From Liran Einav, Amy Finkelstein, and Paul Schrimpf,
We study the demand response to non-linear price schedules using data on insurance contacts and prescription drug claims in Medicare Part D. Consistent with static response of drug use to price, we document significant bunching of annual drug spending as individuals enter the famous “donut hole” insurance becomes discontinuously much less generous on the margin. Consistent with a dynamic response to price, we document a response of drug use to the future out-of-pocket price by using variation in beneficiary birth month which generates variation in contract duration during the first year of eligibility. Motivated by these two facts, we develop and estimate a dynamic model of drug use during the coverage year that allows us to explore and quantify the effects of alternative contract designs on drug expenditures. For example, our estimates suggest that filling the donut hole, as required under the Affordable Care Act, will increase average total drug spending by about $170 per beneficiary, or about 10%, and average Medicare drug spending by about $270 per beneficiary, or almost 30%. We describe the nature of the utilization response and its heterogeneity across individuals and types of drugs.