Drug Firms’ Payments and Physicians’ Prescribing Behavior in Medicare Part D

In a pervasive but controversial practice, drug firms frequently make monetary or in-kind payments to medical providers. Critics are concerned that drug firms are distorting prescribing behavior away from the best interests of patients, while defenders of the practice claim that payments arise from the need to educate providers about changing drug technologies. Using two different identification strategies, we investigate the effect of payments from drug firms on individual-level prescribing behavior in Medicare Part D. We find that individuals whose providers receive payments from a drug firm tend to increase expenditure on the firm’s products. Our method accounts for the selection of physicians into payments (which may result if, e.g., pharmaceutical firms target payments to physicians who see a large number of patients) and our finding holds even when we look over time within individuals who change providers. However, using hand-collected efficacy data on four major therapeutic classes, we find that those receiving payments also prescribe higher-quality drugs on average. In addition, we examine four case studies of major drugs going off patent. Providers receiving payments from the firms experiencing the patent expiry transition their patients just as quickly to generics as prescibers who do not receive such payments. These results suggest that, absent other interventions to facilitate education, policies such as the Physician Payments Sunshine Act may reduce the efficacy of drugs prescribed. ∗We are grateful for helpful comments from Judy Hellerstein and Seth Freedman and seminar participants at Cornell University, University of Michigan, and the 2015 iHEA meetings. Colleen Carey acknowledges the financial support of the Robert Wood Johnson Foundation.