Selected research from leading health care experts whose findings have a direct bearing on public policies effecting medical progress. Research is chosen based on its quality and relevance by the Medical Progress Today editorial staff.

Selected Research

Integrated Insurance Design in the Presence of Multiple Medical Technologies
Dana Goldman, Tomas Philipson, NBER, 1-1-07

Goldman and Philipson argue that insofar as prescription drugs are substitutes for other forms of health care, like doctor's offices and emergency room visits, optimal insurance benefit design (at least for certain chronic disease categories) should have very low or even negative co–pays for prescription drugs.

The classic theory of moral hazard concerns the insurance of a single good and predicts that co–insurance is larger when the elasticity of demand is higher and when small risks are insured. We extend this analysis to the insurance of multiple goods; for example, the simultaneous insurance of medical services and prescription drugs. We show that when multiple goods are either complements or substitutes—so that a change in co–insurance for one service affects the demand of others—the classic moral hazard results do not hold.

For example, the single good model would predict high co–payments for prescription drugs since drug demand is elastic and of modest financial risk. However, a model of multi–good insurance suggests such drug coverage may optimally involve zero or even negative co–insurance when it is a substitute to other services insured such as hospital care or physician services. We summarize some of the empirical evidence in support of markets adopting optimal integrated pricing structures rather than individually optimal pricing structures.

The authors note that:

In sum, the preponderance of evidence suggests strong negative cross–price elasticities between drugs and other medical spending, at least for patients with chronic disease. The behavioral mechanism is almost surely compliance (John A.Rizzo and W. Robert Simons, 1997; L. Wei et al, 2002). For example, Dana P. Goldman et al (2006) investigated the relationship between compliance and subsequent outcomes for patients who had initiated statin therapy in the previous two to five years. They found that full compliance with cholesterol–lowering therapy reduces use of hospital services by 25% among high risk patients, demonstrating a substantial cross–price elasticity between drugs and hospital services among certain chronically–ill populations and for certain drugs. Other studies find similar effects for asthma and diabetes.

Project FDA.
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