Rationing Medicine Through Bureaucracy: Authorization Restrictions in Medicare

High administrative costs in U.S. health care have provoked concern among policymakers, but many of these costs are generated by managed care policies that trade off bureaucratic sludge against reductions in moral hazard. We study this trade-off for prior authorization restriction policies in Medicare Part D, where low-income beneficiaries are randomly assigned to default plans. Beneficiaries who face restrictions on a drug reduce their use of it by roughly 24.2%. Approximately half of marginal beneficiaries are diverted to another related drug, while the other half are diverted to no drug. These policies generated net fiscal savings, reducing drug spending by $84.94 per beneficiary-year (3.17% of drug spending), while generating $9.28-$10.91 in paperwork costs. Revealed preference approaches suggest that the value of the foregone drugs is likely to fall below the cost savings.