Friday, December 03, 2004
Third party payments incentivize consumption of drugs
[Randolph E. Schmid, "More Americans taking medications, report says," Associated Press, The Wichita Eagle, 3 December 2004.]
Americans are taking more prescription drugs than ever, according to a new report:
More than 40 percent of the population is taking at least one prescription drug, and one person in six takes three or more, the government said Thursday. Both figures are up about 5 percentage points in recent years.
How is it that drug prices continue to rise, but consumption increases at the same time? In a typical market, price increases would dampen demand - does medicine not fit into this model? Research actually does show that consumers, despite the claims of some, do generally display similar behavior in regard to changes in price for health care services as they do for any other good.
So we are again left with the question of what is taking place. The answer can be found in a system that does not reveal changes in price to consumers directly. Under most insurance programs, enrollees pay the same amount for a new drug as an old one, for an more expensive drug as for a less expensive drug. Where gradations exist, they typically do not reveal the full difference in cost. Therefore, consumers continue to demand drugs that improve their quality of life - a perfectly rational decision - but the demand is likely overstated from what it would be if costs were paid out-of-pocket.
This overstated demand leading to higher costs is exactly why a shift to consumer-driven health care is so important. Restoring direct consumer participation in purchasing will help bring about behavior that more accurately reflects costs and benefits at the individual level.
[Randolph E. Schmid, "More Americans taking medications, report says," Associated Press, The Wichita Eagle, 3 December 2004.]
Americans are taking more prescription drugs than ever, according to a new report:
More than 40 percent of the population is taking at least one prescription drug, and one person in six takes three or more, the government said Thursday. Both figures are up about 5 percentage points in recent years.
How is it that drug prices continue to rise, but consumption increases at the same time? In a typical market, price increases would dampen demand - does medicine not fit into this model? Research actually does show that consumers, despite the claims of some, do generally display similar behavior in regard to changes in price for health care services as they do for any other good.
So we are again left with the question of what is taking place. The answer can be found in a system that does not reveal changes in price to consumers directly. Under most insurance programs, enrollees pay the same amount for a new drug as an old one, for an more expensive drug as for a less expensive drug. Where gradations exist, they typically do not reveal the full difference in cost. Therefore, consumers continue to demand drugs that improve their quality of life - a perfectly rational decision - but the demand is likely overstated from what it would be if costs were paid out-of-pocket.
This overstated demand leading to higher costs is exactly why a shift to consumer-driven health care is so important. Restoring direct consumer participation in purchasing will help bring about behavior that more accurately reflects costs and benefits at the individual level.
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