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Estimating the price elasticity of expenditure for prescription drugs in the presence of non-linear price schedules: an illustration from Quebec, Canada

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Author Info
Paul Contoyannis
Jeremiah Hurley
Paul Grootendorst
Sung-Hee Jeon
Robyn Tamblyn (Department of Epidemiology and Biostatistics, McGill University, Canada)

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Abstract

The price elasticity of demand for prescription drugs is a crucial parameter of interest in designing pharmaceutical benefit plans. Estimating the elasticity using micro-data, however, is challenging because insurance coverage that includes deductibles, co-insurance provisions and maximum expenditure limits create a non-linear price schedule, making price endogenous (a function of drug consumption). In this paper we exploit an exogenous change in cost-sharing within the Quebec (Canada) public Pharmacare program to estimate the price elasticity of expenditure for drugs using IV methods. This approach corrects for the endogeneity of price and incorporates the concept of a 'rational' consumer who factors into consumption decisions the price they expect to face at the margin given their expected needs. The IV method is adapted from an approach developed in the public finance literature used to estimate income responses to changes in tax schedules. The instrument is based on the price an individual would face under the new cost-sharing policy if their consumption remained at the pre-policy level. Our preferred specification leads to expenditure elasticities that are in the low range of previous estimates (between −0.12 and −0.16). Naïve OLS estimates are between 1 and 4 times these magnitudes. Copyright © 2005 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/hec.1041
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Article provided by John Wiley & Sons, Ltd. in its journal Health Economics.

Volume (Year): 14 (2005)
Issue (Month): 9 ()
Pages: 909-923
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Handle: RePEc:wly:hlthec:v:14:y:2005:i:9:p:909-923

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/5749

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Gerald Auten & Robert Carroll, 1999. "The Effect Of Income Taxes On Household Income," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 681-693, November. [Downloadable!] (restricted)
  2. Moffitt, Robert, 1990. "The Econometrics of Kinked Budget Constraints," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 119-39, Spring. [Downloadable!] (restricted)
  3. Van de ven, Wynand P.M.M. & Ellis, Randall P., 2000. "Risk adjustment in competitive health plan markets," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 14, pages 755-845 Elsevier. [Downloadable!] (restricted)
  4. Hausmann, J. A. & Kinnucan, M. & McFaddden, D., 1979. "A two-level electricity demand model : Evaluation of the connecticut time-of-day pricing test," Journal of Econometrics, Elsevier, vol. 10(3), pages 263-289, August. [Downloadable!] (restricted)
  5. Keeler, Emmett B & Newhouse, Joseph P & Phelps, C E, 1977. "Deductibles and the Demand for Medical Care Services: The Theory of a Consumer Facing a Variable Price Schedule under Uncertainty," Econometrica, Econometric Society, vol. 45(3), pages 641-55, April. [Downloadable!] (restricted)
  6. Zweifel, Peter & Manning, Willard G., 2000. "Moral hazard and consumer incentives in health care," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 8, pages 409-459 Elsevier. [Downloadable!] (restricted)
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  1. Kurt R. Brekke & Astrid L. Grasdal & Tor Helge Holmås, 2007. "Regulation and Pricing of Pharmaceuticals: Reference Pricing or Price Cap Regulation?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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