Is Drug Coverage a Free Lunch? Cross-Price Elasticities and the Design of Prescription Drug Benefits

Martin Gaynor, Jian Li and William Vogt ()

The Centre for Market and Public Organisation from The Centre for Market and Public Organisation, University of Bristol, UK

Abstract: Recently, many US employers have adopted less generous prescription drug benefits. In addition, the U.S. began to offer prescription drug insurance to approximately 42 million Medicare beneficiaries in 2006. We use data on individual health insurance claims and benefit data from 1997-2003 to study the effects of changing consumers’ co-payments for prescription drugs on the quantity demanded and expenditure on prescription drugs, inpatient care and outpatient care. We allow for effects both in the year of the co-payment change and in the year following the change. Our results show that increases in prescription drug prices reduce both the use of and spending on prescription drugs. However, consumers substitute the use of outpatient care and inpatient care for prescription drug use, and the expenditure reductions on prescription drugs are largely offset by the increases in outpatient spending.

Keywords: drugs; elasticity; substitution; cost-sharing; insurance (search for similar items in EconPapers)
JEL-codes: D12 I10 M52 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2006-11
New Economics Papers: this item is included in nep-hea and nep-ias
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Citations: View citations in EconPapers (9)

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Working Paper: Is Drug Coverage a Free Lunch? Cross-Price Elasticities and the Design of Prescription Drug Benefits (2006)
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