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The price elasticity of demand for prescription drugs: An exploration of demand in different settings.

Gemmil, Marin (2008) The price elasticity of demand for prescription drugs: An exploration of demand in different settings. PhD thesis, London School of Economics and Political Science (United Kingdom).

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Abstract

Health systems in most high-income countries provide protection against the financial risks associated with ill health on a broadly universal basis, although many impose measures that lower financial protection, for example, by offering a limited package of benefits or requiring beneficiaries to pay part of the cost of health care at the point of use. This last measure, known as cost sharing or user charges, is a policy tool applied mainly to raise revenue for the health system and to enhance efficiency. The neo-classical economic argument for user fees posits that moral hazard exists in health insurance markets, and user fees help combat this "overconsumption" of care. The simultaneous policy argument is that cost sharing reduces unnecessary consumption of prescription drugs, which leads to both expenditure reductions and health improvements. While literature investigating these cost sharing arguments exists, there are still unanswered questions as many of the papers are outdated, others only focus on specific populations, and there are methodological issues surrounding some studies. As estimates vary widely between studies, a methodological approach that obtains an "adjusted" or "composite" price elasticity from the literature by pooling the existing estimates would provide a broad measure of elasticity. Updated estimates of the price elasticity of demand for the general population, the elderly, and low-income individuals in the United States would also be useful for American policymakers given recent changes to public and private insurance coverage. The calculation of estimates for elderly Americans also provides a useful backdrop for comparing estimates from the elderly in British Columbia, Canada. There is a need for economic and policy discussions related to economic efficiency, policy arguments for efficiency in user fees, and equity in the literature. We contribute to filling these gaps by estimating the price elasticity of demand in three main settings: a collection of elasticity estimates from the existing literature, the American population, and the older population in British Columbia, Canada. Based on our results, we determine that the price elasticity of demand is relatively low in all of these settings, even among the low-income group and the general population. Our adjusted price elasticity estimate is an insignificant -0.16, while the elasticity estimates from the American analyses range from an insignificant -0.11 for the elderly to -0.25 for the general population. We obtain an estimate of -0.30 for the elderly in British Columbia. Overall, the sensitivity to user fees depends on the institutional setting, the level of cost sharing, the specific subpopulation examined, and other factors. The implications of these relatively low estimates can be viewed from both an economics and policy perspective. While cost sharing leads to greater efficiency when we define efficiency in a neo-classical economic sense, from a policy perspective user fees may negatively affect beneficiaries' health and equity. The implication is that policymakers should set transparent policy goals and openly discuss whether any detrimental effects of cost sharing are considered acceptable from a policy standpoint.

Item Type: Thesis (PhD)
Uncontrolled Keywords: Economics, General, Health Sciences, Health Care Management
Sets: Collections > ProQuest Etheses
Departments > Social Policy
URI: http://etheses.lse.ac.uk/id/eprint/2944

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