How Does Cost-Sharing Affect Drug Purchases? Insurance Regimes in the Private Market for Prescription Drugs

Avi Dor, William Encinosa

NBER Working Paper No. 10738
Issued in September 2004, Revised in August 2009
NBER Program(s):Health Economics, Productivity, Innovation, and Entrepreneurship

Insurance for prescription drugs is characterized by two types of cost-sharing: flat copayments and variable coinsurance. We develop a theoretical model to show that refill purchases of preventive drugs (compliance) are lower under coinsurance due to the consumer's exposure to variation in drug prices. Coinsurance creates countervailing incentives. Consumers who never comply under flat copayments might find it optimal to comply if they drew a relatively low price under coinsurance. In contrast, consumers who always comply under flat copayments might stop complying if they drew a relatively high price under coinsurance. Our theory shows the second effect dominates under certain distributional assumptions about health states. Empirically, we derive comparable models for compliance behavior in the two regimes. Using claims data from eight large firms, we focus our analysis on diabetes, a common chronic condition that leads to severe complications when not continuously treated with medications. Propensity score methods are used to create matched samples for the two insurance regimes. We find that when coinsurance and flat copayments have the same expected out-of-pocket of $9, at least 34% of patients under copayments would fully comply and refill their medication over the next 90 days, compared to only 24% under coinsurance. Similarly, under copayments, moving from the 25th percentile to the 75th percentile of cost sharing results in a significantly lower shift into the non-compliance state compared with coinsurance. Thus, the empirical results confirm the main theoretical predictions. This research is a substantial revision and extension of our earlier 2004 NBER working paper no. 10738.

download in pdf format
   (628 K)

email paper

A non-technical summary of this paper is available in the April 2005 NBER Digest.  You can sign up to receive the NBER Digest by email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w10738

Users who downloaded this paper also downloaded* these:
Encinosa, Bernard, and Dor w15691 Does Prescription Drug Adherence Reduce Hospitalizations and Costs?
Antos Analysis of Labor Cost: Data Concepts and Sources
Deb, Trivedi, and Zimmer w15191 Dynamic Cost-offsets of Prescription Drug Expenditures: Panel Data Analysis Using a Copula-based Hurdle Model
Gaynor, Li, and Vogt w12758 Is Drug Coverage a Free Lunch? Cross-Price Elasticities and the Design of Prescription Drug Benefits
Lanjouw w11321 Patents, Price Controls, and Access to New Drugs: How Policy Affects Global Market Entry
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us