HEALTH INSURANCE AND THE GROWTH IN
`PHARMACEUTICAL EXPENDITURES*
`
`PATRICIA M. DANZON and MARK V. PAULY
`University of Pennsylvania
`
`ABSTRACT
`This paper examines the contribution of insurance coverage to the recent unprec-
`edented growth in spending on pharmaceuticals. Trends in drug spending over time
`closely paralleled the growth in drug coverage. Most of the coverage growth reflects
`an increase in the number of people with coverage, 65 percent from 1987 to 1996,
`rather than increased depth of coverage. The direct moral hazard effect of this in-
`surance growth accounts for between one-fourth and one-half of the increase in drug
`spending. Technological change contributed to these changes, because both the flow
`of new drugs increased the demand for insurance and information technologies en-
`abled the development of pharmacy benefit management, which reduced the real
`price of drug coverage. It is plausible that insurance growth also stimulated drug
`promotion. The only obvious source of inefficiency is the tax subsidy, which may
`lead to excessive insurance and promotion. This applies to all health care, not just
`pharmaceuticals.
`
`I.
`
`INTRODUCTION
`
`THE rapid growth of spending on pharmaceuticals in recent years has
`captured the attention of managers, policy makers, consumers, and analysts.
`Spending on outpatient drugs grew at a rate of 17 percent in 1999, compared
`with 8.2 percent in 1990 and 1.1 percent in 1980, whereas total health spend-
`ing grew at a rate of 3.3 percent in 1999, 6.4 percent in 1990, and 5.6 percent
`in 1980. Consequently, the share of total health spending accounted for by
`outpatient drugs increased from 4.9 percent in 1980 to 8.5 percent in 1999.
`Drug spending is also blamed for a resumption of increases in health insurance
`premiums, from .8 percent in 1996 to 8.3 percent in 2000.' Previous analyses
`of these trends have provided an accounting decomposition of the growth in
`drug spending and have distinguished increases in volume of prescriptions
`(scripts), shifts to more expensive products, and price increases for existing
`products. In the 1990s, the dominant contributors to spending growth are
`* The authors thank Edward Buckley for research assistance.
`'Bradley C. Strunk, Paul B. Ginsburg, & Jon R. Gabel, Tracking Health Care Costs: Growth
`in 2001, Health Aff. Web Exclusive
`Accelerates Again
`(September 2002)
`(http://
`www.healthaffairs.org/WebExclusives/2106Strunk.pdf).
`[Journal of Law and Economics, vol. XLV (October 2002)]
`? 2002 by The University of Chicago. All rights reserved. 0022-2186/2002/4502-0012$01.50
`Exhibit 1069
`ARGENTUM
`IPR2017-01053
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`15.5
`
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`
`14.3 14 3.9
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`10% 5 %13
`
`.9 IN\8
`
`THE JOURNAL OF LAW AND ECONOMICS
`
`18.8
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`15.7
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`
`FIGURE 1.--Growth in spending due to price versus volume and innovation (other). Year
`over year percentage changes are shown. Data are from IMS Health, Retail and Provider
`Perspective (February 2003).
`
`more prescriptions and shifting to more expensive products, which together
`account for 75 percent of total drug-spending growth in the 1994-99 time
`period, with price increases accounting for only 25 percent of the total (see
`Figure 1).
`The purpose of this paper is to analyze the causes of the unprecedented
`rise in outpatient drug use in the 1990s and, in particular, to examine the
`role of growth in insurance coverage, which paralleled the acceleration of
`drug spending. The share of outpatient drug expenditures paid out-of-pocket
`declined from 69.4 percent in 1980 to 59.1 percent in 1990, with a more
`rapid decline to 33.4 percent in 1999. Standard theories of insurance and
`moral hazard suggest that this increase in drug coverage would trigger some
`growth in utilization. Ernst Berndt identifies the growth in insurance as one
`of four contributors to drug-spending growth, along with new products, the
`relaxing of the rules governing direct-to-consumer (DTC) advertising in 1997,
`and "the importance of being unimportant," a spending share too small to
`attract the interest of cost controllers and one that has already self-corrected.2
`Robert DuBois et al. discuss the role of new products. Neither of these prior
`studies quantify the direct effect of insurance growth, nor do they discuss
`the connection between insurance and these other contributing factors.3
`
`2 Ernst R. Berndt, The U.S. Pharmaceutical Industry: Why Major Growth in Times of Cost
`Containment? 20 Health Aff. 100 (March/April 2001).
`Robert W. DuBois et al., Explaining Drug Spending Trends: Does Perception Match Reality?
`19 Health Aff. 231 (March/April 2000).
`
`000002
`
`

`

`HEALTH INSURANCE AND PHARMACEUTICALS
`
`589
`
`In this paper, we analyze both the direct effect of insurance on drug use
`(the moral hazard effect) and several indirect channels whereby growth of
`insurance can contribute to growth in drug spending. Specifically, we first
`decompose the growth in overall insurance coverage to provide evidence on
`how much of the decline in the percent paid out-of-pocket reflected an in-
`crease in the number of people covered and how much reflected an increase
`in the depth of coverage (fraction of spending covered) for those with in-
`surance. Second, we use empirically based demand elasticity measures to
`estimate how much of the spending growth might reasonably be attributed
`to the direct or moral hazard effect of these insurance changes. We conclude
`that these direct effects alone may account for one-fourth to one-half of the
`growth in drug spending. Third, we discuss more qualitatively the possible
`indirect effects of insurance, through incentives for research and development
`(R&D) and hence the flow of new products, through incentives for DTC and
`other forms of drug promotion, and through prices.
`We also take the inquiry one step further back, to examine reasons for the
`unprecedented growth in drug insurance during the 1990s. Several previous
`authors (for example, Burton Weisbrod) have hypothesized that an increase
`in insurance coverage can lead to a higher rate of technological change and
`hence to a higher rate of change in spending and that there may be some
`feedback effect from spending on demand for insurance.4 In the case of drugs,
`we argue that the reverse effect is more likely, that technological change, in
`the form of new drug therapies and new insurance technologies, contributed
`to the growth in level and type of drug coverage, which in turn played a
`major role in drug-spending growth. In conclusion, we offer some comments
`on whether these trends are likely to continue and some preliminary nor-
`mative analysis of whether the increases in coverage and in drug spending
`is efficient.
`
`II1. TRENDS IN DRUG EXPENDITURES AND COVERAGE
`Table 1 documents the time trends in expenditures and insurance coverage
`for drugs relative to other medical services in the United States for the period
`1960-98. Over this long time frame, spending growth shifted from the in-
`patient sector to the outpatient sector. For the first 2 decades, drug spending
`grew less rapidly than hospital spending. Consequently, the drug share of
`total spending declined from 10 percent in 1960 to about 5 percent in 1985.
`In the last half of the 1980s, hospital spending growth declined relative to
`both drug spending and physician spending. Since 1990, drug spending has
`outpaced all the other major spending components. In real terms, drug-
`spending growth, although higher than the growth of real gross domestic
`
`4 Burton A. Weisbrod, The Health Care Quadrilemma: An Essay on Technological Change,
`Insurance, Quality of Care, and Cost Containment, 29 J. Econ. Literature 523 (1991).
`
`000003
`
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`000004
`
`

`

`HEALTH INSURANCE AND PHARMACEUTICALS
`
`591
`
`product (GDP), decelerated until about 1980, then began to pick up and grew
`at double-digit rates from 1997 onward." These trends no doubt reflect many
`causes, including technological change, that enabled the shift of care from
`inpatient to outpatient settings. However, the bottom seven rows of Table 1
`suggest that trends in insurance coverage may have played a role.
`Trends in insurance coverage for outpatient drugs move in close parallel
`to these trends in drug expenditures, growing slowly initially and than ac-
`celerating in the 1990s. The center four rows of Table 1 show that for each
`decade from 1960 to 1990, the proportion of aggregate drug expenditures
`paid out-of-pocket fell about 12 percentage points per decade, from 96 percent
`in 1960 to about 59 percent in 1990, then dropping to about 33 percent in
`1999. But measured as an annual percentage change in the out-of-pocket
`share, which takes into account the decline in the base coverage level over
`time, the rate of growth of coverage has accelerated from less than 2 percent
`per year through the 1960s, 1970s, and 1980s to 6-7 percent per year in the
`mid-1990s. Thus, the acceleration of drug spending in the 1990s coincides
`with a dramatic acceleration in the rate of growth of drug coverage. By
`contrast, the percent paid out-of-pocket for other personal health spending
`leveled off and then slightly increased in the late 1990s (Table 1).
`This overall pattern for the last 40 years of positive correlation between
`trends in growth in drug insurance coverage and (slightly lagged) drug-
`spending growth is consistent with the hypothesis that changes in spending
`are positively related to changes in insurance coverage. But correlation, of
`course, does not establish causation in any event.
`With regard to the components of the drug-spending growth, as indicated
`in Figure 1, on the basis of IMS Health data, the increase in drug spending
`in the 1990s was associated primarily with increases in the volume of pre-
`scriptions or units per capita and shifts toward more expensive products,
`which together comprise about 80 percent of the growth in drug spending
`over this period. Only about 20 percent (or less, depending on the year) is
`attributable to rising prices for existing products;6 of this, over half is due
`to economy-wide inflation, leaving a very small share attributable to excess
`
`5 The measures of drug expenditures reported in the National Health Accounts (NHA) do
`not include drugs purchased during a hospital stay, physician or clinic visit, or some nursing
`home stays, because these expenditures are classified as revenues of the institution that received
`payment. The NHA drug-spending estimates are also reduced to reflect rebates from drug
`manufacturers to insurers. For these and other reasons, total drug spending as reported in the
`NHA may differ from the drug-spending total reported by IMS Health.
`6 The contribution of price increase may depend on the type of index used-base-weighted
`Laspeyres or chained Divisia. The source is unclear on this point. IMS Health, Retail and
`Provider Perspective (February 2003) (http://www.imshealth.com).
`
`000005
`
`

`

`592
`
`THE JOURNAL OF LAW AND ECONOMICS
`
`inflation of drug prices.7 This predominant role for volume growth and mix
`upgrade are consistent with insurance being an important inducement to
`spending growth because of the moral hazard effects of coverage on volume.
`Although some forms of insurance could also induce price growth, the man-
`aged care form that predominated has plausibly controlled price growth rel-
`ative to what it might have been under indemnity insurance, but the structure
`of managed drug benefits may have contributed to mix upgrade, as discussed
`below.
`Cross-national comparisons provide a rough way of distinguishing the role
`of new technologies relative to other contributors to health-spending growth.
`Specifically, if new technologies diffuse to the same degree in countries at
`similar levels of income and industrialization, then cross-national differences
`in spending growth among these countries might provide a very rough in-
`dicator of the role of country-specific differences in insurance coverage
`growth. The recent trends in drug spending are not unique to the United
`States; several other industrialized countries (for example, the United King-
`dom, Canada, and Germany) have also experienced more rapid growth of
`spending on drugs than on physician and hospital services. However, in
`countries such as Germany or the United Kingdom that already had universal
`drug coverage by the early 1990s, the differential between expenditure growth
`on drugs and other services is less than in the United States, where there
`was significant expansion of coverage over this period. Moreover, in Ger-
`many, prices and volume of scripts have remained flat or have fallen since
`1993, with all the spending growth coming from a shift to more expensive,
`including new, products. Thus, the more rapid growth of drug spending in
`the United States compared with other countries and the large role of volume
`growth in the United States are consistent with the hypothesis that growth
`in insurance coverage has played a significant role.
`
`III. MORE PEOPLE WITH COVERAGE, MORE COVERAGE PER PERSON?
`The evidence above suggests that rising insurance coverage has something
`to do with the relatively rapid increase in pharmaceutical spending in the
`United States. Evidence from both the United States and other countries
`suggests that new products have played a major role in drug-spending growth.
`Ideally, we would like to quantify the individual contributions of insurance
`and new products to the expenditure growth. This decomposition is prob-
`lematic, even conceptually, because insurance is expected to have both direct
`
`7 Prices of existing products actually declined in real terms in 1994 and 1995, when coverage
`was expanding most rapidly. Although this could partly reflect the market power of the new
`pharmacy benefit managers (PBMs), their market share increased over time, whereas price
`increases trended upward. The 1994-95 drop in drug prices could also reflect the anticipation
`that managed care buyers would be more powerful than they in fact turned out to be, as well
`as the political climate associated with the Clinton health care debate.
`
`000006
`
`

`

`HEALTH INSURANCE AND PHARMACEUTICALS
`
`593
`
`and indirect effects on the uptake of new products, including increased vol-
`ume of scripts per capita and shift of mix from old to new products, which
`in turn affects price per unit and per script. Moreover, reverse effects are
`likely; that is, the expansion of range and expected cost of drug treatments
`increases the demand for insurance coverage, as discussed below.
`Before turning to estimates of the direct effect of insurance on drug-
`spending growth, in this section we provide some evidence on the decom-
`position of insurance growth into number of people with coverage and depth
`of coverage per person. The next section provides rough estimates of the
`potential direct effect of this insurance growth on spending growth. Subse-
`quent sections then discuss the indirect effects of insurance, including the
`stimulus of insurance to R&D and hence number of new products and the
`reverse effect of new products on demand for drug coverage; advertising;
`price levels for new products; and price change for old products.
`How was the increase in the overall percentage of drug expenditures paid
`by insurance-from about 40 percent in 1990 to over 75 percent in
`1999--distributed between growth in the number of people with coverage
`and increase in the depth of coverage for those with coverage? Broad trends
`in health insurance coverage suggest a mix of both effects. In the 1980s and
`1990s managed care insurance in its various forms (health maintenance or-
`ganizations (HMOs), preferred provider organizations, and others) largely
`replaced traditional indemnity insurance for general health insurance. Tra-
`ditional indemnity insurance covered hospital and physician services but
`typically did not cover outpatient prescription drugs. Thus, the Medicare
`program for seniors, which was modeled on the typical private indemnity
`insurance plan of the mid-1960s, does not cover outpatient prescription drugs.
`Indemnity insurers relied on patient copayments to control moral hazard but
`were otherwise largely passive payers for whatever covered expenses patients
`incurred. The defining feature of managed care plans was the use of incentives
`and controls targeted at providers to control moral hazard, in particular,
`selective contracting, negotiated discounts, and risk-sharing forms of reim-
`bursement for providers (such as capitation) and prior authorization and
`utilization review to determine ex ante whether expensive procedures would
`be covered. These managed care techniques were applied to outpatient drugs,
`often by specialized pharmacy benefit managers (PBMs). Managed drug
`benefits were included in most managed care plans, and many indemnity
`plans subsequently added a managed drug benefit, usually contracted out to
`PBMs, especially for employee coverage. Drug coverage also became more
`available to some seniors through employer-based retiree benefits and the
`managed plan options offered under the Medicare+Choice alternative to
`traditional Medicare.8 Given these trends in the types of insurance products
`8 Possibly offsetting these trends toward more people with drug coverage could be a decline
`in the percent of retirees with employer-based coverage, as employers supposedly reduced their
`postretirement health benefits in response to Federal Accounting Standard (FAS) 106.
`
`000007
`
`

`

`594
`
`THE JOURNAL OF LAW AND ECONOMICS
`
`available, some increase in the number of people with coverage is expected.
`At the same time, an increase in depth of coverage is also possible, as
`managed plans relied less on patient copayments and more on other cost
`control strategies. Through the mid-1990s, managed drug benefits typically
`had either a single copayment per script or a two-tier copayment per script
`($5 for a generic, $10 for a brand). This structure is expected to offer some-
`what deeper coverage than indemnity plans, which typically included a drug-
`specific deductible and 20 percent cost sharing above the deductible if they
`covered drugs at all.
`For several reasons, it is not simple to provide rough quantitative estimates
`of the changes in number of people with coverage and average depth of
`coverage. The best available data are from household surveys of insurance
`coverage, specifically, the 1986-87 National Medical Expenditure Survey
`(NMES) and the 1996 Medical Expenditure Panel Survey (MEPS). These
`surveys ask respondents whether they have specific types of health insurance
`(private, Medicare, Medicaid, and others), but neither these nor other surveys
`asked respondents whether they had outpatient drug coverage. Indeed, the
`concept itself is potentially ambiguous since policies could cover some drugs
`in some circumstances but not in others. For example, would a catastrophic
`policy that provides full coverage of medical services above a $10,000 de-
`ductible be said to "cover drugs"? Or a policy that explicitly provides cov-
`erage for only certain expensive or life-saving drugs? Respondent error is
`also a potential problem if household respondents do not know or have
`forgotten what their insurance covers.9 Moreover, individuals may be eligible
`for some forms of third-party payment that they may or may not define as
`insurance; for example, some states have special drug programs for low-
`income seniors and other needy groups, and most drug manufacturers have
`charity programs that provide drugs free or at discounted prices to needy
`individuals.
`In order to avoid these definitional ambiguities, we define people with
`drug insurance as those who report a self-pay amount less than the total drug
`expense, conditional on having positive outpatient drug expense. Similarly,
`we define the insurance payment as this residual difference between the total
`drug and the self-pay amount. Depth of coverage is the ratio of the insurance
`payment to total drug expense. By means of the measures that were calculated
`for the 1987 NMES survey and the 1996 MEPS survey, we calculate the
`growth in the number of people with coverage and the growth in depth of
`coverage. These estimates are no doubt subject to imperfect information on
`the part of survey respondents and recall bias; however, as long as the average
`errors do not change between the two surveys, our measures of growth should
`
`9 Matching expenses reported by the household to plan provisions is not easy. The MEPS
`survey ran into problems trying to obtain plan documents from employers to verify whether
`some type of expense might ever be covered by the employee's insurance plan.
`
`000008
`
`

`

`HEALTH INSURANCE AND PHARMACEUTICALS
`
`595
`
`TABLE 2
`
`DRUG SPENDING AND INSURANCE: THE 1987 NATIONAL MEDICAL EXPENDITURE SURVEY
`(NMES) VERSUS THE 1996 MEDICAL EXPENDITURE PANEL SURVEY (MEPS), EXCLUDING
`PEOPLE WITH MEDICAID AND OTHER PUBLIC INSURANCE, AGES 25-64
`
`% with Rx
`Expense
`
`Expense/
`Capita ($)
`
`Benefit/
`Capita ($)
`
`Benefit/
`Expense (%)
`
`% with
`Insured Rx
`Expense
`
`With private health insurance:
`1987 NMES
`1996 MEPS
`
`57.8
`68.5
`
`110.93
`264.56
`
`50.43
`160.82
`
`45.46
`60.79
`
`29.5
`57.1
`
`ALL
`INSURED,
`EXPENSE/
`CAPITA
`($)
`110.9
`264.6
`
`1987 NMES
`1996 MEPS
`
`Prescriptions per capita:
`1987 NMES
`1996 MEPS
`Expense/prescription:
`1987 NMES
`1996 MEPS
`
`NOTE.--Rx: prescription.
`
`INSURED WITH INSURED Rx EXPENSE
`
`Expense/
`Capita ($)
`261.35
`437.25
`
`Benefit/
`Capita ($)
`170.88
`282.64
`
`INSURED WITH Rx EXPENSE
`
`ALL
`UNINSURED,
`EXPENSE/
`Benefit/
`Expense (%) CAPITA ($)
`65.4
`65.33
`64.6
`132.92
`
`Insured Rx
`Expense
`
`10.23
`12.6
`
`25.55
`34.7
`
`No Rx
`Insurance
`
`5.54
`4.64
`
`21.55
`29.19
`
`UNINSURED WITH
`Rx
`EXPENSE
`
`8.19
`10.22
`
`19.93
`29.93
`
`be unbiased (more on this below). Defining the change in the number of
`people with drug coverage by the change in the number who report positive
`drug insurance payment, conditional on drug expense, could yield an upward
`(downward) biased estimate of the true increase in percent of people with
`drug coverage if the probability of obtaining a prescription, conditional on
`having coverage, increased (decreased) between 1987 and 1996.
`Tables 2 and 3 show trends between 1987 and 1996 in various indicators
`of drug use and insurance coverage. Table 2 represents the population aged
`25-64, excluding those who report being covered by public insurance pro-
`grams (Medicaid, Medicare, the Veterans Association, Champus). This is the
`population potentially likely to buy private insurance. Table 2 shows trends
`in drug use and coverage for all persons with private health insurance and
`reports trends in use for subgroups of the population by health insurance and
`drug insurance status. Table 3 shows trends in drug use and coverage for the
`over-65 population. Although outpatient drug coverage is not included in
`traditional Medicare, seniors may obtain drug coverage from one of several
`sources: Medicaid covers drugs for the lowest-income seniors in all states,
`and some states have developed additional drug programs for needy seniors
`
`000009
`
`

`

`596
`
`THE JOURNAL OF LAW AND ECONOMICS
`
`TABLE 3
`
`DRUG SPENDING AND INSURANCE: THE 1987 NATIONAL MEDICAL EXPENDITURE
`SURVEY (NMES) VERSUS THE 1996 MEDICAL EXPENDITURE
`PANEL SURVEY (MEPS), AGE 65 AND OVER
`
`% with Rx
`Expense
`81
`87.8
`
`Expense/
`Capita ($)
`333.43
`709.95
`
`Benefit/
`Capita ($)
`102.06
`313.52
`
`Benefit/
`Expense (%)
`30.6
`44.2
`
`% with Insured
`Rx Expense
`35.7
`64.4
`
`530.37
`909.23
`
`286.25
`487.02
`
`54.0
`53.6
`
`Insured
`Rx Expense
`
`21.97
`25.37
`
`24.14
`35.84
`
`No Rx Insurance
`
`14.83
`16.62
`
`22.13
`32.03
`
`1987 NMES
`1996 MEPS
`With insured Rx expense:
`1987 NMES
`1996 MEPS
`
`Prescriptions per capita:
`1987 NMES
`1996 MEPS
`Expense/prescription:
`1987 NMES
`1996 MEPS
`
`NOTE. --Rx: prescription.
`
`not eligible for Medicaid; employer retiree policies usually cover drugs if
`drugs are included in the coverage for active-duty employees; some Medigap
`policies include drug coverage (these are supplementary policies to traditional
`Medicare and are subject to strict regulation and severe adverse selection);
`and most Medicare HMOs offer some drug coverage, although both the
`number of Medicare HMOs and the level of drug coverage offered have
`declined since 1997.
`For the under-65 group with general health insurance, the proportion with
`positive drug expense increased from 57.8 in 1987 to 68.5 percent in 1996,
`a 18.5 percent increase. By contrast, the proportion with drug insurance
`(measured as those reporting insured drug expense) increased by 93.6 percent,
`from 29.5 percent to 57.1 percent. Thus, conditional on having positive drug
`expense, the percent of the health-insured under-65 population who also had
`drug insurance increased from 51 percent in 1987 to 83.3 percent in 1996,
`a 63 percent increase.10 For the over-65 population, the trends are similar.
`The proportion of seniors with positive drug expense increased slightly, from
`81 percent to 87.8 percent, while the percent with insured drug expense
`increased 80.6 percent. Thus, conditional on positive drug expense, the per-
`cent of seniors with insurance coverage increased from 44 percent to 73
`percent, which implies a 66 percent increase in the percent with drug cov-
`erage, conditional on positive drug expense. Thus, the percentage growth in
`the number of people with coverage is similar for the under-65 and over-65
`
`"o 29.5/57.8 = 51; 57.1/68.5 = 83.3.
`
`000010
`
`

`

`HEALTH
`
`INSURANCE AND PHARMACEUTICALS
`
`597
`
`populations, despite the differences in coverage options available to each
`group.
`In contrast to this striking increase in the number of people with coverage,
`there was essentially no change in depth of coverage (percent of expense
`covered). For those with health insurance who also had insured drug expense,
`the percent of their drug expense (Benefit/Expense) that was covered by
`insurance remained at roughly 65 percent for the under-65 population, while
`for the over-65 population, the percent of expense covered by insurance was
`stable at 54 percent.
`Overall, there is significant growth in spending per person with insured
`prescription (Rx) expense, in both the number of Rxs and the cost per Rx
`in constant 1996 dollars. For the under-65 population with health insurance
`and drug coverage, the number of scripts per capita increased 23 percent,
`from 10.2 in 1987 to 12.6 in 1996. By contrast, those who had no drug
`insurance but had positive Rx expense show a decline in number of scripts
`per capita, from 5.5 to 4.6. A plausible explanation for this apparent decline
`in utilization by those with health insurance who did not have drug coverage
`is that the growth of drug coverage has been subject to biased selection:
`those with higher expected demand for drugs were more likely to buy drug
`coverage, and only those least likely to need drug coverage remained without
`drug insurance by 1996.
`By contrast, for those uninsured for general health expenses, those with
`positive Rx expense had a level and rate of increase in number of scripts
`per capita, from 8.2 to 10.2, that are only slightly lower than the level and
`rate of increase for those with drug coverage. This suggests that, to the extent
`that gaps in drug insurance remain a problem for the under-65 population,
`severe financial exposure occurs predominantly for those who are also un-
`insured for other health expenditures, not for those who have health insurance
`but choose not to buy drug coverage. This conclusion is confirmed by the
`evidence in Table 4, which shows that the out-of-pocket expense for those
`in the top quartile of drug expense ($865) is almost twice as high for those
`who are uninsured for other medical expenses than it is for those who have
`general health insurance but lack drug coverage ($443).
`In addition to the modest increase in the number of scripts per capita, the
`larger factor contributing to growth in spending per person with drug insur-
`ance is expense per script, which increased by 36 percent for those with drug
`insurance. For the uninsured, the absolute increase in expense per script is
`similar (about $10) but the percentage increase is greater (50 percent) because
`the absolute cost per script is lower for the uninsured. This high number of
`scripts as well as expense per script for both the health- and drug-insured
`population and the health- and drug-uninsured population with Rx expense
`suggest that moral hazard is far from the whole story behind the growth in
`expense per script. Rather, drug therapies have become increasingly valuable
`
`000011
`
`

`

`598
`
`THE JOURNAL OF LAW AND ECONOMICS
`
`TABLE 4
`
`MEAN DRUG EXPENSE AND COVERAGE FOR TOP QUARTILE USERS,a
`CONSTANT 1996 DOLLARS
`
`NMES 1987b
`
`MEPS 1996
`
`Ages 25-65:
`With health insurance:
`With insured Rx expense:
`Total
`Insurance
`% covered
`No insured Rx expense:
`Total
`Insurance
`Rx expense, no Rx insurance:
`Total
`Insurance
`Uninsured:
`With Rx expense:
`Total
`Insurance'
`Over 65:
`With insured Rx expense:
`Total
`Insurance
`% covered
`Rx expense, no Rx insurance:
`Total
`Insurance
`
`756
`497
`65
`
`179
`0
`
`352
`0
`
`500
`100
`
`1,271
`694
`55
`
`835
`0
`
`1,317
`875
`66
`
`151
`0
`
`443
`0
`
`998
`133
`
`2,463
`1,366
`55
`
`1,543
`0
`
`NOTE. -MEPS: Medical Expenditure Panel Survey; NMES: National Medical
`Expenditure Survey; Rx: prescription.
`" Mean expense for fourth quartile of distribution of drug expenditures.
`b 1987 dollars adjusted to 1996 using the gross domestic product deflator.
`Insurance defined as Total - Self-Pay shows some positive amounts for
`those who report that they are uninsured.
`
`forms of treatment that are demanded by those without insurance as well as
`by those with insurance.
`In real terms, drug expense per capita for people under 65 increased by
`128 percent in this 9-year period, from $107 in 1987 to $244 in 1996 in
`constant 1996 dollars (figures not in Table 2). For those with health insurance
`(with and without drug insurance), the rate of increase is 138 percent, from
`$111 in 1987 to $265 in 1996, whereas for those without health insurance,
`the increase is 103 percent, from $65 to $133. Among those with health
`insurance, per capita drug spending appears to have grown more slowly for
`those with drug coverage, although it started at a higher level-a 67 percent
`increase, from $261 to $437. This lower apparent rate of increase in expense
`per capita for those with drug insurance than for those without probably
`reflects biased selection in the growth of drug coverage. Specifically, if the
`sickest people are the first to purchase drug insurance, then as coverage
`increases over time, the drug-insured population expands to include more
`
`000012
`
`

`

`HEALTH INSURANCE AND PHARMACEUTICALS
`
`599
`
`who are intrinsically low risk. This shift in risk profile within the group with
`health insurance would bias down the estimate of change in average expense
`per capita for those with insurance. Thus, without risk adjustment, we cannot
`accurately estimate from these aggregate data the incre