Medicare Reimbursements and Shortages of Sterile Injectable Pharmaceuticals

This paper investigates the rise in shortages of sterile injectable pharmaceutical drugs in the US. I examine a policy change in 2005 that differentially reduced Medicare Part B payments for pharmaceuticals. Drugs whose payments dropped more due to the policy change have had greater increases in shortages. I interpret these results using a model of entry and capacity choice with supply uncertainty. I conclude that Medicare's generous payments before the policy change provided manufacturers with incentives to invest in capacity or induced entry. The effect on total welfare of lowering payments is theoretically ambiguous.