Pharmaceutical demand response to utilization management

Abstract

Prescription drug insurance increasingly imposes prior authorization (requiring providers to request coverage before claim approval) to manage utilization. Prior authorization has been criticized because of its administrative burden on providers. The primary alternative to managing utilization is imposing out-of-pocket (OOP) payment to incentivize beneficiaries to seek lower-cost care, effectively providing beneficiaries with partial insurance. Would beneficiaries prefer indirectly paying for prior authorization through higher premiums; or would they prefer prior authorization was replaced by higher OOP costs? This tradeoff depends on how much OOP costs could be displaced by prior authorization, which depends on their relative impact on demand. I estimate the effect of prior authorization and OOP costs on pharmaceutical demand in Medicare Part D, addressing endogeneity caused by unobserved drug quality and selection into plans. Despite criticism of prior authorization, I find that Medicare beneficiaries would prefer higher premiums to pay for prior authorization, over higher OOP costs.