Three essays on prescription drugs, prices and chronic illness

Prescription drug expenditures have risen considerably over the last decade and employers have increased outpatient prescription drugs copayments in order to mitigate expenditure growth. This dissertation contains three manuscripts that explore the relationship between copayments, chronic illness, and prescription drug utilization and expenditures. Each study takes advantage of a different natural experiment, where the prescription drug copayment levels for one employer group were increased and the copayment levels for a comparison group remained the same. In the first study a difference-in-differences approach is used to estimate the long and short-term effects of a brand name copayment increase. The findings reveal that the effects of the copayment increase are not static, but change over time. Also, individuals with a chronic condition, who are more likely to use prescription drugs, respond differently to the copayment increase than individuals without a chronic condition. The second study focuses on a more vulnerable population: early-retirees with chronic illness. Using a difference-in-differences approach, the effects of a copayment increase are estimated to determine the extent of substitution between brand name drugs and other categories of prescription drugs. A comprehensive view of medical care is also explored by evaluating the extent of substitution between prescription drugs and other medical services. The findings suggest that substitution of inpatient admissions and outpatient hospital visits for prescription drugs may occur. The financial effects of the copayment increase include a reduction in prescription drug expenditures and a negligible effect on medical expenditures. A larger percentage of costs are shifted to patients. The third study examines refill adherence patterns for several classes of maintenance medications commonly used to treat chronic illness (ACE Inhibitors, Diabetes Medications, Statins and Thyroid Medication). Dynamic count panel data models are used to estimate whether habit plays a role in maintenance drug utilization patterns. The findings reveal that, in addition to individual-level heterogeneity, habit effects were also found to play a significant role in explaining variations in refill patterns. These three studies show that a prescription drug copayment increase may have an effect upon health care utilization and expenditures, especially among the sickest enrollees in employer-sponsored health plans.