Is drug coverage a free lunch? Cross-price elasticities and the design of prescription drug benefits
- Presenter:
Chair: Marisa Domino Mon June 5, 2006 10:45-12:15 Room 121
Recently, many US employers have adopted more stringent prescription drug benefits. In addition, the U.S. will offer prescription drug insurance to approximately 42 million Medicare beneficiaries in 2006. These changes in drug prices can be expected to change not only the consumption of drugs but also the consumption of other medical goods, if those goods are complements or substitutes for drugs.
We use data from Medstat on individual claims and benefit design from 1997-2003 to examine the dynamic structure of demand for health care, focusing specifically on whether prescription drugs are (dynamic) complements or substitutes for inpatient and outpatient care. The Medstat data contain inpatient, outpatient, and pharmaceutical claims for a population of employees of a number of large, US employers. Our analytic sample contains more than 520,000 individuals each followed for at least three years and at most seven.
We study the effect of changing consumers’ copayments for prescription drugs on the quantity demanded of and expenditure on prescription drugs, inpatient care and outpatient care, allowing for effects both in the year of the copayment change and in the year following the change and controlling for changes in inpatient and outpatient deductibles, copayments, etc. Since many of our dependent variables have nonstandard distributions in our main analyses we employ fixed-effect count data models for our quantity measures: outpatient visits, inpatient stays, number of days supply of prescription drugs. We employ fixed-effect Tobit models for our various spending measures. In addition to fixed effects, we use block-bootstrap techniques to correct our standard errors for any serially correlated individual random effects.
Our results show that a one dollar increase in the consumer copayment for drugs has the following effects. In the first year after the change, drug spending falls by $20.6, but the outpatient spending increases by $10.9. In the second year after the change, drug spending continues to fall by $12.8, while outpatient spending rises by $15.3. There are no significance changes in inpatient spending in both years. In sum the total spending decreases by $9.5 in the first year after the price changes and increase by $1.5 in the second.
As is evident, there are both dynamic and instantaneous effects of changes in consumer drug copayments. Moreover, there is clear substitution effect between the consumption of prescription drugs and other medical services. The cost-savings on prescription drugs are largely offset by the increases in outpatient spending. These dynamic and substitution effects should be taken into account when estimating the expected cost of programs like the Medicare prescription drug benefit. The findings from this study also provide useful insights into the optimal design of insurance benefits.
