Medicare Part D’s Effect on Evergreening, Generics, and Drug Prices

Publication Date: September 2019

Publisher: Center for Retirement Research at Boston College

Author(s): Geoffrey Sanzenbacher; Gal Wettstein

Research Area:

Keywords: Financing Retirement

Type: Report

Coverage: United States

Abstract:

The launch of Medicare Part D in 2006 expanded prescription drug coverage to all seniors. Its obvious effect has been to improve the well-being of those who gained coverage by reducing their exposure to drug costs. But the law has also boosted demand for drugs and given insurers who provide Part D coverage more leverage over drug manufacturers. Both of these changes could give manufacturers of brand-name drugs an extra incentive to protect their monopoly status, with unforeseen impacts on the generic drug market and, ultimately, on prices. This brief, based on a new study, explores these impacts by first looking at whether Part D made manufacturers more likely to make small changes to their drugs to maintain monopoly power – a practice known as “evergreening.”

The analysis then assesses any impacts of Part D on generic entry and, ultimately, drug prices. The brief proceeds as follows. The first section provides background on Part D and evergreening, and discusses how they could affect generic entry and drug prices. The second section describes the data. The third section looks at trends in the drug market before and after Medicare Part D was enacted. The fourth section presents the main results on the effect of Part D on evergreening, generic entry, and prices. The final section concludes that, while Part D increased evergreening and decreased generic entry, drug prices overall were lower than they would have been without Part D, likely as a result of the increased insurer bargaining power. Still, since the results also show that evergreened drugs saw price increases relative to other drugs, policymakers may want to consider the costs and benefits of regulating this behavior. The discussion proceeds as follows. The first section identifies four factors – immaturity of the 401(k) system, lack of universal coverage, leakages, and fees – that might explain why 401(k)/IRA balances fall below their potential. The second section describes the data and the methodology used to estimate the role of each factor. The third section discusses the results, which show that the immaturity of the system and the lack of universal coverage are the main culprits, followed by leakages, and finally fees. The final section concludes that, without a significant effort to cover the uncovered, a large gap between potential and actual accumulations will persist even after the system matures.