Lydia Cao (NU): When Payers Intervene: Insurer Restrictions, Physician Expertise, and Cost Control
Abstract: Abstract: Rising prescription drug spending has prompted insurers to adopt utilization management (UM) protocols that restrict access to high-cost drugs. I study the welfare effects of UM and why insurers use it. UM lets insurers rein in physicians who do not fully internalize costs, at the risk of underusing their private information about which drugs benefit which patients. By shifting quantities, UM can also move negotiated drug prices, so its net welfare effect is ambiguous ex ante. To quantify the effects of UM on patients, physicians, and payers, I estimate a structural model of physician learning and insurer--manufacturer bargaining for antidiabetic drugs in Medicare Part D. Physicians are relatively insensitive to out-of-pocket costs but learn quickly about patient-specific drug effectiveness, so UM mostly deters prescriptions for marginal patients. Banning UM would raise patient welfare by only 0.17% and relieve physicians of hassle costs in 4.6% of cases, but increase total spending by 9.2%, 42% of which comes through price changes. A decomposition shows that insurers' limited bargaining power contributes substantially to UM use, whereas imperfect physician agents account for most of the welfare gap from the first best. Greater physician expertise may strengthen insurers' incentive to use UM, as learning reveals which patients benefit from expensive drugs and widens disagreement between insurers and physicians. Overall, UM can hurt patients and encumber physicians, while generating savings for insurers and payers at large. Policymakers should weigh these trade-offs and recognize that addressing UM's root causes, such as high drug prices and suboptimal prescribing, can be crucial for reaching socially optimal outcomes and eliminating administrative frictions.
Economics
(847) 491-8200
Email