The Anticipatory Effects of Medicare Part D on Drug Utilization

In the Journal of Health Economics, Abby Alpert examines anticipation effects of Medicare Part D, which went into effect two years after it was signed into law. This potentially gave forward-looking individuals time to change their drug consumption behavior in anticipation of future subsidized drug coverage. This approach contrasts with prior studies of Part D, which do not take the possibility of behavioral responses to the announcement into consideration, thus potentially overestimating the demand response to Part D. This study demonstrates a marked decline in drug use following the announcement of Part D of approximately 6% (or 2 prescriptions per year), suggesting that the elderly delayed drug use in anticipation of lower future prices. The anticipatory effects are strongest for the youngest Medicare beneficiaries, those with below-median incomes, and those without employer prescription drug coverage. Individuals not yet eligible for Medicare may also respond to the anticipation of future coverage. Since the negative anticipatory response can be observed across many drug classes, the anticipatory effect cannot be driven by idiosyncratic shocks to a single class. Moreover, the author finds strong evidence that this anticipatory response is concentrated among chronic drugs, which is consistent with the main theoretical predictions. The author finds little evidence that the decline in utilization is driven by anticipatory responses on the supply side. Finally, the observed anticipatory decline in drug use has consequences for evaluating the program effect of Medicare Part D. When taking into account the negative announcement effects, estimates of the implementation impact of Part D are reduced by about one-half. Thus, failing to account for anticipatory responses may overstate the impact of Part D on drug utilization.