Health Insurance, Price Changes, and the Demand for Pain Relief Drugs: Evidence from Medicare Part D

Overdose deaths from prescription opioids are on the rise, and policymakers seek solutions to curb opioid use and misuse. Recent proposals call for price-based solutions, such as opioid taxes and removal of opioids from insurance formularies. However, little is known about how prices affect the utilization of opioids for new and existing users. This study estimates price elasticities of demand for opioids and other prescription pain relief drugs. I exploit the introduction of Medicare Part D in 2006 as an exogenous change in out-of-pocket drug prices. I find that Part D was associated with a ­28% decrease in out-of-pocket prices and a 74% increase in utilization of prescription painkillers, which implies a price elasticity of -2.67. Further analysis suggests that most of the quantity increase came from new opioid users, as opposed to those who had used opioids even before 2006. The demand for opioids appears to be highly price elastic for new users, which suggests that increasing their out-of-pocket price, through taxes and formulary exclusion, may be effective in reducing the flow of new opioid use.