Insurance benefit design has important implications for consumer welfare. In this article, we model insurer behaviour in the Medicare prescription drug coverage market and show that strategic private insurer incentives impose a fiscal externality on the traditional Medicare program. We document that plans covering medical expenses have more generous drug coverage than plans that are only responsible for prescription drug spending, which translates into higher drug utilization by enrolees. The effect is driven by drugs that reduce medical expenditure and treat chronic conditions. Our equilibrium model of benefit design endogenizes plan characteristics and accounts for asymmetric information; the model estimates confirm that differential incentives to internalize medical care offsets can explain disparities across plans. Counterfactuals show that strategic insurer incentives are as important as asymmetric information in determining benefit design.

We measure the impact of direct-to-consumer television advertising (DTCA) by drug manufacturers. Our identification strategy exploits shocks to local advertising markets generated by the political advertising cycle and a regulatory intervention affecting a single product. We find evidence of significant business stealing effects among branded, advertised drugs. In addition, we show positive spillovers from drug advertisements to non-advertised competitors in the same class. We decompose the effect and show it is primarily due to new customers. Finally, we provide evidence that DTCA is cost-effective from a societal standpoint in our setting.