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Financial Incentives and Physician Prescribing Behavior


Sarah Neyaz


Sarah Neyaz, Kosali Simon, Adam Mathios

Chair: Melayne McInnes; Discussant: TBA Mon June 5, 2006 17:15-18:45 Room 121

As patents on prescription drugs expire and the threat of generics increases, pharmaceutical companies may move a drug into the over-the-counter (OTC) market to take advantage of brand recognition and maximize profits. Little research to date addressed how this change in prescription status affects the use of this drug or other drugs in its class. This purpose of this paper is to examine whether physicians change their prescribing behavior when a drug switches from prescription to OTC status, and how this varies by the insurance status of the patient and the drug class being considered.

Under a standard principal agent model, the physician’s choice of a drug for a patient’s ailment should not be influenced by its OTC vs Rx status, even though a physician authorization is required only for prescription drugs. However, a switch in regulatory status may entail a change in the cost to the patient depending on their insurance coverage. For example, an OTC version of a drug may cost more if the patient has drug insurance which would pay only for Rx medications. Physicians may also face different financial incentives in the decision to prescribe an OTC vs Rx drug, for example, if a capitated managed care contract implies that Rx drugs count negatively in the revenue equation but OTC drugs do not. Physicians may also face incentives in the decision to prescribe OTC drugs could change the probability of the patient continuing to come in for office visits. We hypothesize that under fee-for-service reimbursement, the physician may have greater incentives to recommend prescription drugs (vs OTC) relative to capitated managed care arrangements. When taking an OTC medication, patients do not have to visit their physicians repeatedly since they can purchase these drugs on their own, without physician authorization.

We propose to use micro data from the National Ambulatory Medical Survey, a nationally representative survey of patients who visit physicians, to investigate the relationship between financial incentives and prescribing patterns.


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