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    Estimating the price elasticity of expenditure for prescription drugs in the presence of non-linear price schedules: an illustration from Quebec, Canada

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    Author
    Contoyannis, P; Hurley, J; Grootendorst, P; Jeon, SH; Tamblyn, R
    Date
    2005-09-01
    Source Title
    HEALTH ECONOMICS
    Publisher
    WILEY
    University of Melbourne Author/s
    JEON, SUNG-HEE
    Affiliation
    Melbourne Institute Of Applied Economic And Social Research
    Metadata
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    Document Type
    Journal Article
    Citations
    Contoyannis, P., Hurley, J., Grootendorst, P., Jeon, S. H. & Tamblyn, R. (2005). Estimating the price elasticity of expenditure for prescription drugs in the presence of non-linear price schedules: an illustration from Quebec, Canada. HEALTH ECONOMICS, 14 (9), pp.909-923. https://doi.org/10.1002/hec.1041.
    Access Status
    This item is currently not available from this repository
    URI
    http://hdl.handle.net/11343/27767
    DOI
    10.1002/hec.1041
    Description

    C1 - Refereed Journal Article

    Abstract
    The price elasticity of demand for prescription drugs is a crucial parameter of interest in designing pharmaceutical benefit plans. Estimating the elasticity using micro-data, however, is challenging because insurance coverage that includes deductibles, co-insurance provisions and maximum expenditure limits create a non-linear price schedule, making price endogenous (a function of drug consumption). In this paper we exploit an exogenous change in cost-sharing within the Quebec (Canada) public Pharmacare program to estimate the price elasticity of expenditure for drugs using IV methods. This approach corrects for the endogeneity of price and incorporates the concept of a 'rational' consumer who factors into consumption decisions the price they expect to face at the margin given their expected needs. The IV method is adapted from an approach developed in the public finance literature used to estimate income responses to changes in tax schedules. The instrument is based on the price an individual would face under the new cost-sharing policy if their consumption remained at the pre-policy level. Our preferred specification leads to expenditure elasticities that are in the low range of previous estimates (between -0.12 and -0.16). Naïve OLS estimates are between 1 and 4 times these magnitudes.
    Keywords
    Applied Economics

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