Health care policy evaluation using longitudinal insurance claims data: An application of the Panel Tobit estimator

The British Columbia Ministry of Health provides enhanced prescription drug insurance coverage to residents aged 65 and older. This exogenous change in the effective price of prescription drugs is used to investigate aspects of the drug use by seniors. Three sets of issues are of interest. First, what is the effect of enhanced insurance coverage on drug use and programme costs once drugs are provided free of charge? Second, is this effect permanent, or transitory? Third, are any increases in use observed concentrated among those with lower incomes? Longitudinal administrative claims payment data on 18 000 seniors over the period 1985–92 are used. All individuals in the sample turned 65 at some point and therefore became eligible for subsidized prescription drugs. Health status information is not collected; instead, health status is treated as an individual‐specific fixed endowment, subject to a common rate of decay. Estimation is complicated by censoring of real drug expenditures for those under 65, rendering ‘first differencing’ methods invalid. A semi‐parametric fixed effects Tobit estimator is used instead. For most individuals, the extension of insurance does not permanently increase drug use. Males with lower income were the exception. Little evidence of transitory effects to insurance coverage was found. Finally, the extension of insurance has made only a minor contribution to growth in seniors' drug use, relative to secular growth in drug use over time. © 1997 John Wiley & Sons, Ltd.