Health Care Reform and Firm Dynamics: Evidence from Medicare Part D and the Retail Pharmacy Industry

• In Event: Policies Affecting Medicare Beneficiaries

Abstract

Retail pharmacies are an integral part of the U.S. health care system. Pharmacies fill over 4 billion prescriptions each year and are the most frequent service delivery touchpoint in the health care system. Patients with commercial insurance and Medicare visit a pharmacy almost twice as often as they visit a physician, and pharmacists are among the most trusted members of the health care community. Recognizing the potential for pharmacists to relieve a shortage of primary care physicians, states have passed scope-of-practice expansions allowing pharmacists to prescribe and administer a growing list of medicines, including vaccines, rescue inhalers and insulin pens, and medications to prevent opioid overdoses.

Despite the importance of retail pharmacies for the healthcare system, relatively little is known about the economic factors driving pharmacy access. In this paper, we provide novel evidence on the role of government policy in shaping the retail pharmacy industry by studying the passage and implementation of Medicare Part D. Established by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Medicare Part D provides prescription drug coverage to over 53 million enrollees. At the time of its passage, it was the largest public health insurance expansion in the United States in over forty years. Because the program took several years to be fully implemented and included several unprecedented components, there was substantial uncertainty about the potential effects of the program. Indeed, as the legislation was being debated, the administrator for the Centers for Medicare and Medicaid Services was skeptical that insurers would want to offer Part D plans. Even if they did, it was unknown whether beneficiaries would choose to enroll in the program and how the program would affect drug prices.

Ultimately, researchers have shown that Part D was associated with increased prescription drug utilization, significantly reduced drug prices, and increased administrative costs. As a result, the net effect of Medicare Part D on retail pharmacies is theoretically ambiguous. We provide new evidence on how Medicare Part D shaped the retail pharmacy industry by first developing a conceptual framework of pharmacy market entry. We then use the 2000-2009 National Establishment Time-Series data and a difference-in-differences strategy leveraging pre-period variation in the share of the customers likely enrolled in Medicare. The two-year period between Part D’s passage and implementation was marked by substantial uncertainty about its financial implications for pharmacies. Though Part D ultimately increased prescription utilization, it also reduced drug prices and raised administrative costs. We find that Part D was associated with a 5-percent reduction in the number of pharmacies, driven entirely by a reduction in the number of openings rather than an increase in closures. Finally, we find suggestive evidence that the mortality reduction attributable to Part D was smaller in counties that experienced a reduction in pharmacy access.

Author

• Brandyn F Churchill, American University
  Presenting Author