Rationing Medicine Through Bureaucracy: Authorization Restrictions in Medicare

ABSTRACT

We study the trade-off between bureaucratic costs and reductions in moral hazard induced by managed
care tools in healthcare. We leverage random assignment to Medicare Part D plans to study this tradeoff for prior authorization restrictions. Prior authorization reduces a drug’s utilization by 26.8%. Half
of marginal beneficiaries are diverted to another related drug, while the other half are diverted to no
drug. These policies reduced drug spending by $96 per beneficiary-year (3.6% of drug spending), while
generating approximately $10 in paperwork costs. Revealed preference approaches suggest that the net
cost savings exceed beneficiaries’ willingness to pay for foregone drugs.