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Public programs that provide benefits through private markets contend with strategic
firm behavior. We study this dynamic in Medicare Part D. The Affordable Care Act closed
a coverage gap in Part D by mandating drug manufacturers cover 50% of branded drug costs
in the gap. Beneficiaries became 5 percentage points less likely to forgo prescriptions upon
reaching the gap. However, manufacturers' response led to 21% higher drug prices, partially
offsetting the insurance expansion. The closure was intended to be a $100 transfer to beneficiaries financed by manufacturers, but instead resulted in a $55 transfer to beneficiaries
financed by the government.
