The Role of Government Reimbursement in Drug Shortages

The Role of Government Reimbursement in Drug Shortages

By
Ali Yurukoglu, Eli Liebman, David B. Ridley
American Economic Journal: Economic Policy. May
2017, Vol. 9, Issue 2, Pages 348-382

Beginning in the mid-2000s, the incidence of drug shortages rose, especially for generic injectable drugs such as anesthetics and chemotherapy treatments. We examine whether reimbursement changes contributed to the shortages, focusing on a reduction in Medicare Part B reimbursement to providers for drugs. We hypothesize that lower reimbursement put downward pressure on manufacturers’ prices, which reduced manufacturers’ incentives to invest in capacity, reliability, and new launches. We show that after the policy change, shortages rose more for drugs with higher shares of patients insured by Medicare, greater decreases in provider reimbursement, and greater decreases in manufacturer prices.