Insurers offering Medicare Part D face a form of profit regulation in which federal reimbursement rates are tied to their costs. This provides an incentive to inflate costs. In a new paper, Kakani et al show that firms shifted where they take their to an unregulated upstream affiliate. Higher pharmacy prices by affiliated pharmacies represent higher costs to insurers, some of which will be reimbursed through higher insurance prices. Moreover, "We detect larger price increases by insurers that were at greatest risk of exceeding the allowable profit level. More than one-fifth of these higher prices were borne by the federal government."
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