The differential effects of co-payment and co-insurance on the use and cost of prescription drugs.

Abstract

This research studies the differential effects of a fixed dollar co-payment and a fixed percentage co-insurance rate on the utilization and cost of prescription drugs. The research presents a theoretical framework and sheds light on the policy debate over whether co-payment or co-insurance is more effective in containing prescription drug use and cost. This study uses a prescription claims data file established by a national health insurance company in the US. One observation (averaged data for 1988 and 1989) per employer group, together with other related information, such as employee, employer and market characteristics, were used for analysis. The study sample includes 517 employer groups (89%) which use a 20% co-insurance, and 64 employer groups (11%) which use a $5 co-payment, for the outpatient prescriptions covered. Utilization and cost of prescriptions are modeled as a linear function of physician office visits, the form of the cost-sharing method, the effective price to the patient, and other related factors. Results show, ceteris paribus, a fixed dollar co-payment, relative to a fixed percentage co-insurance rate, is associated with: (1) a 21% lower drug utilization rate; (2) a 27% lower unit cost of prescriptions; (3) a 43% lower total drug expenditures per insured person; (4) a 59% lower employer drug cost per insured person; and (5) a 21% lower employee-shared cost per insured person.