Is Drug Coverage a Free Lunch? Cross-Price Elasticities and the Design of Prescription Drug Benefits
Recently, many U.S. 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 about 35% of the expenditure reductions on prescription drugs are offset by the increases in other spending.
We are greatly indebted to the NBER for the use of the Medstat data, and we express our sincere thanks to Ms. Jean Roth for her kind assistance. We are grateful for comments from Roger Feldman, Jonathan Gruber, Sean Nicholson, Mike Chernew, Avi Dor, Tomas Philipson and participants at the 2005 Annual Health Economics Conference, the Spring 2005 NBER Health Care Program Meeting, and the 2006 Annual Meeting of American Society of Health Economists in Madison. The usual caveat applies. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
- Higher drug co-payments save money on drug spending, but cost money on outpatient spending and have much smaller effects on overall...