The Role of Government Reimbursement in Drug Shortages

Beginning in the mid-2000s, drug shortages rose dramatically, especially shortages of generic injectable drugs such as anesthetics, antibiotics, and chemotherapy treatments. We examine whether reimbursement changes contributed to the shortages. One reimbursement change was a reduction in Medicare Part B reimbursement to providers for the aforementioned drugs. We hypothesize that lower drug reimbursement put downward pressure on drug prices which reduced manufacturers' incentives to invest in capacity, reliability, and new launches. We show that, after the policy change, shortages rose more for drugs with (i) higher shares of patients who are insured by Medicare, (ii) greater decreases in provider reimbursement, and (iii) greater decreases in manufacturer prices.