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Estimating the price elasticity of expenditure for prescription drugs in the presence of non‐linear price schedules: an illustration from Quebec, Canada

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  • Paul Contoyannis
  • Jeremiah Hurley
  • Paul Grootendorst
  • Sung‐Hee Jeon
  • Robyn Tamblyn

Abstract

The price elasticity of demand for prescription drugs is a crucial parameter of interest in designing pharmaceutical benefit plans. Estimating the elasticity using micro‐data, however, is challenging because insurance coverage that includes deductibles, co‐insurance provisions and maximum expenditure limits create a non‐linear price schedule, making price endogenous (a function of drug consumption). In this paper we exploit an exogenous change in cost‐sharing within the Quebec (Canada) public Pharmacare program to estimate the price elasticity of expenditure for drugs using IV methods. This approach corrects for the endogeneity of price and incorporates the concept of a ‘rational’ consumer who factors into consumption decisions the price they expect to face at the margin given their expected needs. The IV method is adapted from an approach developed in the public finance literature used to estimate income responses to changes in tax schedules. The instrument is based on the price an individual would face under the new cost‐sharing policy if their consumption remained at the pre‐policy level. Our preferred specification leads to expenditure elasticities that are in the low range of previous estimates (between −0.12 and −0.16). Naïve OLS estimates are between 1 and 4 times these magnitudes. Copyright © 2005 John Wiley & Sons, Ltd.

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  • Paul Contoyannis & Jeremiah Hurley & Paul Grootendorst & Sung‐Hee Jeon & Robyn Tamblyn, 2005. "Estimating the price elasticity of expenditure for prescription drugs in the presence of non‐linear price schedules: an illustration from Quebec, Canada," Health Economics, John Wiley & Sons, Ltd., vol. 14(9), pages 909-923, September.
  • Handle: RePEc:wly:hlthec:v:14:y:2005:i:9:p:909-923
    DOI: 10.1002/hec.1041
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    1. M Ryan & S Birch, 1991. "Charging for Health Care: Evidence on the Utilization of NHS Prescribed Drugs," Centre for Health Economics and Policy Analysis Working Paper Series 27, Centre for Health Economics and Policy Analysis (CHEPA), McMaster University, Hamilton, Canada.
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    5. Keeler, Emmett B & Newhouse, Joseph P & Phelps, C E, 1977. "Deductibles and the Demand for Medical Care Services: The Theory of a Consumer Facing a Variable Price Schedule under Uncertainty," Econometrica, Econometric Society, vol. 45(3), pages 641-655, April.
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    7. Leibowitz, Arleen & Manning, Willard G. & Newhouse, Joseph P., 1985. "The demand for prescription drugs as a function of cost-sharing," Social Science & Medicine, Elsevier, vol. 21(10), pages 1063-1069, January.
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