ACA-Era Medicaid Expansion and Pharmaceutical Innovation

Prior research has documented a causal relationship between changes in pharmaceutical market size and new product R&D and introduction. In this study, we investigate whether recent large-scale expansions in state Medicaid programs increased investments in the development of pharmaceuticals utilized by the Medicaid-eligible population. While prior studies have focused on the passage of Medicare Part D and demographic shifts in burden of disease as exogenous demand shifters, we focus on the impact of the Affordable Care Act (ACA)-era Medicaid expansions.

Over the period of our study, Medicaid enrollment grew by 15 million across the United States, leading to an increase in the number of individuals with health insurance – and in particular, prescription drug benefits. However, Medicaid is known for relatively low rates of reimbursement for both services and medicines. Therefore, although Medicaid expansions were expected to lead to an increase in the volume of prescription drugs covered, marginal revenues on this added volume were also expected to be quite low.

We first present evidence for how ACA-era Medicaid expansions shifted demand for pharmaceuticals. The first contribution of this study is to show that members of the newly-eligible Medicaid population differed significantly from the traditional Medicaid population in their demand for pharmaceuticals. This, in turn, suggests that estimates of changes in demand based on historical data from Medicaid claims is likely to be a poor approximation of realized changes in demand as a result of eligibility expansions.

We then use a novel dataset of clinical trials linked to ICD-9 codes at the sub-chapter level to ask whether the passage of the ACA spurred the development of new products – or additional indications for existing products – targeting diseases with a high market share of new Medicaid enrollees. Across a number of different specifications, we fail to find evidence that the 2010 passage of the ACA led to meaningful shifts in pharmaceutical R&D projects among pharmaceutical companies. Our results suggest that volume demand shocks with minimal increases in overall and marginal revenues have little effect on supply-side incentives for pharmaceutical innovation when prices are limited.