Eakinomics: CEA and the Roots of the Opioid Crisis

The opioid crisis has taken a tragic toll on American families, as well as harmed the economy by diminishing labor force participation and output. It is now recognized that the crisis occurred in two waves; prior to 2010 the crisis centered on prescription opioids, while in more recent years the challenge has been illegal, synthetic opioids (e.g., fentanyl). This week the President’s Council of Economic Advisers (CEA) released a paper looking at the economic foundations of the opioid crisis. It is an interesting read; here I focus on the early years of the crisis.

The CEA paper makes a simple and very important point: “Out-of-pocket prices for prescription opioids declined by an estimated 81 percent between 2001 and 2010. The falling prices were a consequence of the expansion of government health care coverage, which increased access to all prescription drugs—including opioids. We argue that these falling out-of-pocket prices effectively reduced the price of opioid use not only in the primary market but also in the secondary (black) market for diverted opioids, from which most people who misuse prescription opioids obtain their drugs.”

Among the most important expansions of “government health care coverage” was the implementation of the Medicare Part D (outpatient prescription drug) program in 2006. Now it might seem silly to think that a program aimed at seniors would contribute to a drug addiction problem in the working-age population. But recall that Social Security Disability Insurance participants, those with end-stage renal disease, and those dually eligible for both Medicare and Medicaid are eligible for Part D. The first wave of the opioid crisis was an era of rising disability rolls (which have declined more recently). Put simply, there were lots of potential customers for legal, prescription opioids.

But as the CEA quote stresses, the issue is not just that the government subsidy reduces the price and increases the quantity of opioids prescribed. It is that this initial lower price lowers acquisition costs for those reselling in the “secondary” market for misusing opioids. The figure below (Figure 9 in the CEA paper) shows that the black market was a significant source of opioids.


Lower prices do not a crisis make, however. The CEA is careful to emphasize that “falling out-of-pocket prices could not have led to a major rise in opioid misuse and overdose deaths without the increased availability of prescription opioids resulting from changes in pain-management practice guidelines that encouraged liberalized dispensing practices by doctors, illicit ‘pill mills,’ increased marketing and promotion efforts from industry, and inadequate monitoring or control against drug diversion.”

Stepping back, the larger lesson is that a subsidy in one part of a market never stays in just that segment. It will spill over into the market as a whole. For those objects of public policy that are desirable to be used (e.g., drugs) but susceptible to misuse, it is a reminder of the power of unintended consequences of public policies.