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Incentives and Selection Effects of Drug Coverage on Total Drug Expenditure: a Finite Mixture Approach

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Munkin, M
Trivedi, P. K

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Abstract

This paper takes a nte mixture approach to model heterogeneity in incentives and selection effects of drug coverage on the total drug expenditure among the Medicare elderly US population. Evidence is found that the positive drug expenditures of the entire elderly popultion can be decomposed into two groups of relatively healthy with lower average expenditures and relatively unhealthy with higher average expenditures, accounting for approaximately 25% and 75% of the population, respectively. The incentive effects of drug insurance, i.e. ex post moral hazard, are much stronger in magnitude for the unhealthy group. There is also evidence of adverse selection into drug insurance, and this appears to be greater for the higher-expenditure component.

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Paper provided by HEDG, c/o Department of Economics, University of York in its series Health, Econometrics and Data Group (HEDG) Working Papers with number 09/22.

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Date of creation: Jul 2009
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Handle: RePEc:yor:hectdg:09/22

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  1. Lillard, L.A. & Rogowski, J. & Kington, R., 1999. "Insurance Coverage for Prescription Drugs: Effects on Use and Expenditures in the Medicare Population," Papers 99-09, RAND - Labor and Population Program.
  2. Dana P. Goldman & Geoffrey Joyce & Pinar Karaca-Mandic & Neeraj Sood, 2006. "Adverse Selection in Retiree Prescription Drug Plans," Forum for Health Economics & Policy, Berkeley Electronic Press, vol. 9(1). [Downloadable!]
  3. Fruhwirth-Schnatter S., 2001. "Markov Chain Monte Carlo Estimation of Classical and Dynamic Switching and Mixture Models," Journal of the American Statistical Association, American Statistical Association, vol. 96, pages 194-209, March. [Downloadable!] (restricted)
  4. Duan, Naihua, et al, 1983. "A Comparison of Alternative Models for the Demand for Medical Care," Journal of Business & Economic Statistics, American Statistical Association, vol. 1(2), pages 115-26, April.
  5. 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)
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  6. Mullahy, John, 1998. "Much ado about two: reconsidering retransformation and the two-part model in health econometrics," Journal of Health Economics, Elsevier, vol. 17(3), pages 247-281, June. [Downloadable!] (restricted)
  7. Murat K. Munkin & Partha Deb & Pravin K. Trivedi, 2006. "Bayesian analysis of the two-part model with endogeneity: application to health care expenditure," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(7), pages 1081-1099. [Downloadable!]
  8. Nasreen Khan & Robert Kaestner & Swu Jane Lin, 2007. "Prescription Drug Insurance and Its Effect on Utilization and Health of the Elderly," NBER Working Papers 12848, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Keane, Michael P, 1992. "A Note on Identification in the Multinomial Probit Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(2), pages 193-200, April.
  10. Jones, Andrew M., 2000. "Health econometrics," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 6, pages 265-344 Elsevier. [Downloadable!] (restricted)
  11. Baoping Shang & Dana P. Goldman, 2007. "Prescription Drug Coverage and Elderly Medicare Spending," NBER Working Papers 13358, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Goldman, Dana P. & Hosek, Susan D. & Dixon, Lloyd S. & Sloss, Elizabeth M., 1995. "The effects of benefit design and managed care on health care costs," Journal of Health Economics, Elsevier, vol. 14(4), pages 401-418, October. [Downloadable!] (restricted)
  13. Teresa Bago d'Uva, 2005. "Latent class models for use of primary care: evidence from a British panel," Health Economics, John Wiley & Sons, Ltd., vol. 14(9), pages 873-892. [Downloadable!]
  14. John Geweke & Gautam Gowrisankaran & Robert J. Town, 2003. "Bayesian Inference for Hospital Quality in a Selection Model," Econometrica, Econometric Society, vol. 71(4), pages 1215-1238, 07. [Downloadable!] (restricted)
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  15. Lee A. Lillard & Jeannette Rogowski & Raynard Kington, 1999. "Insurance Coverage for Prescription Drugs: Effects on Use and Expenditures in the Medicare Population," Working Papers 99-09, RAND Corporation Publications Department. [Downloadable!]
  16. Manning, Willard G. & Mullahy, John, 2001. "Estimating log models: to transform or not to transform?," Journal of Health Economics, Elsevier, vol. 20(4), pages 461-494, July. [Downloadable!] (restricted)
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