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

51 Pages Posted: 22 Dec 2006 Last revised: 12 Nov 2022

See all articles by Martin Gaynor

Martin Gaynor

Carnegie Mellon University; National Bureau of Economic Research (NBER); Leverhulme Centre for Market and Public Organisation

Jian Li

Carnegie Mellon University

William B. Vogt

RAND Corporation; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2006

Abstract

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.

Suggested Citation

Gaynor, Martin and Li, Jian and Vogt, William B., Is Drug Coverage a Free Lunch? Cross-Price Elasticities and the Design of Prescription Drug Benefits (December 2006). NBER Working Paper No. w12758, Available at SSRN: https://ssrn.com/abstract=951914

Martin Gaynor (Contact Author)

Carnegie Mellon University ( email )

H. John Heinz III School of Public Policy
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Leverhulme Centre for Market and Public Organisation

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Jian Li

Carnegie Mellon University ( email )

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William B. Vogt

RAND Corporation ( email )

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National Bureau of Economic Research (NBER)

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