Venue: The Fuqua School of Business, Duke University, 1 Towerview Drive, Durham, NC 27708-0120
Presentation
Who Pays for Drug Quality?
Pharmaceutical costs have increased at double digit rates in recent years. Controlling further pharmaceutical cost increases seems urgent and cost sharing will play a critical role in such efforts. This study examines how pharmaceutical costs are shared among consumers and insurers and how drug quality affects these costs.
We provide a model which delineates the tradeoff between paying more for higher quality drugs to reduce future medical costs in determining the optimal copayment strategy for the third party payers. In particular, if insurers believe they can save on future medical cost by offering the drug at a lower copayment, they are more likely to do so to encourage consumers to take the drug. Otherwise, they will charge a higher copay to reduce their current pharmaceutical costs.
We test the model using two large drug therapeutic classes: brand name antidepressants and non-steroidal anti inflammatory drugs (NSAIDs). These two drug classes are interesting to study because they differ in the degree of variation in product quality. While there is little quality differentiation among the antidepressants studied, quality varies by more among the NSAIDS; hence, quality differences are more readily discernible. The results indicate that consumers' out-of-pocket payments are larger for high quality antidepressants, while insurers pay less for these drugs. In contrast, for the higher quality NSAIDs, insurers share the drug cost together with the consumers. These findings suggest that insurers shift the drug costs associated with higher quality onto consumers when there is little perceived quality variation among drug alternatives but share in the costs of higher quality drugs when there is greater perceived variation in drug quality.