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Is Price Inflation Different for the Elderly? An Empirical Analysis of Prescription Drugs

Author

Listed:
  • Berndt Ernst R.

    (MIT Sloan School of Management and NBER)

  • Cockburn Iain M.

    (University of British Columbia and NBER)

  • Cocks Douglas L.

    (Eli Lilly and Company)

  • Epstein Arnold M.

    (Harvard Medical School)

  • Griliches Zvi

    (Harvard University and NBER)

Abstract

Recently controversy has surrounded the issue of whether Social Security payments to the elderly should continue to be adjusted automatically according to changes in the Consumer Price Index (CPI). One issue in the public policy debate concerns whether price inflation is different for the elderly, particularly because the official Bureau of Labor Statistics price indexes for medical care have been growing more rapidly than the overall CPI, and medical care expenditures constitute a larger proportion of the elderly's budget than of the young's.Using annual IMS data from 1990 to 1996, we examine empirically whether elderly-nonelderly price inflation differentials exist for prescription pharmaceuticals. We assess prices for prescription drugs destined for ultimate use by the elderly versus the nonelderly at three points in the distribution chain: initial sales from manufacturers, intermediate purchases by retail pharmacies, and final sales from retail pharmacies to patients or payors. We find that at the initial point in the distribution chain, no differences in price inflation exist for the aggregate of drugs destined for use by the elderly versus those for the nonelderly. At the intermediate sell-in point to pharmacy distribution, we examine antibiotics (ABs), antidepressants (ADs), and calcium channel blockers (CCBs). For ABs, since 1992 price inflation has been somewhat greater for the elderly than for the young, reflecting in part the elderly's more intensive use of newer branded products having fewer side effects, adverse drug interactions and more convenient dosing-attributes of particular importance to the elderly. For ADs, price inoation is considerably less for the elderly than for the young, due in large part to the elderly's greater use of older generic products. For CCBs, elderly-nonelderly differentials are negligible. None of these differentials adjust for variations in quality.At the final retail sell-out point, we examine only ADs. We find that because retailers obtain larger gross margins on generic than on branded products, and because the elderly are disproportionately large users of generic ADs, the elderly-nonelderly price inflation differential benefiting the elderly at the intermediate point is reduced considerably at final sale.

Suggested Citation

  • Berndt Ernst R. & Cockburn Iain M. & Cocks Douglas L. & Epstein Arnold M. & Griliches Zvi, 1998. "Is Price Inflation Different for the Elderly? An Empirical Analysis of Prescription Drugs," Forum for Health Economics & Policy, De Gruyter, vol. 1(1), pages 1-45, January.
    • Handle: RePEc:bpj:fhecpo:v:1:y:1998:n:3
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    References listed on IDEAS

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    1. David M. Cutler & Mark McClellan & Joseph P. Newhouse & Dahlia Remler, 1996. "Are Medical Prices Declining?," NBER Working Papers 5750, National Bureau of Economic Research, Inc.
    2. David M. Cutler & Ellen Meara, 1998. "The Medical Costs of the Young and Old: A Forty-Year Perspective," NBER Chapters, in: Frontiers in the Economics of Aging, pages 215-246, National Bureau of Economic Research, Inc.
    3. Griliches, Zvi & Cockburn, Iain, 1994. "Generics and New Goods in Pharmaceutical Price Indexes," American Economic Review, American Economic Association, vol. 84(5), pages 1213-1232, December.
    4. Berndt, Ernst R & Griliches, Zvi & Rosett, Joshua G, 1993. "Auditing the Producer Price Index: Micro Evidence from Prescription Pharamceutical Preparations," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(3), pages 251-264, July.
    5. Michael, Robert T, 1979. "Variation across Households in the Rate of Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(1), pages 32-46, February.
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    Cited by:

    1. Sara Fisher Ellison & Catherine Wolfram, 2001. "Pharmaceutical Prices and Political Activity," NBER Working Papers 8482, National Bureau of Economic Research, Inc.
    2. Daron Acemoglu & Joshua Linn, 2004. "Market Size in Innovation: Theory and Evidence from the Pharmaceutical Industry," The Quarterly Journal of Economics, Oxford University Press, vol. 119(3), pages 1049-1090.
    3. Bart Hobijn & David Lagakos, 2005. "Inflation Inequality In The United States," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 51(4), pages 581-606, December.
    4. Sara Fisher Ellison & Catherine Wolfram, 2004. "Coordinating on Lower Prices: Pharmaceutical Pricing Under Political Pressure," Economics Working Papers 0048, Institute for Advanced Study, School of Social Science.
    5. Michel Grignon, 2005. "Aging, Health and Aggregate Medical Care Spending in France," Department of Economics Working Papers 2005-05, McMaster University.

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    More about this item

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation

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