The Effect of Medicare Part D on Evergreening, Generic Entry, and Drug Prices

WP#2019-8

Abstract

Medicare Part D was established to expand outpatient prescription drug coverage to all seniors. An obvious effect of Part D was to improve the well-being of those who gained coverage by reducing their exposure to drug costs. But, the law also boosted demand for drugs used by those ages 65 and over, and extended the bargaining power enjoyed by commercial plans vis a vis drug manufacturers to the Part D market. Both these changes could give branded drug manufacturers extra incentive to protect their products’ monopoly status through so-called “evergreening,” with unforeseen impacts on the generic drug market and ultimately on prices. While work to date has generally found that Part D decreased prices through increased insurer bargaining power, that literature focused on the few years after Part D launched, a time before the effect of increased evergreening or decreased generic entry could be felt. This paper takes a longer view of how Part D has affected evergreening, generic entry, and ultimately drug prices in a difference-in differences design that compares these outcomes for drugs used frequently by those ages 65 and over to those used infrequently by this population. The results show that Part D increased evergreening and reduced generic entry, and suggest that these effects are associated with higher prices. However, Part D’s overall effect on drug prices is still negative, as the impact of insurer bargaining power apparently more than offsets the effect of more limited supply-side competition.