Health Care Reform and Firm Dynamics: Evidence from Medicare Part D and the Retail Pharmacy Industry

Health care reforms are often enacted before implementation, creating uncertainty that can shape firms’ decisions. We examine how Medicare Part D affected the retail pharmacy industry using 2000-2009 establishment-level data, leveraging the fact that Part D disproportionately affected counties with larger elderly populations. Consistent with predictions from a conceptual model in which pre-implementation uncertainty discourages entry and lower post-implementation margins prevent full recovery, we find that Part D was associated with a 5-percent reduction in pharmacies, driven by fewer openings rather than more closures. We also find suggestive evidence that reduced pharmacy access dampened Part D’s mortality benefits. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.