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Health Insurance and the Growth in Pharmaceutical Expenditures

Listed author(s):
  • Patricia M. Danzon
  • Mark V. Pauly

This paper examines the contribution of insurance coverage to the recent unprecedented growth in spending on pharmaceuticals. Trends in drug spending over time closely paralleled the growth in drug coverage. Most of the coverage growth reflects an increase in the number of people with coverage, 65 percent from 1987 to 1996, rather than increased depth of coverage. The direct moral hazard effect of this insurance growth accounts for between one-fourth and one-half of the increase in drug spending. Technological change contributed to these changes, because both the flow of new drugs increased the demand for insurance and information technologies enabled the development of pharmacy benefit management, which reduced the real price of drug coverage. It is plausible that insurance growth also stimulated drug promotion. The only obvious source of inefficiency is the tax subsidy, which may lead to excessive insurance and promotion. This applies to all health care, not just pharmaceuticals.

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File URL: http://dx.doi.org/10.1086/368005
Download Restriction: Access to the online full text or PDF requires a subscription.

File URL: http://dx.doi.org/10.1086/368005
Download Restriction: Access to the online full text or PDF requires a subscription.

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Article provided by University of Chicago Press in its journal The Journal of Law and Economics.

Volume (Year): 45 (2002)
Issue (Month): S2 ()
Pages: 587-613

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Handle: RePEc:ucp:jlawec:doi:10.1086/368005
Contact details of provider: Web page: http://www.journals.uchicago.edu/JLE/

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  1. Weisbrod, Burton A, 1991. "The Health Care Quadrilemma: An Essay on Technological Change, Insurance, Quality of Care, and Cost Containment," Journal of Economic Literature, American Economic Association, vol. 29(2), pages 523-552, June.
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