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Price elasticities of pharmaceuticals in a value based‐formulary setting

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  • Kai Yeung
  • Anirban Basu
  • Ryan N. Hansen
  • Sean D. Sullivan

Abstract

Empirical estimates of price elasticities of demand (PED) for pharmaceuticals suggest that they are relatively price inelastic. However, in many settings, a medication and its substitutes and complements face simultaneous differential changes in prices that affect the observed “composite” PED. We exploit an implementation of a value‐based formulary (VBF) that utilized drug‐specific incremental cost‐effectiveness ratios (ICERs) to inform drug copayments, resulting in increases in copayments for some medications and decreases in copayments for others. We first show theoretically that by changing the price of a medication and its substitute in opposite directions, VBF designs can leverage cross‐price effects to increase the range of composite PEDs. We then empirically estimate PED and welfare effects using a consumer surplus approach. Overall PED was −0.16, similar to the RAND Health Insurance Experiment estimate. However, there was substantial dispersion of PED across the VBF copayment tiers ranging from −0.09 to −0.87 with a statistically significant trend aligned with the levels of value as reflected by the ICER estimates (p

Suggested Citation

  • Kai Yeung & Anirban Basu & Ryan N. Hansen & Sean D. Sullivan, 2018. "Price elasticities of pharmaceuticals in a value based‐formulary setting," Health Economics, John Wiley & Sons, Ltd., vol. 27(11), pages 1788-1804, November.
    • Handle: RePEc:wly:hlthec:v:27:y:2018:i:11:p:1788-1804
    DOI: 10.1002/hec.3801
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    References listed on IDEAS

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    Cited by:

    1. Li, Dong & Dong, Chuanwen, 2022. "Government regulations to mitigate the shortage of life-saving goods in the face of a pandemic," European Journal of Operational Research, Elsevier, vol. 301(3), pages 942-955.

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