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


In the United States, prescription drug spending is a large and growing component of both total health spending and overall GDP; understanding the determinants of drug spending is important from an economic perspective and as a matter of national policy. This project focuses particular attention on generic pharmaceutical pricing, and the extent to which two crucial inputs – manufacturer market structure and government intervention – determine the prices paid throughout the supply chain. In doing so, we hope to shed new light on the causal welfare effects of several policies regarding pharmaceutical competition and regulation.


In this project, 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 estimate the impact of changes in wholesale drug prices on short- and long-run 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 (in the latter case, this will comprise immediate pass-through from the supply chain upstream of the Part D plan; in the former, this will comprise passthrough accounting for subsequent Part D plan alterations to premiums, copays, and coinsurances). The second goal of this study is to estimate the equilibrium price effects induced by changes in coverage requirements in the Part D coverage gap 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. In particular, we will consider the impact of large increases in wholesale generic drug prices, pay-for-delay agreements, and additional changes to the Part D program.

Funded By: 
Funded By: 
Award Dates: 
July 1, 2014 - June 30, 2016
PARC Grant Year: 
Year 21