Drug Prices under the Medicare Drug Discount Card Program

By Dinlersoz, Emin M.; Hernández-Murillo, Rubén et al. | Review - Federal Reserve Bank of St. Louis, November/December 2008 | Go to article overview

Drug Prices under the Medicare Drug Discount Card Program


Dinlersoz, Emin M., Hernández-Murillo, Rubén, Li, Han, Sherman, Roger, Review - Federal Reserve Bank of St. Louis


In early 2004, the U.S. government initiated the Medicare Drug Discount Card Program (MDDCP), which allowed card subscribers to obtain discounts on prescription drugs. Pharmacy-level prices were posted on the program website weekly with the hope of promoting competition among card sponsors by facilitating consumer access to prices. A large panel of pharmacy-level price data collected from this website indicates that price dispersion across cards persisted throughout the program. Prices declined initially when consumers were choosing cards, but rose later when subscribers were restricted to commit to their card choices. In contrast, contemporaneous prices from online drug retailers, which were unrelated to the program, rose steadily over time, indicating that program prices evolved in a way different from the general evolution of prices outside the program. (JEL D43, D83, I11, I18, L11, L13, L50)

Federal Reserve Bank of St. Louis Review, November/December 2008, 90(6), pp. 643-66.

(ProQuest: ... denotes formulae omitted.)

On April 29, 2004, in conjunction with the Medicare Drug Discount Card Program and Transitional Assistance Program (MDDCP), the U.S. government activated a website to publicize prices offered by discount cards for more than 800 prescription drugs at individual pharmacy levels across all zip code areas in the United States. The MDDCP was initiated as a transition to the broader Medicare Part D prescription drug assistance program that took effect in January 2006, aiming to lower the cost of drugs and therapy for elderly and handicapped individuals covered by Medicare. The price information on the MDDCP website was updated on a weekly basis for the duration of the program. This mandatory release of prices continues under the Medicare Part D program, and it is unmatched in scale in the history of government policy on information transparency.

The MDDCP and its successor program, Medicare Part D, were intended to induce competition among drug card sponsors, largely through the extensive amount of price information that drug card sponsors were required to release on the website. The premise was that the ease of consumer search for prices in the program web site would enable them to choose the lowest-price card sponsor, leading to intensified competition among sponsors. However, at the same time that the MDDCP generated price information with the intent to boost competition among drug cards, the program design also required subscribers to commit to a single drug card once they subscribed, rather than being allowed to switch cards at will. This institutional constraint on consumer switching, among other factors, could inhibit competition by preventing consumers from switching to low-price providers. Thus, a major question is whether MDDCP competition among the drug card sponsors was indeed effective in lowering drug prices as intended by the program initiators.

This paper studies the dynamics of prices over the course of the program by using a large sample of prices collected from the MDDCP web-site for several weeks. The empirical analysis indicates that the program resulted in economically significant and persistent price dispersion across cards. More importantly, the evidence points to a nonmonotonic time path for prices. Drug prices declined in the early phases of the program when card subscription was still diffusing across consumers, and they rose later when new card subscriptions slowed and consumers could no longer switch cards, although the magnitudes of these shifting trends were not exceptionally large relative to the overall average of program prices. As a benchmark for comparison, contemporaneous prices unrelated to the program were collected from online drug retailers, and these prices exhibited a steady upward trend. In particular, when MDDCP prices declined, online prices rose, and when both sets of prices rose, the rise in MDDCP prices was actually greater than the rise in online prices.

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