How does Insurance affect the Price of Drugs: A Graphical Analysis

Prices of drugs differ greatly across countries and to a certain degree across payment agencies within countries (OECD (2015)). It is well known among health economists that the presence of insurance creates a separation between the consumer of pharmaceuticals and the payer. This separation can result in the price of drugs being driven up simply because somebody other than the consumer is responsible for paying for them. The precise impact of insurance on drug prices however, will depend critically on the structure of the insurance, a fact that has tended to get lost in health policy debate. The purpose of this paper is to use diagrammatic analysis of three types of insurance: co-insurance, reference pricing and co-payment, to investigate how each affects the price of prescription drugs. In addition, we analyze the role of a new pricing tool, which has recently been increasingly used by pharmaceutical companies in North America: co-Payment waiver coupons. Among other policy implications, we suggest that the use of co-pay waivers turns the co-payment insurance constraint into something similar to the reference pricing constraint, from the supplier's perspective, but with greater transactions costs.