Insurance Choice and the Demand for Prescription Drugs

Abstract

This paper analyzes the influence that health insurance has on elderly individuals' decisions to use prescription drugs. We create a data base from a survey of health insurance and medicine use in the Commonwealth of Pennsylvania conducted during the summer of 1990 by researchers affiliated with the Medicine, Health, and Aging Project at Penn State [23]. Pennsylvania is particularly interesting in this regard because of the generous provisions of the PACE (Pharmaceutical Assistance Contract for the Elderly) program, which pays for all outpatient prescriptions for low income elderly, less a $4.00 copayment per 30 days dosage. Our analytic framework is dictated by three considerations. First, we wish to produce quantitative estimates of insurance effects over a wide range of prescription benefit provisions. Most prior research on prescription drug demand has focused on the effects of relatively minor alterations in insurance benefits such as the addition of a $.50 or $1.00 copayment. Findings from these studies are not generalizable to situations in which individuals gain (or lose) prescription coverage or face other major changes in prescription benefits. Second, we wish to address the question of whether prescription demand is driven more by the own-price effects of drug coverage or by the cross-price effects of Medicare supplementation for ambulatory physician visits. Outpatient physician visits are covered under Medicare Part B, but are subject to deductible and coinsurance provisions which may reduce their use. Since physi