Estimating the price elasticity of expenditure for prescription drugs in the presence of non-linear price schedules: an illustration from Quebec, Canada
Author
Contoyannis, P; Hurley, J; Grootendorst, P; Jeon, SH; Tamblyn, RDate
2005-09-01Source Title
HEALTH ECONOMICSPublisher
WILEYUniversity of Melbourne Author/s
JEON, SUNG-HEEAffiliation
Melbourne Institute Of Applied Economic And Social ResearchMetadata
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Journal ArticleCitations
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
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10.1002/hec.1041Description
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 EconomicsExport Reference in RIS Format
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