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

by Arleen Leibowitz, Willard G. Manning, Joseph P. Newhouse

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This Note estimates how the use of drugs varies when insurance plans alter the coinsurance rate of drugs and other medical services. Data for the analysis are derived from the RAND Health Insurance Experiment, a randomized trial designed to determine the effect of cost-sharing on the demand for health services and on the health status of individuals. Participants in the experiment were randomly assigned to insurance plans with varying coinsurance rates and deductibles. Data from four sites are used to estimate how drug expenditures vary by insurance plan. Findings show that individuals with generous insurance buy more drugs. The percentage reduction in use caused by cost-sharing was similar for drugs and other medical care use. Reduced numbers and prescriptions purchased, rather than lower cost prescriptions or use of generic drugs, accounted for most of the effect.

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