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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 U.S. 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 about 35% of the expenditure reductions on prescription drugs are offset by the increases in other spending.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12758.

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Date of creation: Dec 2006
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Handle: RePEc:nbr:nberwo:12758

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Cited by:
  1. Simonsen, Marianne & Skipper, Lars & Skipper, Niels, 2010. "Price Sensitivity of Demand for Prescription Drugs: Exploiting a Regression Kink Design," Working Papers 10-1, University of Aarhus, Aarhus School of Business, Department of Economics.
  2. 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.
  3. Alan M. Garber & Jonathan Skinner, 2008. "Is American Health Care Uniquely Inefficient?," NBER Working Papers 14257, National Bureau of Economic Research, Inc.
  4. 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.

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