EFFECTS OF PRICE SHOCKS ON PRESCRIPTION DRUG DEMAND
June 13, 2005
The National Bureau of Economic Research (NBER) finds that people with different drug payment plans react differently to price increases.
The authors analyzed 27,057 adults diagnosed with chronic type II diabetes who need ongoing oral medications. Some had copayment plans (where policy holders pay a specific dollar amount per prescription), while others were covered by coinsurance plans (where policy holders pay a fixed percentage of the total prescription price). They then tested whether or not those adults continued to take their medicine after different price shocks. The researchers found that:
- A simulated increase from $6 to $10 in the up-front copayment results in a 6.2 percent increase in noncompliance.
- In the coinsurance sample, a proportional increase in the coinsurance rate (from 20 percent to 75 percent) results in a 9.9 percent increase in noncompliance.
- In another test, holding the out-pocket share constant at $15 in both samples leads to a much higher noncompliance in the coinsurance sample (45.3 percent compared with 35 percent in the co-payment sample).
The authors also find that these price increases may not be cost-effective. Since so many adults stop taking their medicine, insurance companies pay greater costs in more treatments. For example:
- The savings from increasing the co-payment from $6 to $10 reaches $124.8 million per year or 4.9 percent of annual national spending on anti-diabetic medicine.
- However, the resulting increase in noncompliance rates would also increase the costs of diabetic complications (such as blindness, heart disease, and the like) by an estimated $360 million.
The authors note that noncompliance is higher under coinsurance programs than under fixed copayment systems. Consequently, both private and public insurance providers may be able to reduce overall medical costs by switching from coinsurance to co-payment systems.
Source: Carlos Lozada, "Effects of Co-payment on Prescription Drug Demand," NBER Digest, April 2005; based upon: Avi Dor and William Encinosa, "Does Cost Sharing Affect Compliance? The Case of Prescription Drugs," National Bureau of Economic Research, Working Paper No. 10738, September 2004.
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