Do Prescription Drugs Reduce Hospitalizations and Costs?
- Presenter:
Chair: Avi Dor ; Discussant: Jian Li Mon June 5, 2006 13:45-15:15 Room 325
As health care costs continue to soar, Medicare, employers, and insurers are now designing pharmaceutical benefit plans to require greater consumer cost sharing. In fact, between 2000 and 2004, copayments for preferred drugs increased 62%, and copayments for non-preferred drugs increased 94%. In most circumstances, economists would conclude that increased patient cost sharing reduces moral hazard and excessive medical consumption, thereby improving social welfare. However, the case of prescription drugs is more complex. Often drugs are associated with preventive efforts to reduce further illness and complications, but the patient might not internalize these long run benefits of drugs. As a result, increased cost-sharing may lead to underuse of drugs. In fact, Dor and Encinosa (NBER, 2004) recently showed that copayment increases reduced patient compliance with anti-diabetic medications. In this paper, we examine the effect of drug noncompliance on patient outcomes and costs. We focus on diabetes since it is one of the most common chronic conditions, with 18.2 million affected in 2004 (6.3% of US population). It is also the leading cause of adult blindness, kidney failure, lower extremity amputations, and a leading cause of heart disease. It is the 6th leading cause of death. The prevalence of diabetes increased by more than 30% over the past 10 years. We examine the impact of anti-diabetic drug purchase compliance on hospitalizations and costs among persons with type 2 diabetes. We use Medstat’s Marketscan claims database for 45 large employers for 2001 and 2002. Since unobservable patient severity may determine both hospitalization and drug compliance, we control for unobservable severity by using GMM and AGLS Probit instrumental variable techniques. Our results show that compliance with drug treatment regimes lead to a lower probability of hospitalizations and to lower health care expenditures. Using the AHRQ HCUP Prevention Quality Indicators, we find that the probability of preventable diabetic hospitalizations under perfect drug compliance is 0.5%, compared to 8.8% under 50% compliance. More generally, under perfect compliance the probability of any hospitalization is 2.8% with an average length of stay of 3.6 days, compared to 38.6% under 50% compliance, with an average length of stay of 6.2 days. Under perfect compliance the probability of having any ER visits is 6.4%, compared to 24.5% under 50% compliance. In all IV models, patients with more severe unobservable severity were more apt to comply with their medications. As expected, the annual prescription drug costs are higher for patients who perfectly comply with drug treatment. The annual drug costs under perfect compliance are $3,683, and $1,727 under 50% compliance. It is not clear a priori whether there would be outpatient cost offsets associated with drug compliance, since getting prescriptions requires physician visits. We find that compliance is associated with more office visits, but fewer ER visits. The expected outpatient expenditures under perfect compliance are $3,116, compared to $592 for 50% compliance. However, the reduction in hospitalizations associated with drug compliance lead to large cost offsets…
