On Pharmaceuticals and Price Sensitivity
Posted: 28 Jun 2007
Date Written: June 14., 2007
This paper estimates price elasticities for prescription drugs, thereby adding to a small but important literature. Reliable estimates are crucial for policy makers, especially because of the foreseen increase in medical expenditures during the next decades in all OECD countries.
Estimations are based on a 10% random sample drawn from Danish administrative panel data. The data holds precise and complete information on medical histories including physician prescriptions, out-of-pocket payments, and subsidies received from public health insurance along with crucial socioeconomic characteristics.
The Danish market for outpatient prescription drugs is ideal for this type of analysis: the market is highly regulated to secure correct handling of as well as uniform prices on drugs across pharmacies. This latter feature greatly simplifies the analysis because the consumer is met with the same price no matter the pharmacy. Prices do therefore not result from local demand variations. Similarly, pharmacies lack the possibility of price discrimination according to unobserved characteristics that would introduce endogeneity issues. Pharmaceutical companies report pharmacy purchase prices to the Danish Medicines Agency, who then announces retail prices. These retail prices (along with a comprehensive list of information about the specific drugs including substitutable drugs) are made publicly available and registered online five years back in time. Furthermore, changes in purchase prices must be reported by the pharmaceutical companies two weeks ahead of time.
To identify elasticities we exploit an introduction of discontinuities in annual prescription drug coverage. Before March 2000, beneficiaries were responsible for a fixed share of the price depending on the type of the prescribed drug. After March 2000, on the other hand, drug coverage increases discontinuously with the level of total drug consumption throughout the year. This resembles the very recently enacted US Medicare prescription drug benefit, though without the controversial 'doughnut hole'. Realizing that consumers are forward-looking, however, we combine this scheme with an economic model that explicitly allows for this pivotal feature of demand for drugs.
Keywords: Prescription drugs, price sensitivity, regression kink design
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