How Prices and Utilization of Prescription Drugs Change when Consumer Copayments Increase: Heterogenous Treatment Effects

Presenter: Niels Skipper, University of Aarhus

Abstract

As a response to increasing prescription drugs expenditures, many countries with government provided health insurance have pursued different cost-containment measures, such as reference pricing and generic substitution. In 2000 there was a reform of the prescription drugs reimbursement scheme faced by the general public in Denmark. One of the goals with this reform was to increase the average consumer copayment : A scheme where all drugs received either a 50% or a 75% subsidy was replaced by a scheme where the subsidy would depend on consumer accumulated expenditures.

This paper investigates how this change in consumer reimbursement affected prices and utilization of prescription drugs in Denmark. Specifically, we consider consumer copayments, quantities demanded and retail prices. In the presence of moral hazard, exposing the consumers more directly to the full price of medications (through increased copayment) will potentially change the optimal price set by drug firms in the market, thereby serving as an indirect cost containment measure.

Using a 20% random sample of the Danish population with recordings of quantities sold and prices (co-payments as well as full price) on a daily basis, we construct time series consisting of the period one year before the reform to one year after the reform for different types of drugs. Using regression techniques I analyze the effect of the prescription drugs reimbursement reform. To control for the fact that consumers are likely to be forward looking and stock up on medications used to treat chronic conditions, I exclude a number of days on each side of the reform as a sensitivity analysis.

My results suggest that the reform had a statistically as well as economically significant effect on prices and quantities demanded. The average copayment on the drugs studied was found to increase along with a decline in quantities demanded. The impact on prices set by pharmaceutical firms is ambiguous. Furthermore, this study gives fruitful insight to the possible heterogeneous effect of price changes for different prescription drugs on utilization behavior. The empirical evidence presented in this paper shows that consumers of drugs used to treat chronic conditions have a strong degree of forward looking behavior, which does not seem to be the case for consumers of drugs used to treat non-chronic conditions.