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

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Author Info
Martin Gaynor
Jian Li
William B. Vogt ()

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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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File URL: http://www.bris.ac.uk/Depts/CMPO/workingpapers/wp166.pdf
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Publisher 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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Related research
Keywords: drugs; elasticity; substitution; cost-sharing; insurance;

Other versions of this item:

Find related papers by JEL classification:
D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
I10 - Health, Education, and Welfare - - Health - - - General
M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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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.:
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    Other versions:
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    Other versions:
  5. Grossman, Michael, 1972. "On the Concept of Health Capital and the Demand for Health," Journal of Political Economy, University of Chicago Press, vol. 80(2), pages 223-55, March-Apr. [Downloadable!] (restricted)
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  13. Honore, Bo E, 1992. "Trimmed LAD and Least Squares Estimation of Truncated and Censored Regression Models with Fixed Effects," Econometrica, Econometric Society, vol. 60(3), pages 533-65, May. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, 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. Dana Goldman & Tomas Philipson, 2007. "Integrated Insurance Design in the Presence of Multiple Medical Technologies," NBER Working Papers 12870, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Alan M. Garber & Jonathan Skinner, 2008. "Is American Health Care Uniquely Inefficient?," NBER Working Papers 14257, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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