Mergers in Medicare Part D: Decomposing Market Power, Cost Efficiencies, and Bargaining Power

Anna Chorniy, Clemson University, Daniel Miller, Clemson University, and Tilan Tang, Clemson University analyze Mergers in Medicare Part D: Decomposing Market Power, Cost Efficiencies, and Bargaining Power.

ABSTRACT: We examine horizontal mergers amongst Part D insurers with the aim of decomposing market power, cost efficiency, and bargaining power merger effects. We apply a differences-in-differences identification strategy to panel data on plans offered between 2006 and 2012 to document the effects of mergers on plan premiums and drug coverage characteristics. The results indicate substantial market power as mergers cause premiums to rise. But, premiums fall and drug coverage improves for merging insurers that restructure plans and renegotiate contracts with drug suppliers by consolidating existing plans. We attribute these effects to improved cost efficiencies and increased bargaining power.