Insurance choice and the demand for prescription drugs.

• Author: Coulson, N. Edward

1. Introduction

   Over the past decade or so, expenditure on outpatient prescription drugs has become one of the fastest-growing components of health care expenditure in the U.S. [11]. Much of the debate over the Medicare Catastrophic Coverage Act of 1988 and the current debate over health care reform is concerned with the rising cost and utilization of prescription drugs particularly among the elderly. There is of course a general debate over the extent to which the problems of adverse selection and/or moral hazard arising from universal coverage will render futile the cost estimates for the sundry forms of health insurance to be covered under any reform. The case of prescriptions is particularly interesting, as witness the pressure placed on pharmaceutical companies by administration officials in 1993.

   This paper analyzes the influence that health insurance has on elderly individuals' decisions to use prescription drugs. We create a data base from a survey of health insurance and medicine use in the Commonwealth of Pennsylvania conducted during the summer of 1990 by researchers affiliated with the Medicine, Health, and Aging Project at Penn State [23]. Pennsylvania is particularly interesting in this regard because of the generous provisions of the PACE (Pharmaceutical Assistance Contract for the Elderly) program, which pays for all outpatient prescriptions for low income elderly, less a $4.00 copayment per 30 days dosage.

   Our analytic framework is dictated by three considerations. First, we wish to produce quantitative estimates of insurance effects over a wide range of prescription benefit provisions. Most prior research on prescription drug demand has focused on the effects of relatively minor alterations in insurance benefits such as the addition of a $.50 or $1.00 copayment. Findings from these studies are not generalizable to situations in which individuals gain (or lose) prescription coverage or face other major changes in prescription benefits.

   Second, we wish to address the question of whether proscription demand is driven more by the own-price effects of drug coverage or by the cross-price effects of Medicare supplementation for ambulatory physician visits. Outpatient physician visits are covered under Medicare Part B, but are subject to deductible and coinsurance provisions which may reduce their use. Since physicians control access to prescription medicine, it follows that changes in the price of physician care may affect drug demand as well.

   The third consideration is methodological rather than substantive. Elderly who have prescription coverage obtain it from three basic sources: employer-sponsored plans, individual Medigap policies, or public programs including Medicaid and pharmaceutical assistance plans like PACE. Except for employer-sponsored plans, the elderly must seek coverage on their own. It is reasonable to suspect that those who do are more likely to need prescription drugs than those who do not seek coverage. Unless controlled for, self selection can lead to serious bias in models designed to measure the moral hazard engendered by insurance.

   Most of the empirical research on the demand for prescription drugs involve studies of differences in utilization following small changes in insurance coverage. Several studies conducted in the 1960s and early 1970s concluded that Medicaid copayments reduce drug utilization rates [7; 2; 21], but methodological shortcomings make the results difficult to generalize. Later studies using interrupted time-series designs have produced similar findings. A South Carolina study observed a significant decline in drug use following imposition of a $.50 drug copayment in that state's Medicaid program in 1977 [12; 17]. A study by Soumerai et al. [22] found significant reductions in prescription fill rates among New Hampshire Medicaid recipients following imposition of a three-per-month [R.sub.x] limit and a $1.00 copayment.

   Similar before-and-after studies (some with controls, some without) have been conducted in Great Britain following changes in National Health Service patient cost-sharing provisions for prescription drugs that occurred at various times from 1969 through 1986 [16; 20; 1; 8; 14; 19]. Estimated [R.sub.x] price elasticities from these studies range from a low of -.06 [19] to a high of -.64 [14], with a preponderance of estimates in the -.10 to -.20 range.

   Changes in cost-sharing for prescription medicine among privately insured groups in the United States have also been shown to have significant effects on drug utilization in the expected direction. An early study by Weeks [25] found that the introduction of prepaid drug benefits in an employee health plan increased the average number of prescriptions filled. A recent study by Harris, Stergachis and Ried [6] discovered that progressively higher copayment levels led to proportionate reductions in drug use among non-aged HMO enrollees.

   The Rand Health Insurance Experiment (HIE) produced two papers on the relationship between drug utilization and insurance coverage [10; 9]. Unfortunately, the health insurance packages offered to HIE participants did not vary according to prescription drug benefits, so that it proved impossible to estimate directly the price effect of [R.sub.x] coverage on utilization levels. Moreover, the sample frame excluded the elderly. Despite these shortcomings, the HIE provides important clues to the possible impact of insurance on medicine use. In their 1985 paper, Leibowitz, Manning, and Newhouse [10] examined the relationship between [R.sub.x] utilization and patient cost-sharing (for all medical services, not just drugs). They found that HIE enrollees with generous insurance filled significantly more prescriptions than did those with less generous coverage; in fact, the degree of price responsiveness did not differ much between drugs and other medical services. Their conclusion that "drugs, like medical care expenditures in general, respond to cost-sharing faced by consumers" [10, 1068] has been widely debated on grounds that the HIE results cannot distinguish between the own-price effect of insurance on the covered service in question (prescription drugs) and the cross-price effect of coverage for services that complement drug therapy (physician visits). A second Leibowitz paper [9] reported no significant relationship between insurance plan generosity and utilization rates for over-the-counter medicine (which may potentially substitute for [R.sub.x] products).

   Finally, we take note of a study by Cameron et al. [3] which uses Australian data to estimate a series of health services demand equations including equations for prescription drug use. This study is relevant to our purposes mainly because it demonstrates the difficulty of estimating insurance effects in the presence of self-selected coverage (variation in own-price for prescribed medicine in Australia arises from private insurance supplements of the national insurance plan). The authors first estimate a model with endogenous insurance variables and find that more generous insurance coverage has a positive and significant effect on prescription utilization. They then reestimate the models using instrumental...