Information Policy and Drug Prices: Evidence from the Medicare Discount Drug Card Program

In early 2004, the U.S. Government initiated the Medicare Discount Drug Card Program, which created a market for drug cards that allowed their subscribers to obtain discounts on their prescription drug purchases. Pharmacy-level prices for several drugs were posted on the program website weekly from May 29, 2004 to December 31, 2005, as the largest undertaking in the history of government-sponsored information release aimed at promoting competition by facilitating access to prices. A large sample of pharmacy-level drug price data collected from the Medicare website for several weeks indicate that the program generated significant dispersion in prices across drug cards that persisted over time. Moreover, the time-path of prices was non-monotonic: the prices declined initially and rose later as the program matured. In contrast, contemporaneous control prices unrelated to the program that were collected from on-line drug retailers rose steadily over time, indicating that the program prices evolved in a way different from the general evolution of prices outside the program. In view of the institutional aspects of the program which prevented consumers from changing their card choices at will, the evolution of prices can be reconciled with models of dynamic price competition with consumer switching costs as in Klemperer (1987a,b). The estimates of savings under the program are also provided.