Does Medicaid Pay Too Much for Prescription Drugs? A Case Study of Atypical Anti-Psychotics

During the last several years, government spending on drugs used to treat schizophrenia and other psychotic illnesses has increased at more than 30% per year, with the $3 billion in 2001 Medicaid expenditures exceeding spending in any other therapeutic category. This growth has been primarily driven by a shift to atypical anti-psychotic drugs, which are several times more expensive than the conventional anti-psychotics that preceded them and are purchased almost exclusively by state governments through the Medicaid program. In this paper, I estimate the productivity of these new drugs using a 5% sample of California Medicaid recipients eligible for the program in at least one month between January of 1993 and December of 2001 and diagnosed with schizophrenia during that period. My results indicate that the shift to atypical anti-psychotics has significantly increased government spending, has not reduced the utilization of hospitals or long-term care facilities, and has not improved observable measures of health among Medicaid recipients. The findings suggest that the price of a prescription drug purchased differentially by consumers with Medicaid or other public health insurance may be an inaccurate measure of it value to patients.