What impact do prescription drug charges have on efficiency and equity? Evidence from high-income countries

Willingness to pay and welfare loss

Economic arguments in favour of user charges are based on the concept of allocative efficiency, which deems resources to be efficiently allocated when people are willing to pay for a commodity at a price that reflects the marginal cost of producing the commodity [17]. This has two ramifications. First, only those who are willing to pay should have access to a particular commodity. Second, providing a harmful or ineffective commodity to those willing to pay for it is efficient, whereas providing an effective and beneficial commodity to those unable to pay for it is inefficient. For example, if the presence of health insurance means that health care is free at the point of use, the consumption of health care will not reflect the marginal costs of its production, leading to welfare loss since scarce resources might be better spent on producing and consuming other commodities [18]. User charges redress this loss by reinstating price: those willing to pay the price may use health care, those unable to pay must do without. From an economic perspective, any reduction in the use of health care following the introduction of user charges contributes to allocative efficiency, regardless of the distributional or health consequences.

We might ask what relevance allocative efficiency has for policy making in health care. If it is to be understood as a normative concept, then we must assume either that the distributional and health consequences are of no importance or, if they are important, that all individuals in a given society share the same level of income, the same tastes and preferences, and the same risk of ill health, etc. [17, 19]. But neither assumption reflects reality. Policy makers in all OECD countries show demonstrable concern for population health and equity of access to health care, albeit to varying degrees, while the people living in these countries experience different levels of income and health. We therefore prefer to use a definition of efficiency that explicitly refers to the external criterion of health improvement. Under this definition, an efficient allocation of health care resources would be one that maximises health gain, where health gain is measured in a standardised manner (for example, through quality-adjusted life years) [20]. For equity, we consider two dimensions. Equity in finance requires richer people to pay more for health care, as a proportion of their income, than poorer people [21]. Equity of access to health care implies access to health care based on need rather than ability to pay. Because equity of access is difficult to measure, most studies employ equal use of health care as a proxy for equal access, as we do in our concluding discussion.

Containing health care costs

Economic theory would consider any reduction in use attributed to user charges as an improvement in allocative efficiency, regardless of the value or effectiveness of the health services foregone. However, many non-economists assume that, faced with user charges, rational consumers will forego the health services of least benefit to them (certainly those that are potentially harmful and perhaps those that are less effective). In this way, they argue, reduced use will not adversely affect health, but will help to contain costs and make health care more effective. Does this assumption hold? If patients do not have sufficient information to make rational choices, they may forego or delay useful treatment, perhaps damaging their health and leading to greater expenditure at a later date. Conversely, patients may turn to free (but more resource-intensive) forms of health care to avoid paying charges. The result might be higher rather than lower health care costs.

Improving efficiency by raising revenue

User charges can raise revenue for the health system if they are set low enough not to deter significant amounts of use. This policy argument is more prevalent in low-income countries, where public resources for health care may be severely limited or non-existent. Under such circumstances, drawing on private resources to ensure an adequate supply of drugs, for example, could lead to health improvement, particularly if poorer people are exempt from user charges. In high-income countries it is hard to see how private finance could be more efficient (in contributing to health improvement) than public finance. Unless user charges exempt high users of health care, they are really a form of tax on people in poor health.

Concern for efficiency or concern for third party payer budgets?

Which of these arguments in favour of user charges seems most convincing in the case of prescription drug charges? Applying the allocative efficiency argument to a form of health care that requires a doctor's prescription only underlines its irrelevance to health policy. The focus on patient use seems misplaced when it is doctors who make the decision to prescribe drugs. If charges are not applied across all health services, the use of substitutes for prescription drugs (often emergency care) may increase costs. This leaves the revenue-raising argument, which, as we have noted, is barely plausible in high-income countries. Is it possible, then, that the real reason third party payers impose prescription drug charges is to contain their own budgets by shifting costs to patients? And is this why so many countries exempt particular groups of people from paying prescription drug charges, in the hope that cost shifting will not adversely affect health? By studying policy outcomes, we may be able to provide an indirect answer to these and other questions.

4.1. How do prescription drug charges affect expenditure on prescription drugs?

In this section we consider two types of expenditure: total prescription drug expenditure and patients' out-of-pocket expenditure. If patients are not particularly sensitive to changes in the price of prescription drugs, introducing or increasing user charges will have little effect on total prescription drug expenditure but will increase out-of-pocket spending on prescription drugs. Conversely, if patients are sensitive to changes in price, the impact on total expenditure will be greater, while the impact on out-of-pocket expenditure may be smaller as patients lower their use of prescription drugs.

Thus, there is some evidence to suggest that cost sharing leads to slightly lower total expenditure or lower expenditure growth on prescription drugs and higher out-of-pocket expenditure for patients. The finding that patients are relatively insensitive to changes in the price of prescription drugs has important implications. Few of the studies we reviewed were of sufficient duration to permit assessment of long-term expenditure control. However, the reference price studies that took a slightly longer perspective found that reference pricing had little effect on expenditure beyond the first year or two, which suggests that user charges may not be relied upon to reduce pharmaceutical budgets in the long term. It also indicates that, rather than substantially lowering total expenditure on prescription drugs, user charges shift some prescription drug costs from third party payers to patients.

4.2. How do prescription drug charges affect total health care expenditure?

As the use of prescription drugs requires a doctor's prescription, in most cases we would expect prescription drug charges to result in lower use of doctors (to the extent that patients are sensitive to changes in price). Several studies found that user charges, reimbursement limits, and reference pricing did indeed lead to a reduction in doctor visits; three studies found that prescription drug charges had no effect on doctor visits; and one study found that they increased doctor visits. However, two of the three studies finding no relationship between prescription drug charges and doctor visits examined situations in which user charges were designed to encourage the use of lower-cost drugs through multi-tier formularies [28] or differential charges for generics and brand-name medications [29], rather than to lower the use of prescription drugs. In the third of the three studies, the insignificant effect on doctor visits may be explained by the fact that everyone in the study sample had experienced a heart attack, while those with lower incomes were afforded greater protection from prescription drug charges [30]. Consequently, this group was less likely to be sensitive to changes in price and perhaps more likely to see the doctor for reasons other than to obtain a prescription. The positive result came from a sample of older people in Canada with rheumatoid arthritis [31]. As health insurance in Canada fully covers doctor visits, it is not surprising that some patients would substitute physician care for prescription drugs.

Studies show mixed results for OTC drugs. In the RAND experiment, higher co-insurance rates lowered the probability of purchasing an OTC drug but, after controlling for this, cost sharing had no impact on OTC expenditure [32]. Additional insurance coverage led to higher use of prescription drugs compared to OTC drugs in another US study [33], but had the opposite effect in a French study [34]. The French result probably differed because additional health insurance in France covers more than just prescription drugs; and as doctors often recommend the use of OTC drugs, increased OTC drug use may have been prompted by increased doctor visits. Having a limit on the number of free prescriptions an individual is allowed per month (a policy most often associated with Medicaid in the United States) positively influenced the quantity of OTC drugs used [35].

The results for outpatient, inpatient, and emergency care are much more consistent. As expected, user charges designed to encourage patients to choose lower-cost drugs had no significant effect on the use of inpatient or emergency care [28, 36]. Otherwise, with the exception of four studies, there was generally a positive relationship between cost sharing and outpatient, inpatient, and emergency care. Studies also found that prescription limits increased the frequency of partial hospitalisation [37] and nursing home admissions [38] and the use of emergency mental health services [37]. Two of the studies that found no effect were based on chronically ill patients [30, 38]. Soumerai et al. [38] also suggest that their insignificant result for inpatient admissions might be due to the fact that the outcome variable they used (time to first hospital admission) would not highlight repeat hospital visits.

These findings reveal two things. First, prescription drug charges are unlikely to lower total health care expenditure and may in fact increase spending overall. Although a decline in the use of services that complement prescription drugs (doctor visits) may lead to cost savings, any savings are likely to be outweighed by increased use of the highly resource-intensive services that substitute for prescription drugs (inpatient, emergency and long-term care). Second, the design of a cost sharing policy can mitigate this potentially explosive effect on total health care expenditure. Policies that give patients incentives to switch to lower-cost drugs and policies that protect low-income groups may prevent inefficient patterns of health care use which, while more accessible to patients, are more costly to the health system.

4.3. Is lower prescription drug expenditure achieved through reductions in price or quantity?

In this section we return to the question of total prescription drug expenditure and consider whether expenditure reductions resulting from user charges are achieved through reductions in the price of prescription drugs or reductions in the quantity of prescription drugs consumed. From a policy perspective, lowering expenditure through reductions in price would be preferable because, as the previous sections have shown, reductions in quantity can have unwelcome consequences for total health care costs and for equity (unless user charges exclusively reduce the use of unnecessary or ineffective prescription drugs).

4.4. What sort of prescription drugs are patients most likely to forego?

The finding that cost sharing reduces the use of essential as well as non-essential drugs suggests that, if policy makers are concerned about the impact of user charges on health (see below), they should not rely on patients to make the 'right' decisions about which drugs they may or may not forego.

4.5. Which patients are most likely to reduce their use of prescription drugs?

Prescription drug charges may adversely affect some groups of people more than others (for example, poorer people and heavy users of prescription drugs). Very few studies provide direct comparisons of reductions in prescription drug use among different population groups. However, Canadian researchers found that the introduction of additional insurance coverage lowered the proportion of a patient's budget spent on prescription drugs for older households with low and high levels of out-of-pocket spending on prescription drugs [68]. A later study confirmed this result and also found that among non-elderly households, the additional insurance coverage lowered out-of-pocket spending on prescription drugs more for low-income households than for high-income households [69]. This suggests that poorer households were most affected financially by user charges. At least in this context, it also indicates that increased user charges shifted expenditure from the government to poorer households. There was another interesting finding relating to specific types of insurance coverage. Although we might expect older Medicaid beneficiaries to spend more on prescription drugs than others due to the correlation between age, income, and health [70], poorer Medicare beneficiaries who were also eligible for Medicaid actually had lower prescription drug expenditure than those with Medicare only [71] (Medicare is the public insurance program for those aged 65 and above in the United States). This may be due to cost containment measures imposed by Medicaid, such as prescription restrictions and the use of formularies. A study that specifically addressed differences in essential drug consumption by income found that welfare recipients experienced greater reductions in essential drug use than older people, even when there was an annual out-of-pocket maximum in place [72].

Other studies indirectly compared sensitivity to prescription drug charges among different groups by comparing price elasticity estimates. Among the general population, price elasticity estimates showed that a 10% increase in price would lead to a 0.2 to 4.6% decrease in use based on non-aggregate data and a 0.9 to 8.0% decrease in use based on aggregate data. Changes in use for older people ranged from a 5.6% reduction to a 0.9% increase based on non-aggregate data, and the only study using aggregate data found a reduction of 5.1% [62]. Meanwhile reductions in use for poorer people ranged from 0.3 to 2.0% based on non-aggregate data and 0.5 to 4.0% based on aggregate data. These estimates suggest that poorer and older people are not more sensitive to price, in contrast to earlier literature reviews which found that poorer people were most sensitive and older people least sensitive to price [2, 5]. Our results may differ due to newer estimates or estimates not considered in the earlier reviews. However, new statistical techniques such as meta-regression analysis also indicate that large variations in elasticity estimates may be influenced by publication bias (where journals favour papers with significant elasticity values), study characteristics, and institutional settings [73]. It is therefore difficult to make inferences regarding the distributional consequences of user charges based on elasticity estimates alone.

The few studies that have directly compared changes in the use of prescription drugs (in response to user charges) among different age or income groups have generally found that poorer people are more likely to lower their use when faced with higher prices. But there is a need for more research in this area, as the indirect evidence provided by elasticity estimates produces different results.

4.6. How do prescription drug charges affect health?

Datasets of sufficient longitude for the analysis required to assess the impact of user charges on health are scarce. Consequently, there are few direct attempts to answer this question. The RAND experiment found that there were only small differences in adult and child health status between those receiving 'free' care and those subject to user charges. However, it was not able to measure the long-term health effects of reductions in use, and few of its studies specifically linked prescription drug charges to health status. With regard to prescription drugs, the experiment found that people with higher levels of education used more OTC drugs and spent a larger proportion of their drug budget on OTC products (Leibowitz 1989). If, as this suggests, poorer people face financial and other barriers to access to OTC drugs (a substitute for prescription drugs), prescription drug charges are likely to have a greater negative effect on their health status.

Some non-experimental studies have also tried to assess the health impact of prescription drug charges. A Canadian study examined the impact of a change from no co-payment for people receiving social assistance and a small co-payment (CDN $2) with a CDN $100 out-of-pocket maximum for older people to 25% co-insurance with an annual maximum prescription charge of CDN $200–$925, depending on income [72]. The authors found that higher prescription charges increased hospitalisation rates, nursing home admissions, and mortality associated with reductions in the use of essential drugs. However, a separate study of the same change in user charges found that cost sharing had no impact on mortality or readmissions for complications among a group of older people who had experienced a heart attack [30]. Another study considered a natural experiment in which low-income patients with cardiovascular disease who did not have prescription drug coverage were given free drugs [74]. The study found that average blood pressure declined among patients with hypertension and average LDL fell among patients receiving free lipid-lowering drugs. A study of older people who had restricted their use of prescription drugs due to cost found that they experienced greater declines in health status compared with people who had not restricted use for cost reasons [75]. An Italian study looked at the correlation between co-payments, adherence to treatment and health in a sample of hypertension patients [76]. It found that the abolition of co-payments lowered the mortality rate for low-adherent patients by 0.7 percentage points, but had no effect on the mortality rate for high-adherent patients.

Adherence was also problematic for patients with a multi-tier formulary (vs. a two-tier formulary) [65] and for those who purchased non-preferred drugs in a multi-tier formulary (as opposed to generic or preferred drugs) [79, 80]. Having any type of insurance coverage increased adherence to treatment, while the existence of a limit on the number of reimbursable prescriptions had the opposite effect [35, 81]. The only study to find no effect on adherence examined the impact of a change from a CDN $2 co-payment to an income-related deductible (CDN $0 to $350) and 25% co-insurance with an income-related annual maximum (CDN $200 – $750) among a group of people who had all had experienced heart attacks [30]. As this paper focused on patients who were chronically ill and had experienced an adverse event related to their illness, it is not surprising that they adhered to their treatment. However, the study did not measure patients' adherence to other medications unrelated to cardiovascular disease, and it is possible that these patients lowered their adherence to other medications in order to be able to pay for cardiovascular treatment.

Overall, most studies that directly or indirectly considered the impact of prescription drug charges on health concluded that they lowered or were likely to lower health status because they led patients to forego the use of essential drugs, reduced adherence to treatment, and increased the likelihood of needing more intensive care and of dying. In the RAND experiment, the health effects of user charges (for all health services, not just prescription drugs) were more pronounced among low-income groups, in spite of an income-related annual maximum ceiling on out-of-pocket expenditure. This suggests that protection mechanisms do not always protect high-risk households.

Implications for health care costs

Almost all the studies we review conclude that prescription charges reduce the use of prescription drugs. However, they also show that most patients are not particularly sensitive to changes in the out-of-pocket price of prescription drugs. Put in economic terms, the demand for prescription drugs is price inelastic. This result is not surprising when we consider the pivotal role of doctors in prescribing drugs, which must have some bearing on patients' views about the necessity of taking such drugs, even when the financial outlay involved may be high. It may also be linked to unmeasured factors, including patient strategies to limit costs, such as obtaining higher doses of the same medication or cutting pills in half. But the implications for policy are profound. Because patients' overall response to prescription drug charges is muted, these charges fail to achieve large or long-term reductions in total prescription drug expenditure at the same time as they succeed in increasing patients' out-of-pocket spending on prescription drugs. What this suggests is that one of the main effects of prescription drug charges is to shift costs from third party payers (public or private) to patients. Indeed, a policy change in the Canadian province of British Columbia that slightly lowered prescription drug user charges for low-income groups and substantially increased them for middle- and higher-income groups directly transferred around CDN $134 million in prescription drug costs from the provincial government budget to patients, leading to substantial cost savings for the public purse [82].

There is some evidence to suggest that patients and producers respond to policies that enable patients to choose lower-cost drugs (for example, generic substitutes for brand-name drugs in multi-tier formularies or drugs available at the reference price), which has some effect on total and out-of-pocket expenditure on prescription drugs. However, as with reductions in the quantity of drugs consumed, the cost savings generated by reductions in price are usually limited and are one-off events. Nevertheless, by giving patients access to cheaper drugs, reference pricing or tiered formularies seem to prevent patients from turning to more expensive forms of free health care (inpatient, emergency, or long-term care) as a way of avoiding prescription drug charges. In contrast, standard prescription drug charges lead to increased use of these resource-intensive services, which results in higher levels of total expenditure on health care and undermines efforts to improve efficiency in the delivery of health care. From this we conclude that prescription drug charges should not be relied on to contain prescription drug costs in the longer term, or the costs of health care more generally. We recommend that policy makers monitor the impact of prescription drug charges (and other user charges) on the use of alternative health services.

Implications for health

Few studies examined the impact of prescription drug charges on health, perhaps due to the difficulty of obtaining the long-term data required to do so. In general, those that directly considered health effects concluded that prescription drug charges increased the likelihood of needing more intensive care and, ultimately, of dying. The handful of studies that found that prescription drug charges had no negative effect on health usually focused on the use of drugs for chronic conditions among chronically ill people, a group we might expect to be less likely to lower use. A larger number of studies examined health effects indirectly, looking at the impact of prescription drug charges on adherence to treatment and the use of essential and non-essential drugs as proxy indictors for health. Most studies found that user charges lowered adherence to treatment and reduced the use of essential and non-essential drugs, strongly suggesting a negative impact on health.

The finding about reduced use of essential drugs indicates that the information asymmetry inherent in so many aspects of health care also affects the use of prescription drugs. Consequently, unless charging policies are specifically designed to direct patients towards or away from the use of particular types of drugs, their effect is likely to be indiscriminate. And if user charges adversely affect health, it is hard to see how they can lead to efficiency gains. Finally, reductions in the use of essential drugs suggest that in some cases patients may be unwilling or unable to pay for essential drugs, raising questions about equity.

Implications for equity

If a key effect of prescription drug charges is to shift the costs of prescription drugs from public to private sources of finance, the impact on equity in finance is highly likely to be negative. International evidence consistently demonstrates that user charges are a regressive form of health care finance, requiring the poor to pay more for health care as a proportion of their income than the rich [83, 84]. And in OECD countries, where levels of public spending on health care are usually high as a proportion of total spending, user charges undermine the equity (and efficiency) gains achieved by pooling financial resources across groups of people and over time.

Prescription drug charges are also likely to lower equity in the use of health care. Although elasticity estimates did not show low-income groups to be more sensitive to price than others, studies found that poorer people reduced their use of prescription drugs even when co-payment levels were very low. Low-income groups may already face significant financial and non-financial barriers to accessing prescription drugs, some possibly related to other cost control mechanisms in place, as the lower levels of drug expenditure incurred by Medicaid beneficiaries (vs. the privately-insured) in the United States suggest. Similarly, while older people seem to be less sensitive to price, the financial burden they face may be substantial if they are heavy users of prescription drugs. In the absence of substantial research into inequity in the use of prescription drugs, the results of studies examining inequity in the use of other forms of health care may be instructive. For example, international research has found significant pro-rich inequity in the use of general practitioners in the United States and Mexico but not in other high-income countries [85]. As prescription drug charges are more prevalent than other user charges, we infer that inequity in the use of prescription drugs may be an issue in some countries. Horizontal inequity may also be an issue in countries where prescription drug charges for low-income and older people can vary significantly from region to region (for example, in Canada and the United States). Further research in this area might contribute to lowering inequity in the use of prescription drugs and other forms of health care.

Correlations between income, age, and health [70], combined with some evidence to show that poorer people are sensitive to price and that the health effects of user charges (for all health services, not just prescription drugs) are more pronounced among low-income groups, suggest that policy makers should focus on protecting poorer and older groups and heavy users of prescription drugs from the financial burden of user charges. In some countries protection mechanisms in the form of exemptions or reduced rates cover groups not considered to be particularly vulnerable, such as high-income older people. This may be motivated by dislike of the administrative costs and stigma associated with means testing, forcing policy makers to balance concerns for equity with concerns for administrative efficiency and political fall-out. In other countries voluntary insurance may be the predominant protection mechanism, but as it only protects those who are able to pay for it, its impact may be limited and it may even exacerbate inequalities in access.

The extent to which protection mechanisms are effective depends on the context, particularly the form and scope of the protection mechanisms involved. Only a few studies have specifically examined this issue. A Canadian study found that a change from a fixed deductible to an income-related deductible was not adequate to protect low-income people [53]. Conversely, the introduction of drug benefit programs in another part of the country did manage to ensure access for low-income groups [68, 69]. Where protection mechanisms target groups of people, individuals who are just above the threshold for exemption from prescription charges may be particularly disadvantaged. Again, few studies have explicitly addressed this question. Most of the relevant research involves US data and shows that individuals who are just above the Medicaid threshold are more likely to be uninsured than higher-income people and may therefore face substantial access barriers.

Policy options

The evidence we have reviewed suggests two main options for policy makers wanting to use prescription drug charges to improve efficiency without lowering equity. First, enable patients to opt for cheaper alternatives such as generic vs. brand-name drugs or drugs that are cost-effective. While the cost savings involved may be limited, these policies have the advantage of contributing to efficiency in health care delivery. Second, introduce mechanisms to protect poorer people and heavy users of prescription drugs. Although research in these areas is limited, we suggest that smarter cost sharing systems would be carefully designed to ensure that protection mechanisms reflect need, are consistently applied, and do not conflict with other health policy goals. For example, voluntary insurance only protects those who can afford it and counteracts efforts to moderate demand, while fine-tuning exemption schemes through greater use of targeting (usually by means testing) may enhance equity at the expense of administrative efficiency. As a result of expanded exemption schemes, the burden of paying for prescription drugs may fall on the working population, who in many cases already make a significant contribution to financing health care. This involves economic and political trade-offs and decisions should reflect an open debate about values and goals. Similarly, while tiered formularies generate some cost savings, they may incur both administrative and political costs, particularly if they aim to promote cost-effectiveness.

Perhaps the smartest strategy would be to target those who research, manufacture, prescribe, and dispense drugs. Improvements in medical technologies (including drugs) leading to wider use are generally acknowledged to be the main driver of health care expenditure [86]. This implies a need for more research on the relationship between prescription drug charges and the diffusion of new technology. It also suggests that, rather than targeting patients through user charges, policy makers should focus on the incentives facing pharmaceutical companies, physicians, and pharmacists. The political economy of health systems may not make this an attractive option, but it is these groups who bear much of the responsibility for making decisions about the availability, use, and cost of prescription drugs.