“Medicare Reimbursements and Shortages of Sterile Injectable Pharmaceuticals,” by Ali Yurukoglu (w17987, April 2012, .pdf format, 32p.).
Abstract:
This paper investigates the rise in shortages of sterile injectable pharmaceutical drugs in the United States. I focus on a policy change that occured in 2005 that reduced Medicare reimbursements for sterile injectable drugs. The policy change affected different drugs by different amounts. I empirically look at the change in shortages for drugs after the policy change conditional on the amount that the policy change affected each drug. I find that drugs that were more affected by the policy change, ie with greater “treatment,” either because they serve older patient populations or have low fixed costs, have had a greater increase in shortages and a greater decrease in number of manufacturers post-regulation. I interpret these results using a model of capacity choice with supply uncertainty. Total installed capacity is higher and the probability of a shortage is lower when margins are higher. I conclude that Medicare’s generous payments before the policy change provided manufacturers with incentives to take actions to avoid shortages either by investing in additional maintenance or capacity, or by inducing more entry into production of the drug. The effect on total welfare of removing those payments is theoretically ambiguous, and would require more detailed data to credibly estimate.
