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Health Insurance and the Growth in Pharmaceutical Expenditures

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  • Patricia M. Danzon
  • Mark V. Pauly

Abstract

This paper examines the contribution of insurance coverage to the recent unprecedented growth in spending on pharmaceuticals. Trends in drug spending over time closely paralleled the growth in drug coverage. Most of the coverage growth reflects an increase in the number of people with coverage, 65 percent from 1987 to 1996, rather than increased depth of coverage. The direct moral hazard effect of this insurance growth accounts for between one-fourth and one-half of the increase in drug spending. Technological change contributed to these changes, because both the flow of new drugs increased the demand for insurance and information technologies enabled the development of pharmacy benefit management, which reduced the real price of drug coverage. It is plausible that insurance growth also stimulated drug promotion. The only obvious source of inefficiency is the tax subsidy, which may lead to excessive insurance and promotion. This applies to all health care, not just pharmaceuticals.

Suggested Citation

  • Patricia M. Danzon & Mark V. Pauly, 2002. "Health Insurance and the Growth in Pharmaceutical Expenditures," Journal of Law and Economics, University of Chicago Press, vol. 45(S2), pages 587-613.
    • Handle: RePEc:ucp:jlawec:doi:10.1086/368005
    DOI: 10.1086/368005
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    References listed on IDEAS

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    1. Weisbrod, Burton A, 1991. "The Health Care Quadrilemma: An Essay on Technological Change, Insurance, Quality of Care, and Cost Containment," Journal of Economic Literature, American Economic Association, vol. 29(2), pages 523-552, June.
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    Cited by:

    1. Frédéric Gannon & Vincent Touzé, 2006. "Insurance and Optimal Growth," SciencePo Working papers Main halshs-00085181, HAL.
    2. repec:hal:wpspec:info:hdl:2441/4422 is not listed on IDEAS
    3. Melissa Newham & Marica Valente, 2022. "The Cost of Influence: How Gifts to Physicians Shape Prescriptions and Drug Costs," Papers 2203.01778, arXiv.org, revised Apr 2023.
    4. Newhouse, Joseph Paul & Berndt, Ernst R., 2010. "Pricing and Reimbursement in U.S. Pharmaceutical Markets," Scholarly Articles 4450127, Harvard Kennedy School of Government.
    5. repec:spo:wpecon:info:hdl:2441/4422 is not listed on IDEAS
    6. Bardey, D. & Bommier, A. & Jullien, B., 2010. "Retail price regulation and innovation: Reference pricing in the pharmaceutical industry," Journal of Health Economics, Elsevier, vol. 29(2), pages 303-316, March.
    7. Son Hong Nghiem & Luke Brian Connelly, 2017. "Convergence and determinants of health expenditures in OECD countries," Health Economics Review, Springer, vol. 7(1), pages 1-11, December.
    8. Ritesh Banerjee & Ethan Cohen-Cole, 2012. "Competition and the cost of health care," Applied Economics, Taylor & Francis Journals, vol. 44(10), pages 1201-1207, April.
    9. Rosemary Avery & Donald Kenkel & Dean Lillard & Alan Mathios, 2007. "Regulating advertisements: the case of smoking cessation products," Journal of Regulatory Economics, Springer, vol. 31(2), pages 185-208, April.
    10. Kyle, Margaret K., 2022. "Incentives for pharmaceutical innovation: What’s working, what’s lacking," International Journal of Industrial Organization, Elsevier, vol. 84(C).
    11. repec:hal:spmain:info:hdl:2441/4422 is not listed on IDEAS
    12. William S. Comanor & Stuart O. Schweitzer, 2007. "Determinants of drug prices and expenditures," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(4-5), pages 357-370.
    13. Moshe Levy & Adi Rizansky Nir, 2014. "The Pricing of Breakthrough Drugs: Theory and Policy Implications," PLOS ONE, Public Library of Science, vol. 9(11), pages 1-12, November.
    14. William S. Comanor, 2015. "Pharmaceutical Economics Since the 1960s: Plus Ça Change, Plus C'est La Même Chose," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 22(2), pages 169-171, July.
    15. Jorgen Lauridsen & Mariluz Sánchez & Mickael Bech, 2010. "Public pharmaceutical expenditure: identification of spatial effects," Journal of Geographical Systems, Springer, vol. 12(2), pages 175-188, June.
    16. Chiara Bonassi & Fabio Pammolli & Massimo Riccaboni & Nicola Carmine Salerno, 2007. "Regolazione, innovazione e ciclo di vita dei prodotti - per una riforma del pricing al lancio e della governance della spesa nella farmaceutica pubblica," Working Papers CERM 02-2007, Competitività, Regole, Mercati (CERM).
    17. Patricia M. Danzon & Eric L. Keuffel, 2014. "Regulation of the Pharmaceutical-Biotechnology Industry," NBER Chapters, in: Economic Regulation and Its Reform: What Have We Learned?, pages 407-484, National Bureau of Economic Research, Inc.

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