19.03.2025 |
Research
Drug price subsidies increase prescription drug purchases
A study by Jouko Verho and Jarkko Harju analyzes pharmaceutical pricing in Finland and provides strong evidence of moral hazard behavior in response to government drug price subsidies. The study highlights how copayment thresholds impact prescription drug purchases, offering important insights for healthcare policy.
Jouko Verho (VATT Institute for Economic Research) and Jarkko Harju (Tampere University) examine the fixed copayment threshold in Finland, where out-of-pocket costs for prescription drugs sharply decrease after individuals reach an annual spending limit of 672 euros. Using comprehensive transaction-level data from all prescription drug purchases made in 2009 and a regression discontinuity design (RDD), the analysis assesses how demand responds to these price changes.
The findings reveal that average drug costs increase by 17% due to the significant drop in out-of-pocket costs. The estimated price elasticity of demand for prescription drugs is -0.17, aligning with previous research in the field. The increase in drug purchases is primarily driven by a higher number of transactions rather than a shift to more expensive medications.
The strongest behavioral responses occur in medications used to treat mental health and respiratory conditions, which are often taken on an as-needed basis. Specifically, the study finds a 27% increase in purchases for nervous system drugs, compared to just a 6% increase for cardiovascular drugs.
These findings raise important questions about the design of copayment systems for prescription drugs. Traditional economic theory suggests that drugs with high demand responses should have higher coinsurance levels. Alternatively, policies regulating reimbursements for expensive drugs with high price elasticity could be expanded. Currently, certain costly medications require additional medical certification or are reimbursed only for a one-month supply. Expanding such regulations to a broader range of medications may help optimize healthcare spending while maintaining access to necessary treatments.
An important next step for research would be to examine health outcomes with more recent data – specifically, whether increased drug purchases lead to measurable improvements in patient health. If higher drug copayment thresholds discourage necessary drug consumption, leading to negative health impacts, this would have significant implications for future healthcare policy design.
The article Copayments for Prescription Drugs: The Drivers of Demand Responses has been published in Health Economics in March 2025.
