The Demand for Prescription Drugs as a Function of Cost-Sharing

This paper estimates how cost-sharing affects the use of prescription drugs. The data for this analysis are derived from the Rand Health Insurance Experiment (HIE), a randomized controlled trial that randomly assigned participants to insurance plans with varying coinsurance rates and deductibles. Therefore, the cost-sharing they faced was independent of their health and demographic characteristics. The paper used HIE data from four sites to estimate how drug expenditures vary by insurance plan, and to compare the plan response for drugs with that for all ambulatory expenses. The findings show that: (1) individuals with more generous insurance buy more prescription drugs; (2) the cost-sharing response for drugs is similar to the response for all ambulatory medical services; (3) the Dayton, Ohio site had significantly greater drug expenditures per capita than the other sites studied and a significantly higher proportion of drugs sold by physicians; and (4) the proportion of brand-name drugs among all drugs purchased in pharmacies was not a function of insurance plan. In the Dayton, Ohio site, a significantly higher proportion of the drugs purchased in pharmacies were brand-name rather than generic.