Distributional Effects of Prescription Drug Programs: Canadian Evidence

Distributional Effects Distributional Effects of Prescription Drug of Prescription Drug

Programs: Programs: Canadian EvidenceCanadian Evidence

Sule Alan, Thomas F. Crossley, Sule Alan, Thomas F. Crossley, Paul Grootendorst, Michael R. Paul Grootendorst, Michael R.

VeallVeall

January, 2004January, 2004

[email protected]@mcmaster.ca

IntroductionIntroduction

In Canada, the public provision of In Canada, the public provision of hospital care and physician services hospital care and physician services is mandated by federal legislation. is mandated by federal legislation.

However, neither the However, neither the Medicare Care Medicare Care ActAct (1968) nor the (1968) nor the Canada Health Canada Health Act Act (1984) mandate the public (1984) mandate the public subsidization of prescription drugs subsidization of prescription drugs used outside of hospital. used outside of hospital.


The scope for drugs to manage health The scope for drugs to manage health problems continues to grow, as do the problems continues to grow, as do the attendant drug expenditures. attendant drug expenditures.

The outpatient prescription drug share The outpatient prescription drug share of total Canadian health care of total Canadian health care expenditures is estimated to have expenditures is estimated to have increased from 6% in 1975 to 13% in increased from 6% in 1975 to 13% in 2002. 2002.

This share that is about equal to the This share that is about equal to the share allocated to physicians’ services.share allocated to physicians’ services.


Provincial governments have Provincial governments have introduced outpatient prescription introduced outpatient prescription drug subsidies for seniors and for drug subsidies for seniors and for social assistance recipients.social assistance recipients.

There are some provincial programs There are some provincial programs that defray drug costs for the that defray drug costs for the general population.general population.


Recently the Recently the KirbyKirby ReportReport and the and the RomanowRomanow ReportReport have called for the have called for the federal government to take actions federal government to take actions which would expand publicly funded which would expand publicly funded prescription drug plans in Canada.prescription drug plans in Canada.


There are a number of There are a number of efficiencyefficiency or or cost arguments for public cost arguments for public prescription drug plans:prescription drug plans: Costs may be controlled through the Costs may be controlled through the

purchasing power of a single provider;purchasing power of a single provider; Individuals lacking prescription drug Individuals lacking prescription drug

cover may substitute (more expensive) cover may substitute (more expensive) hospital or physician services for drugs hospital or physician services for drugs in the management of health problems.in the management of health problems.


However, much of the public However, much of the public discussion (see especially discussion (see especially National National Forum on HealthForum on Health, , 19971997) has ) has concentrated on concentrated on redistributionredistribution (affordability).(affordability).

Prescription drug subsidies almost Prescription drug subsidies almost surely redistribute from the well to surely redistribute from the well to the sick. But do they benefit the poor the sick. But do they benefit the poor more than the rich?more than the rich?

ObjectiveObjective

Examine the distributional Examine the distributional consequences of prescription drug consequences of prescription drug subsidies using household subsidies using household expenditure data.expenditure data.

ApproachApproach

Compare changes in out-of-pocket Compare changes in out-of-pocket prescription drug expenditure by households prescription drug expenditure by households of different levels of affluence before and of different levels of affluence before and after the introduction of provincial after the introduction of provincial prescription drug subsidies.prescription drug subsidies.

Canadian provincial prescription drug Canadian provincial prescription drug subsidies were introduced:subsidies were introduced: After the beginning of the collection of household-After the beginning of the collection of household-

level expenditure data;level expenditure data; In a staggered fashion.In a staggered fashion.

PapersPapers

Seniors:Seniors: The Effects of Drug Subsidies on Out-of-Pocket The Effects of Drug Subsidies on Out-of-Pocket

Prescription Drug Expenditures by Seniors: Prescription Drug Expenditures by Seniors: Regional Evidence from Canada. Regional Evidence from Canada. Journal of Health Journal of Health EconomicsEconomics. 21(5):87-108. (September, 2002). 21(5):87-108. (September, 2002)

`General Population’:`General Population’: Distributional Effects of “General Population” Distributional Effects of “General Population”

Prescription Drug Programs in Canada (December, Prescription Drug Programs in Canada (December, 2003)2003)

http://socserv.mcmaster.ca/crossley/research/http://socserv.mcmaster.ca/crossley/research/drugs151203.pdfdrugs151203.pdf

Bottom Line:Bottom Line:

A simple senior prescription drug A simple senior prescription drug subsidy would be no more subsidy would be no more redistributive to senior households redistributive to senior households than an equal-cost proportional-to-than an equal-cost proportional-to-income transfer to senior households.income transfer to senior households.

There is much more evidence that drug There is much more evidence that drug subsidy programs are redistributive in subsidy programs are redistributive in the income sense among non-seniors.the income sense among non-seniors.

Conceptual FrameworkConceptual Framework

If a small subsidy of size If a small subsidy of size is is introduced, an approximation of the introduced, an approximation of the total increase in the indirect utility total increase in the indirect utility of household of household

is:is:

The cost of such a subsidy would be The cost of such a subsidy would be

summed over all householdssummed over all households..

1( )

ln lnh h h

i ih ihh h h

v v vs sp q ss x x x

s

( , )h hv v x p h

i ihsp q

H


Suppose instead the same resources were Suppose instead the same resources were distributed as a proportion cash distributed as a proportion cash transfer .transfer .

The utility gain to household would be:The utility gain to household would be:

where is the average budget share.where is the average budget share. Household prefers the cash transfer if:Household prefers the cash transfer if:

hT

h

h

Ai

Aih i

ln lnAh h h

h h h ih h h

v v vT T x s

T x x


If the Engel curve ( against ) If the Engel curve ( against ) for good is downward sloping, then for good is downward sloping, then this is a this is a progressiveprogressive subsidy, in the subsidy, in the sense that those with low income will sense that those with low income will prefer the subsidy to a proportional prefer the subsidy to a proportional cash transfer. cash transfer.

ih ln hx i

Is the Engel Curve Is the Engel Curve sufficient?sufficient?

This `textbook’ analysis is a first order This `textbook’ analysis is a first order approximation and only appropriate for approximation and only appropriate for infinitesimal subsidies.infinitesimal subsidies.

If subsidies are of significant size, price If subsidies are of significant size, price elasticities matter (and especially if they vary elasticities matter (and especially if they vary by with income). by with income).

Our data are not suited to the estimation of Our data are not suited to the estimation of price elasticities.price elasticities.

The literature (Leibowitz, Manning and The literature (Leibowitz, Manning and Newhouse, 1985; Hurley, 1990; Grootendorst Newhouse, 1985; Hurley, 1990; Grootendorst and Levine, 2001) suggests prescription drug and Levine, 2001) suggests prescription drug elasticities price elasticities are small.elasticities price elasticities are small.

Is the Engel Curve Is the Engel Curve sufficient?sufficient?

But there are other issues:But there are other issues: The pre-policy Engel curve is not the same as The pre-policy Engel curve is not the same as

the counter-factual Engel curve because many the counter-factual Engel curve because many new drugs have been developed in the interim.new drugs have been developed in the interim.

The `textbook’ analysis relies on the household The `textbook’ analysis relies on the household consuming a non-zero amount of the consuming a non-zero amount of the commodity.commodity.

Existing programs are not close to ad valorem Existing programs are not close to ad valorem subsidies but have deductibles, co-payments, subsidies but have deductibles, co-payments, and maximum out of pocket provisionsand maximum out of pocket provisions

Can We Explicitly Model Can We Explicitly Model the (Nonlinear) Budget the (Nonlinear) Budget

Constraints?Constraints? Price and quantity data are difficult to obtain.Price and quantity data are difficult to obtain. Programs are very complex:Programs are very complex:

Grootendorst (2003) takes 6 pages to describe the Grootendorst (2003) takes 6 pages to describe the premiums, co-payments and deductibles.premiums, co-payments and deductibles.

Formulary issues.Formulary issues. Households may have different: Households may have different:

probabilities of need non-formulary drugs;probabilities of need non-formulary drugs; Numbers of uninsured individuals;Numbers of uninsured individuals; degrees of success at obtaining financial benefit degrees of success at obtaining financial benefit

from a plan.from a plan.

““Difference-in Difference” Difference-in Difference” ApproachApproach

Implemented by mean regression.Implemented by mean regression. Implemented with quantile regression Implemented with quantile regression

(80(80thth percentile): percentile): A way of dealing with zeros and other A way of dealing with zeros and other

heterogeneity in effects, and of heterogeneity in effects, and of focusing the analysis on those who focusing the analysis on those who may benefit from the program.may benefit from the program.

1, 1, 4, 4,q after q before q after q beforew w w w

DataData

Canadian Family Expenditure Survey Canadian Family Expenditure Survey (FAMEX)(FAMEX)

9 surveys between 1969 and 1996.9 surveys between 1969 and 1996. Annual expenditure (including on Annual expenditure (including on

prescription drugs) and income data is prescription drugs) and income data is collected in in extensive face-to-face collected in in extensive face-to-face interviews, conducted in the first quarter interviews, conducted in the first quarter of the following year.of the following year.

SampleSample The survey is designed to be representative of all The survey is designed to be representative of all

persons living in private households, except that in persons living in private households, except that in some years rural households are not covered.some years rural households are not covered.

For consistency limit we the sample to urban For consistency limit we the sample to urban households in all years (50-60%).households in all years (50-60%).

For consistency, we must also exclude households For consistency, we must also exclude households with multiple economic families (~5%).with multiple economic families (~5%).

The survey is a stratified multistage sample; we The survey is a stratified multistage sample; we use survey weights provided by Statistics Canada use survey weights provided by Statistics Canada in all calculations.in all calculations.

We use robust standard errors throughout, but We use robust standard errors throughout, but Statistics Canada will not provide the information Statistics Canada will not provide the information that would allow us to correct for cluster effects.that would allow us to correct for cluster effects.

Variable DefinitionsVariable Definitions Total outlay (expenditure) excludes large Total outlay (expenditure) excludes large

durables (vehicles), savings.durables (vehicles), savings. Budget share is the ratio of a category of Budget share is the ratio of a category of

expenditures to total outlay.expenditures to total outlay. We define a “high income” household as We define a “high income” household as

one in the top quartile of total outlay one in the top quartile of total outlay (“permanent income”) and a “low income” (“permanent income”) and a “low income” household as one in the bottom quartile of household as one in the bottom quartile of total outlay.total outlay.

Households with heads under 65 years of Households with heads under 65 years of age are deemed to be non-senior. age are deemed to be non-senior.

Mean Real Annual Out-of-Pocket Mean Real Annual Out-of-Pocket Medical Expenses, Canadian Medical Expenses, Canadian

Households, $Households, $

Total Total

(Excluding (Excluding Insurance)Insurance)

Prescription DrugsPrescription Drugs

Non-Non-SeniorSenior

SeniorSenior Non-Non-SeniorSenior

SeniorSenior

19691969 862862 639639 203203 225225

19741974 644644 482482 138138 158158

19841984 565565 394394 9494 5555

19861986 576576 477477 9696 4949

19901990 631631 571571 108108 9292

19921992 628628 541541 126126 119119

19961996 638638 693693 132132 178178Source: Table 1, ACGV 2002

Heterogeneity in Heterogeneity in Prescription Drug Budget Prescription Drug Budget

Shares, 1996Shares, 1996SeniorsSeniors Non-SeniorsNon-Seniors

MeanMean 1.1%1.1% 0.5%0.5%

MedianMedian 0.4%0.4% 0.1%0.1%

9090thth 2.9%2.9% 1.2%1.2%

9595thth 4.6%4.6% 2.2%2.2%

99th99th 9.5%9.5% 6.4%6.4%

Source: 1996 FAMEX

Introduction and Changes to Prescription Drug Subsidy Programs for Non-senior Households, Not on Social

Assistance, by Province, Canada, 1969-1996

British British ColumbiaColumbia

Jan., 1972;June, 1977April, 1994

In Jan. 1972, program introduced for the working poor with co-payment of $2 per prescription + 50% of remainder; in June 1977 that program was discontinued and replaced by a program for all non-senior households not on social assistance: co-payment=20%; deductible initially $100 rising incrementally to $500 by March 1993; April, 1994: co-payment lowered to zero for low income households and raised to 30% for high income households, in both cases with $600 deductible.

AlbertaAlberta July, 1970June, 1994

co-payment = 20%; June 1994, co-payment=min[30%,$25]; premiums contingent on income and household size.

SaskatcheSaskatchewanwan

Sept., 1975July, 1987Mar., 1991May, 1992Mar., 1993

Initially $2 per prescription co-payment which increased incrementally to $3.95 by June 1984; July 1987: $125 deductible, 20% co-payment; March, 1991: $125 deductible, 25% co-payment; May, 1992: semi-annual deductible of $190/family, 35% co-payment to semi-annual out-of-pocket limit of $375, then 10% co-payment; March, 1993: $850 semi-annual deductible, then 35% co-payment to semi-annual out-of-pocket limit of 1.7% of adjusted household income for those with adjusted income under $50,000.

Introduction and Changes to Prescription Drug Subsidy Programs for Non-senior Households, Not on Social

Assistance, by Province, Canada, 1969-1996

ManitobaManitoba Jan., 1975Jan., 1993Apr., 1996

20% co-payment and deductible (e.g. $50 at inception, increased annually); January 1993: co-payment increased to 40%; beginning April 1996 zero co-payment with income-contingent deductible (2%-3% of household income, for households with incomes of less than, and greater than $15,000, respectively).

OntarioOntario April, 1995April, 1996July, 1996

Deductible falls with family size and ranges from $300 (household of 3 or more, net income up to $6,500) to $4089 (single with household income of approx.$100,000). For households with income in excess of $100,000, deductible is $0.045 × (Net income - 20,000) + x, where Net income is as designated in federal income tax assessment and x = $500 for a single person household, $400 for a two-person household, $350 for a three-person household and $300 for a four or more person household. Households that purchase private drug insurance can reduce their provincial plan deductible by $100 (single) or $200 (family); in April, 1996: minimum deductible lowered to $150; in July, 1996, $2 per prescription co-payment added.

Semiparametric Engel Semiparametric Engel CurvesCurves

Estimated by the differencing Estimated by the differencing method described by Yatchew method described by Yatchew (1998).(1998).

coefficients are given in Table 2 in coefficients are given in Table 2 in ACGV, 2003.ACGV, 2003.

(ln )h h h hg x z

General PopulationGeneral PopulationEngel CurveEngel Curve

Source: Fig. 1, ACGV 2003.

bu

dge

t sh

are

(co

vari

ate

ad

just

ed

)

Engel Curves for Prescription Drugs, Non-senior Populationreal total outlay

1969 1986 program 1996 program

5000 15000 50000

-.01

0

.01

.02

.03

.04

Province-Specific, `D-in-D’ Estimates of Province-Specific, `D-in-D’ Estimates of Program Introduction Effects (on Program Introduction Effects (on

Budget Shares)Budget Shares)MeanMean 8080thth Percentile Percentile

Change, Change,

Low Income Low Income GroupGroup

Additional Additional Change, Change,

High Income High Income GroupGroup

Change, Change,

Low Income Low Income GroupGroup

Additional Additional Change, Change,

High Income High Income GroupGroup

B.C.B.C. -0.0068 *-0.0068 * 0.0040 *0.0040 * -0.0118 *-0.0118 * 0.0082 *0.0082 *

AlbertaAlberta -0.0015-0.0015 0.00000.0000 -0.0020-0.0020 -0.0006-0.0006

Sask.Sask. -0.0063 *-0.0063 * 0.00250.0025 -0.0142 *-0.0142 * 0.0089 *0.0089 *

ManitobManitobaa

-0.0044 *-0.0044 * 0.0055 *0.0055 * -0.0072 *-0.0072 * 0.0088 *0.0088 *

OntarioOntario 0.00090.0009 -0.0010-0.0010 -0.0007-0.0007 0.00040.0004

Source: Table 3, ACGV 2003

Pooled `D-in-D’ Pooled `D-in-D’ EstimatesEstimates

Table 4, ACGV 2003.Table 4, ACGV 2003. All provinces and years.All provinces and years. 17 program dummies (interacted with 17 program dummies (interacted with

income group).income group). Province-specific time-trends.Province-specific time-trends. Program introduction effects qualitatively Program introduction effects qualitatively

and quantitatively similar.and quantitatively similar. The addition of co-payments and The addition of co-payments and

deductibles reduce the effectiveness and deductibles reduce the effectiveness and redistributive nature of the subsidies.redistributive nature of the subsidies.

Private Supplemental Private Supplemental Health InsuranceHealth Insurance

The probability of private prescription drug The probability of private prescription drug coverage rises with income (Grootendorst coverage rises with income (Grootendorst and Levine, 2001).and Levine, 2001).

Supplemental health insurance may be Supplemental health insurance may be employer provided:employer provided: In Canada, the after-tax cost of employer In Canada, the after-tax cost of employer

provided health insurance rises with income provided health insurance rises with income (Stabile, 2001).(Stabile, 2001).

The FAMEX contains data on out-of-pocket The FAMEX contains data on out-of-pocket payments for health insurance premiums.payments for health insurance premiums.

Such premiums may relate to cover for Such premiums may relate to cover for items other than prescription drugs.items other than prescription drugs.

Program Effects On Program Effects On Rx Drug + Health Insurance Premium Rx Drug + Health Insurance Premium

Budget SharesBudget Shares

Table 5, ACGV 2003.Table 5, ACGV 2003. Similar resultsSimilar results except except large and large and

redistributive effects now for Alberta and redistributive effects now for Alberta and Ontario (and stronger results for Ontario (and stronger results for Manitoba.) Manitoba.)

Consistent with the idea that in these Consistent with the idea that in these instances the drug programs “crowed out” instances the drug programs “crowed out” private insurance among low income private insurance among low income households (but less so among high households (but less so among high income households.)income households.)

Additional Specification Additional Specification ChecksChecks

Re-estimated the Rx drug budget share models Re-estimated the Rx drug budget share models only on those with no out-of-pocket health only on those with no out-of-pocket health insurance premium payments:insurance premium payments: Similar effects for low income households but less Similar effects for low income households but less

evidence of a differential effect for high income evidence of a differential effect for high income households.households.

Estimated program effects on Rx + OTC budget Estimated program effects on Rx + OTC budget shares,shares,

Province specific income effects,Province specific income effects, Exclusion of likely Social Assistance recipients,Exclusion of likely Social Assistance recipients,

All led to qualitatively – and usually quantitatively – All led to qualitatively – and usually quantitatively – similar results.similar results.

Summary Summary Much more evidence that prescription Much more evidence that prescription

drug subsidy programs are redistributive drug subsidy programs are redistributive (in the income sense) among non-seniors:(in the income sense) among non-seniors: The pre-1969 Engel curve is uniformly The pre-1969 Engel curve is uniformly

downward slopingdownward sloping With the introduction of subsidies, the Engel With the introduction of subsidies, the Engel

curve shifted down more at lower incomescurve shifted down more at lower incomes Mean, and especially quantile, regressions Mean, and especially quantile, regressions

suggest that budget share reductions with suggest that budget share reductions with new programs were larger for low income new programs were larger for low income householdshouseholds

SummarySummary

There is evidence that this is largely There is evidence that this is largely due to differential private due to differential private supplemental health insurance supplemental health insurance coverage by income group and coverage by income group and “crowd-out.” “crowd-out.”

As expected, large deductibles As expected, large deductibles appear to reduce both the appear to reduce both the effectiveness and redistributive effectiveness and redistributive nature of prescription drug subsidies.nature of prescription drug subsidies.

Concluding RemarksConcluding Remarks

Seniors versus “General” PopulationSeniors versus “General” Population Prescription drug programs for seniors Prescription drug programs for seniors

operate within the context of a number operate within the context of a number of redistributive programs specifically of redistributive programs specifically targeted at seniors.targeted at seniors.

Prescription drug programs for the Prescription drug programs for the “general” population operate within the “general” population operate within the context of widespread (and often context of widespread (and often employer provided) supplemental employer provided) supplemental health insurance. health insurance.


A key issue remains whether price A key issue remains whether price elasticities for prescription drugs elasticities for prescription drugs vary by income group (and other vary by income group (and other demographic characteristics).demographic characteristics).

If the poor in particular had If the poor in particular had significant price elasticities, this significant price elasticities, this would bias our results against would bias our results against finding that prescription drug finding that prescription drug subsidies are redistributive.subsidies are redistributive.


Why use prescription drug subsidies Why use prescription drug subsidies as distributional tool?as distributional tool? Unobservable income or need? Unobservable income or need? Paternalism?Paternalism?

Efficiency considerations are Efficiency considerations are important.important.

Distributional Effects of Prescription Drug Programs: Canadian Evidence

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