How Does Cost-Sharing Affect Drug Purchases? Insurance Regimes in the Private Market for Prescription Drugs
AbstractInsurance for prescription drugs is characterized by two types of cost-sharing: flat copayments and variable coinsurance. We develop a theoretical model to show that refill purchases of preventive drugs (compliance) are lower under coinsurance due to the consumer’s exposure to variation in drug prices. Coinsurance creates countervailing incentives. Consumers who never comply under flat copayments might find it optimal to comply if they drew a relatively low price under coinsurance. In contrast, consumers who always comply under flat copayments might stop complying if they drew a relatively high price under coinsurance. Our theory shows the second effect dominates under certain distributional assumptions about health states. Empirically, we derive comparable models for compliance behavior in the two regimes. Using claims data from eight large firms, we focus our analysis on diabetes, a common chronic condition that leads to severe complications when not continuously treated with medications. Propensity score methods are used to create matched samples for the two insurance regimes. We find that when coinsurance and flat copayments have the same expected out-of-pocket of $9, at least 34% of patients under copayments would fully comply and refill their medication over the next 90 days, compared to only 24% under coinsurance. Similarly, under copayments, moving from the 25th percentile to the 75th percentile of cost sharing results in a significantly lower shift into the non-compliance state compared with coinsurance. Thus, the empirical results confirm the main theoretical predictions. This research is a substantial revision and extension of our earlier 2004 NBER working paper no. 10738.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10738.
Date of creation: Sep 2004
Date of revision:
Note: HE PR
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Find related papers by JEL classification:
- I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
This paper has been announced in the following NEP Reports:
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.:
- Levy, H & Markowtiz, H M, 1979. "Approximating Expected Utility by a Function of Mean and Variance," American Economic Review, American Economic Association, vol. 69(3), pages 308-17, June.
- Crown William H. & Berndt Ernst R. & Baser Onur & Finkelstein Stan N. & Witt Whitney P. & Maguire Jonathan & Haver Kenan E., 2004.
"Benefit Plan Design and Prescription Drug Utilization Among Asthmatics: Do Patient Copayments Matter?,"
Forum for Health Economics & Policy,
De Gruyter, vol. 7(1), pages 1-35, January.
- William H. Crown & Ernst R. Berndt & Onur Baser & Stan N. Finkelstein & Whitney P. Witt & Jonathan Maguire & Kenan E. Haver, 2004. "Benefit Plan Design and Prescription Drug Utilization Among Asthmatics: Do Patient Copayments Matter?," NBER Chapters, in: Frontiers in Health Policy Research, Volume 7, pages 95-128 National Bureau of Economic Research, Inc.
- William H. Crown & Ernst R. Berndt & Onur Baser & Stan N. Finkelstein & Whitney P. Witt, 2003. "Benefit Plan Design and Prescription Drug Utilization Among Asthmatics: Do Patient Copayments Matter?," NBER Working Papers 10062, National Bureau of Economic Research, Inc.
- Manning, Willard G, et al, 1987. "Health Insurance and the Demand for Medical Care: Evidence from a Randomized Experiment," American Economic Review, American Economic Association, vol. 77(3), pages 251-77, June.
- Martin Gaynor & Jian Li & William B. Vogt, 2006.
"Is Drug Coverage a Free Lunch? Cross-Price Elasticities and the Design of Prescription Drug Benefits,"
The Centre for Market and Public Organisation
07/166, Department of Economics, University of Bristol, UK.
- Martin Gaynor & Jian Li & William B. Vogt, 2006. "Is Drug Coverage a Free Lunch? Cross-Price Elasticities and the Design of Prescription Drug Benefits," NBER Working Papers 12758, National Bureau of Economic Research, Inc.
- Alan M. Garber & Jonathan Skinner, 2008.
"Is American Health Care Uniquely Inefficient?,"
Journal of Economic Perspectives,
American Economic Association, vol. 22(4), pages 27-50, Fall.
- Randall D. Cebul & James B. Rebitzer & Lowell J. Taylor & Mark E. Votruba, 2008.
"Organizational Fragmentation and Care Quality in the U.S. Healthcare System,"
Journal of Economic Perspectives,
American Economic Association, vol. 22(4), pages 93-113, Fall.
- Randall D. Cebul & James B. Rebitzer & Lowell J. Taylor & Mark Votruba, 2008. "Organizational Fragmentation and Care Quality in the U.S. Health Care System," NBER Working Papers 14212, National Bureau of Economic Research, Inc.
- William Encinosa, 2009. "Value-based insurance design in medicare," Applied Health Economics and Health Policy, Springer, vol. 7(3), pages 149-154, September.
- Patrick Thiebaud & Bimal V. Patel & Michael B. Nichol, 2008. "The demand for statin: the effect of copay on utilization and compliance," Health Economics, John Wiley & Sons, Ltd., vol. 17(1), pages 83-97.
- Lien, Hsien-Ming & Lu, Mingshan & Albert Ma, Ching-To & McGuire, Thomas G., 2010.
"Progress and compliance in alcohol abuse treatment,"
Journal of Health Economics,
Elsevier, vol. 29(2), pages 213-225, March.
- Hsien-Ming Lien & Mingshan Lu & Ching-To Albert Ma & Thomas G. McGuire, 2006. "Progress and Compliance in Alcohol Abuse Treatment," Boston University - Department of Economics - Working Papers Series WP2006-043, Boston University - Department of Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.