Anticipatory Behavior in Response to Medicare Part D's Coverage Gap

Under the standard Medicare Part D benefit structure, copayments for medications change discontinuously at certain levels of accumulative drug spending. Beneficiaries pay 25% of the cost of medications in the initial phase, 100% in the coverage gap, and 5% in the catastrophic phase. We examine whether individuals anticipate these copayment changes and adjust their consumption in advance. We use variation in birth‐months of beneficiaries who enroll in Part D plans when they first turn 65. Birth‐months generate exogenous variation in the end‐of‐year price because those who enroll earlier in the year are more likely to reach the coverage gap than those who enroll later. We study the impact of variation in end‐of‐year price on the first three months of medication use immediately following enrollment. We use difference‐in‐differences to adjust for seasonal trends in use, by comparing our main study group with those who receive low‐income subsidies, and therefore do not face a coverage gap. We find strong evidence of anticipatory behavior, with an implied elasticity with respect to future prices ranging from −0.2 to −0.5. In addition, we find that beneficiaries modify their consumption by changing the quantity of prescriptions filled, instead of switching between brand‐name and generic drugs. Copyright © 2016 John Wiley & Sons, Ltd.