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Compassion and cost: The dual role of reference pricing

  • Yesim Köksal, Miyase


    (Department of Economics, School of Business, Economics and Law, Göteborg University)

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    Providing health insurance involves a trade-off between the benefits from risk spreading and the costs due to moral hazard. Focusing on pharmaceuticals consumption, this paper examines theoretically whether reference pricing, requiring individuals to pay the price difference if, in this case, they don’t buy the cheaper parallel imported drug, can ease this trade-off – an issue which has not previously been pointed out in the debate on health insurance. The results indicate that, if individuals are extremely risk-averse, a policy shift from coinsurance to reference pricing would do this by providing more insurance while decreasing moral hazard.

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    Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 498.

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    Length: 36 pages
    Date of creation: 18 May 2011
    Date of revision:
    Handle: RePEc:hhs:gunwpe:0498
    Contact details of provider: Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
    Phone: 031-773 10 00
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    1. Coulson, N Edward, et al, 1995. "Estimating the Moral-Hazard Effect of Supplemental Medical Insurance in the Demand for Prescription Drugs by the Elderly," American Economic Review, American Economic Association, vol. 85(2), pages 122-26, May.
    2. Martin Feldstein & Jonathan Gruber, 1995. "A Major Risk Approach to Health Insurance Reform," NBER Chapters, in: Tax Policy and the Economy, Volume 9, pages 103-130 National Bureau of Economic Research, Inc.
    3. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    4. Feldstein, Martin S, 1973. "The Welfare Loss of Excess Health Insurance," Journal of Political Economy, University of Chicago Press, vol. 81(2), pages 251-80, Part I, M.
    5. Nina Pavcnik, 2002. "Do Pharmaceutical Prices Respond to Potential Patient Out-of-Pocket Expenses?," RAND Journal of Economics, The RAND Corporation, vol. 33(3), pages 469-487, Autumn.
    6. Joan Costa-Font & Panos Kanavos & Joan Rovira, 2007. "Determinants of out-of-pocket pharmaceutical expenditure and access to drugs in Catalonia," Applied Economics, Taylor & Francis Journals, vol. 39(5), pages 541-551.
    7. Thomas Aronsson & Mats Bergman & Niklas Rudholm, 2001. "The Impact of Generic Drug Competition on Brand Name Market Shares – Evidence from Micro Data," Review of Industrial Organization, Springer, vol. 19(4), pages 423-433, December.
    8. David M. Cutler & Richard J. Zeckhauser, 1999. "The Anatomy of Health Insurance," NBER Working Papers 7176, National Bureau of Economic Research, Inc.
    9. Lundin, Douglas, 2000. "Moral hazard in physician prescription behavior," Journal of Health Economics, Elsevier, vol. 19(5), pages 639-662, September.
    10. Mats A. Bergman & Niklas Rudholm, 2003. "The Relative Importance of Actual and Potential Competition: Empirical Evidence From the Pharmaceuticals Market," Journal of Industrial Economics, Wiley Blackwell, vol. 51(4), pages 455-467, December.
    11. Brekke, Kurt R. & Grasdal, Astrid L. & Holmås, Tor Helge, 2006. "Regulation and Pricing of Pharmaceuticals: Reference Pricing or Price Cap Regulation?," Working Papers in Economics 14/06, University of Bergen, Department of Economics.
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