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Does Cost Sharing Affect Compliance? The Case of Prescription Drugs

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Author Info
Avi Dor
William Encinosa
Abstract

Private insurance for prescription drugs is characterized by two regimes: flat copayments and variable co-insurance. We develop a simple model to show that patient compliance is lower under coinsurance due to uncertainty in cost-sharing. Empirically, we derive comparable models for compliance behavior in the two regimes. Using claims data from nine large firms, we focus our analysis on diabetes, a common chronic condition that leads to severe complications when inappropriately treated. In the coinsurance model, an increase in the coinsurance rate from 20% to 75% resulted in the share of persons who never comply to increase by 9.9%, and reduced the share of fully compliant persons by 24.6%. In the copayment model, an increase in the copayment from $6 to $10 resulted in a 6.2% increase in the share of never-compliers, and a concomitant 9% reduction in the share of full compliers. Similar results hold when the level of cost-sharing is held constant across regimes. While non-compliance reduces expenditures on prescription drugs it may also lead to increases in indirect medical costs due to avertable complications. Using available aggregate estimates of the cost of diabetic complications, we calculate that the $6-$10 increase in copayment would have the direct effect of reducing national drug spending for diabetes by $125 million. However, the increase in non-compliance rates is expected to increase the rate of diabetic complications resulting in an additional $360 million in treatment costs. The results suggest that both private payers and public payers may be able to reduce overall medical costs by switching from coinsurance to copayments in prescription drug plans.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10738.

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Date of creation: Sep 2004
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Handle: RePEc:nbr:nberwo:10738

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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

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  1. 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.
  2. Sara Ellison Fisher & Iain Cockburn & Zvi Griliches & Jerry Hausman, 1997. "Characteristics of Demand for Pharmaceutical Products: An Examination of Four Cephalosporins," RAND Journal of Economics, The RAND Corporation, vol. 28(3), pages 426-446, Autumn. [Downloadable!] (restricted)
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  3. 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. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
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  1. 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. [Downloadable!] (restricted)
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  2. 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. [Downloadable!] (restricted)
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  3. Alan M. Garber & Jonathan Skinner, 2008. "Is American Health Care Uniquely Inefficient?," NBER Working Papers 14257, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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