Pass-Through in a Highly Regulated Supply Chain – The Who, What, and When of the US Drug Market

We estimate the incidence effects of two types of exogenous shocks to the U.S. pharmaceutical market – supply shocks due to nationwide changes in pharmaceutical production market structure, and demand shocks further along in the supply chain induced by changes in regulated prescription drug coverage requirements. We study these effects in the market for prescription drugs purchased by enrollees in Medicare Part D.

Pharmaceuticals manufacturers are charged with developing, obtaining approval for, and producing drug molecules; drugs are then distributed by wholesalers to pharmacies and consumers. Demand for drugs is, in turn, determined by pharmacy pricing and stocking decisions, physician prescribing behavior, prescription drug plan benefit design, and patient diagnoses and preferences. In Medicare Part D, prescription drug plans are offered by private insurers, and the plan benefit designs are highly restricted, with changing requirements year to year.

The first goal of this study is to document variation in wholesale drug price changes, focusing on drugs taken by Part D enrollees. The second goal of this study is to estimate the impact of changes in wholesale drug prices on short- and long-run point-of-sale and consumer out-of-pocket prices. We identify causal estimates of pass-through using variation in exposure to wholesale price increases across Part D plans and regions. Our data allow us to directly observe plan benefit design, so that we can distinguish price pass-through with and without plan benefit adjustments. The third goal of this study is to estimate the equilibrium price effects induced by changes in coverage requirements in the Part D donut hole that increase plan costs. Causal effects on retail prices are again identified using variation in exposure to the regulatory change across plan-drug pairs. Taken together, these estimates will allow us to explore a number of counterfactuals relevant to current policy debates. We consider the impact of large increases in wholesale generic drug prices, pay-for-delay agreements, and additional changes to the Part D program.