape's rapid evolution.

The US Medicare Modernization Act of 2003 introduced optional prescription drug coverage, beginning in 2006, widely known as Medicare Part D. This paper uses up-to-date nationally representative survey data to investigate the impact of Part D not only on drug spending and consumption, but also on the composition of drug consumption. The paper aims to discuss these issues.

Specifically, the paper investigates whether Part D impacted the number of therapeutic classes for which drugs were prescribed, and also whether Part D lead to increased usage of drugs for specific medical conditions that typically receive drug-intensive therapies.

In addition to confirming findings from previous studies, this paper shows that Part D increased the number of therapeutic classes to which seniors receive drugs by approximately four classes. Part D also lead to increased usage of drugs used to treat upper respiratory disease, hypertension, and diabetes.

While mostly concurring with previous studies on the spending impacts of Part D, this paper is the first to shed light on other impacts of Part D, specifically with respect to its impact on therapeutic classes for which drugs are prescribed.

Objective – To examine whether local area pharmacy market structure influences contract terms between prescription drug plans (PDPs) and pharmacies under Part D.

Data – Data were collected and compiled from four sources: a national mail survey to independent pharmacies, National Council for Prescription Drug Programs (NCPDP) Pharmacy database, 2000 U.S. Census data, and 2006 Economic Census data.

Results – Reimbursements varied substantially across pharmacies. Reimbursement for 20mg Lipitor (30 tablets) ranged from $62.40 to $154.80, and for 10mg Lisinopril (30 tablets), it ranged from $1.05 to $18. For brand-name drug Lipitor, local area pharmacy ownership concentration had a consistent positive effect on pharmacy bargaining power across model specifications (estimates between 0.084 and 0.097), while local area per capita income had a consistent negative effect on pharmacy bargaining power across specifications(−0.149 to −0.153). Few statistically significant relationships were found for generic drug Lisinopril.

Conclusion – Significant variation exists in PDP reimbursement and pharmacy bargaining power with PDPs. Pharmacy bargaining power is negatively related to the competition level and the income level in the area. These relationships are stronger for brand name than for generics. As contract offers tend to be non-negotiable, variation in reimbursements and pharmacy bargaining power reflect differences in initial insurer contract offerings. Such observations fit Rubinstein's subgame perfect equilibrium model.

Implication – Our results suggest pharmacies at the most risk of closing due to low reimbursements are in areas with many competing pharmacies. This implies that closures related to Part D changes will have limited effect on Medicare beneficiaries’ access to pharmacies.

This chapter assesses the doctrine of reasonable interchangeability through the lens of the US Department of Justice’s (DOJ’s) successful effort to enjoin the megamerger of two of the largest national insurance companies, Aetna and Humana. The DOJ focused its challenge on the companies’ Medicare Advantage business, arguing that it is a separate product market from original Medicare and the merger would substantially reduce competition in the market for Medicare Advantage in many geographic markets across the country. The case turned on whether there was reasonable interchangeability between original Medicare and Medicare Advantage in the eyes of consumers. The judge relied on both practical indicia of interchangeability, including evidence of how likely Medicare beneficiaries were to switch between Medicare Advantage and Original Medicare, along with econometric evidence. The decision provides a useful roadmap of how a knowledgeable judge reviewing a merger will consider both Brown Shoe factors and econometric evidence in assessing reasonable interchangeability.

With expenditures totaling $227 billion in 2007, prescription drug purchases are a growing portion of the total medical expenditure, and as this industry continues to grow, prescription drugs will continue to be a critical part of the larger health care industry. This chapter presents a survey on the economics of the US pharmaceutical industry, with a focus on the role of R&D and marketing, the determinants (and complications) of prescription drug pricing, and various aspects of consumer behavior specific to this industry, such as prescription drug regulation, the patient's interaction with the physician, and insurance coverage. This chapter also provides background in areas not often considered in the economics literature, such as the role of pharmacy benefit managers in prescription drug prices and the differentiation between alternative measures of prescription drug prices.

Long‐term care is getting more attention these days due to its impact on the growth of overall healthcare cost. With the implementation of the Medicare Part D prescription drug plan, the incentives and payment dynamics have changed the long‐term care market. This paper seeks to focus on the pharmaceutical market in the long‐term care space and to identify a few characteristics for the stakeholders' strategies.

The study used the IMS data sets, complemented by the information and statistics available in the literature to isolate the long‐term care market with regard to pharmaceutical products, its characteristics and dynamics.

The analysis showed that the market for pharmaceutical products in the long‐term‐care space is characterized by a couple of therapeutic classes, concentrated in a rather few geographical area in the USA. The traditional institutional based care is declining but the home health care use is increasing.

Access to the IMS data makes the findings of the study unique. Given the government sponsored prescription drug plan for the elderly is expanding, it will be of significant value to document the impact of the Part D plan on the overall healthcare cost in a dynamic long‐term care market.

The purpose of this paper is to examine rates of potentially inappropriate prescribing in a population dually eligible for Medicare and Medicaid using the new 2003 Fick update, which revises the previous 1997 Beers list.

Cross sectional retrospective review of 2003 Centers for Medicare and Medicaid Service (CMS) Medicaid Pharmacy claims data. Claims data submitted for outpatient and nursing home residents for elderly enrollees dually eligible for Medicare and Medicaid were analyzed. Potentially inappropriate drug use was assessed using the 2003 Fick update to the previous 1997 Beers list. Inappropriate use was identified based on these criteria for drugs independent of diagnosis.

Of enrollees with drug use, 34 percent received an inappropriate drug per the 1997 Beers list; 47 percent per the 2003 Fick update. Hispanics had the highest percentage of drug recipients receiving an inappropriate drug in the Northeast region per the 2003 Fick update. Within therapeutic category, the number of inappropriate genitourinary products dispensed to total genitourinary products ranked the highest at 20 percent per the 2003 Fick update.

This study examines variations in Beers drug use in the elderly dually eligible Medicare and Medicaid population in 2003 by applying the 2003 Fick et al. update of the 1997 Beers list to one of the nation's largest sources of person‐specific data on prescribed drugs. Inappropriate use was identified for drugs independent of diagnosis. Of enrollees with drug use, 34 percent received an inappropriate drug per the 1997 Beers list; 47 percent per the 2003 Fick update. Within therapeutic category, the number of inappropriate genitourinary products dispensed to total genitourinary products ranked the highest at 20 percent per the 2003 Fick update. The paper's findings provide evidence that the potential use of inappropriate drugs in Hispanics should be considered separately from other ethnicity groups.

A markedly higher rate of potentially inappropriate drug use in the elderly Medicaid population exists following the Fick update. These findings provide evidence that the potential use of inappropriate drugs in Hispanics should be considered separately from other ethnicity groups. By comparing drug use based on therapeutic category, genitourinary products were found to have the highest potential for inappropriate prescribing.

As the size of the U.S. population age 65 and older continues to grow, racial disparities within this population persist despite near universal insurance coverage provided through Medicare. Reform of the government administered program in 2003 has the potential to influence racial disparities due to increased privatization. This study compares racial disparities in health service utilization between Medicare fee-for-service and managed care, the two drastically different ways Medicare administers health care. Data was analyzed from the National Health Interview Survey (NHIS), a nationally representative study of the U.S. civilian, noninstitutionalized, household population. Included in this study were African American and white respondents aged 65 and older who participated in the NHIS in any year from 2004 to 2008 (N=22,364). Small differences were found in regard to the number of medical office visits, with African Americans reporting fewer visits. However, these differences were significant in only 25% of the analyses conducted. Across both types of Medicare, significant differences between African Americans and whites regarding consultations with a medical specialist and having surgery were found in 75% of analyses. In all analyses, African Americans were less likely to have interacted with a specialist or have surgery. The greatest difference in racial disparity between fee-for-service and managed care for all three health service use indicators was observed among those who were chronically ill and poor, and the smallest difference was observed among those who were chronically ill and very poor. These racial disparities in health service use may be linked to earlier life disparities in access to health care, higher out-of-pocket costs in Medicare fee-for-service, and the for-profit structure of managed care plans.

Purpose – This chapter offers an integrative review of psychological and neurobiological differences between younger and older adults that might impact economic behavior. Focusing on key health economic challenges facing the elderly, it offers perspectives on how these psychological and neurobiological factors may influence decision-making over the life course and considers future interdisciplinary research directions.

Methodology/approach – We review relevant literature from three domains that are essential for developing a comprehensive science of decision-making and economic behavior in aging (psychology, neuroscience, and economics), consider implications for prescription drug coverage and long-term care (LTC) insurance, and highlight future research directions.

Findings – Older adults face many complex economic decisions that directly affect their health and well-being, including LTC insurance, prescription drug plans, and end of life care. Economic research suggests that many older Americans are not making cost-effective and economically rational decisions. While economic models provide insight into some of the financial incentives associated with these decisions, they typically do not consider the roles of cognition and affect in decision-making. Research has established that older age is associated with predictable declines in many cognitive functions and evidence is accumulating that distinct social motives and affect-processing profiles emerge in older age. It is unknown how these age differences impact the economic behaviors of older people and implies opportunities for path-breaking interdisciplinary research.

Originality/value of the chapter – Our chapter looks to develop interdisciplinary research to better understand the causes and consequences of age-related changes in economic decision-making and guide interventions to improve public programs and overall social welfare.