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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)

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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Bibliographic Info

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

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  1. 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.
  2. 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.
  3. Moffitt, Robert, 1990. "The Econometrics of Kinked Budget Constraints," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 119-39, Spring.
  4. M Ryan & S Birch, 1991. "Charging for Health Care: Evidence on the Utilization of NHS Prescribed Drugs," Centre for Health Economics and Policy Analysis Working Paper Series 27, Centre for Health Economics and Policy Analysis (CHEPA), McMaster University, Hamilton, Canada.
  5. 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.
  6. Leibowitz, Arleen & Manning, Willard G. & Newhouse, Joseph P., 1985. "The demand for prescription drugs as a function of cost-sharing," Social Science & Medicine, Elsevier, vol. 21(10), pages 1063-1069, January.
  7. 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.
  8. 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.
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Cited by:
  1. Brekke, Kurt R. & Grasdal, Astrid L. & Holmås, Tor Helge, 2006. "Regulation and Pricing of Pharmaceuticals: Reference Pricing or Price Cap Regulation?," Working Papers in Economics 14/06, University of Bergen, Department of Economics.
  2. Chad D. Meyerhoefer & Samuel H. Zuvekas, 2010. "New estimates of the demand for physical and mental health treatment," Health Economics, John Wiley & Sons, Ltd., vol. 19(3), pages 297-315.
  3. Li, Xin & Guh, Daphne & Lacaille, Diane & Esdaile, John & Anis, Aslam H., 2007. "The impact of cost sharing of prescription drug expenditures on health care utilization by the elderly: Own- and cross-price elasticities," Health Policy, Elsevier, vol. 82(3), pages 340-347, August.
  4. Merja Halme & Kari Linden & Kimmo Kääriä, 2009. "Patients’ Preferences for Generic and Branded Over-the-Counter Medicines," The Patient: Patient-Centered Outcomes Research, Springer, vol. 2(4), pages 243-255, December.
  5. Marianne Simonsen & Lars Skipper & Niels Skipper, 2010. "Price Sensitivity of Demand for Prescription Drugs: Exploiting a Regression Kink Design," Economics Working Papers 2010-03, School of Economics and Management, University of Aarhus.
  6. Niels Skipper, 2010. "On Utilization and Stockpiling of Prescription Drugs when Co-payments Increase: Heterogeneity across Types of Drugs," Economics Working Papers 2010-12, School of Economics and Management, University of Aarhus.
  7. Sergei Koulayev & Niels Skipper & Emilia Simeonova, 2013. "Who Is in Control? The Determinants of Patient Adherence with Medication Therapy," NBER Working Papers 19496, National Bureau of Economic Research, Inc.
  8. Fiorio, Carlo V. & Siciliani, Luigi, 2010. "Co-payments and the demand for pharmaceuticals: Evidence from Italy," Economic Modelling, Elsevier, vol. 27(4), pages 835-841, July.
  9. Dag Morten Dalen & Enrico Sorisio & Steinar Strøm, 2010. "Choosing among Competing Blockbusters: Does the Identity of the Third-Party Payer Matter for Prescribing Doctors?," CESifo Working Paper Series 3227, CESifo Group Munich.
  10. Dalen Dag Morten & Locatelli Marilena & Sorisio Enrico & Strom Steinar, 2011. "A Probability Approach to Pharmaceutical Demand and Price Setting: Does the Identity of the Third-Party Payer Matters for Prescribing Doctors?," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201110, University of Turin.
  11. Skipper, Niels, 2012. "On reimbursement reforms and stockpiling of prescription drugs: The case of insulin," Health Policy, Elsevier, vol. 106(3), pages 233-240.
  12. Helmut Farbmacher & Peter Ihle & Ingrid Schubert & Joachim Winter & Amelie C. Wuppermann, 2013. "Heterogeneous Effects of a Nonlinear Price Schedule for Outpatient Care," CESifo Working Paper Series 4499, CESifo Group Munich.
  13. Laura González & Giuliano Masiero, 2011. "Disentangling spillover effects of antibiotic consumption: a spatial panel approach," Quaderni della facoltà di Scienze economiche dell'Università di Lugano 1106, USI Università della Svizzera italiana.

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