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Is Drug Coverage a Free Lunch? Cross-Price Elasticities and the Design of Prescription Drug Benefits

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  • Martin Gaynor
  • Jian Li
  • William B. Vogt

    ()

Abstract

Recently, many US employers have adopted less generous prescription drug benefits. In addition, the U.S. began to offer prescription drug insurance to approximately 42 million Medicare beneficiaries in 2006. We use data on individual health insurance claims and benefit data from 1997-2003 to study the effects of changing consumers’ co-payments for prescription drugs on the quantity demanded and expenditure on prescription drugs, inpatient care and outpatient care. We allow for effects both in the year of the co-payment change and in the year following the change. Our results show that increases in prescription drug prices reduce both the use of and spending on prescription drugs. However, consumers substitute the use of outpatient care and inpatient care for prescription drug use, and the expenditure reductions on prescription drugs are largely offset by the increases in outpatient spending.

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Bibliographic Info

Paper provided by Department of Economics, University of Bristol, UK in its series The Centre for Market and Public Organisation with number 07/166.

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Length: 29 pages
Date of creation: Nov 2006
Date of revision:
Handle: RePEc:bri:cmpowp:07/166

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Keywords: drugs; elasticity; substitution; cost-sharing; insurance;

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Cited by:
  1. Tomas J. Philipson & Dana Goldman, 2007. "Integrated Insurance Design in the Presence of Multiple Medical Technologies," American Economic Review, American Economic Association, American Economic Association, vol. 97(2), pages 427-432, May.
  2. Simonsen, Marianne & Skipper, Lars & Skipper, Niels, 2010. "Price Sensitivity of Demand for Prescription Drugs: Exploiting a Regression Kink Design," Working Papers, University of Aarhus, Aarhus School of Business, Department of Economics 10-1, University of Aarhus, Aarhus School of Business, Department of Economics.
  3. Alan M. Garber & Jonathan Skinner, 2008. "Is American Health Care Uniquely Inefficient?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 22(4), pages 27-50, Fall.
  4. Shi, Lijia & Gao, Zhifeng & Chen, Xuqi, 2014. "The cross-price effect on willingness-to-pay estimates in open-ended contingent valuation," Food Policy, Elsevier, Elsevier, vol. 46(C), pages 13-21.

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