to control for adverse selection and estimated a price elasticity of demand of –1.01 for number of
prescriptions filled and –0.69 for total drug expenditures.17
An important methodological issue unique to estimating the price elasticity of demand for
prescription drugs is the prevalence of direct-to-consumer advertising and marketing. At least
two recent studies suggest that failure to control for marketing intensity may produce biased
estimates of price elasticity. Comparing drug sales before and after the relaxation of restrictions
on direct-to-consumer marketing in 1997, Ling et al. (2002) examined the effect of marketing
intensity and order of entry on the market share of anti-ulcer and heartburn medications. They
found direct-to-consumer marketing had a significant impact on market share, and even had a
spillover effect to other drugs by the same manufacturer. Ridley (2004) confirmed this effect.
Estimating the demand for prescription drugs as a function of copayments, drug prices, and drug
marketing expenditures, he found that copayments explained the demand for prescription drugs
more accurately than prices, and that failing to control for the effect of promotional spending
biased the copayment elasticity downward by nearly 50 percent.
C. ACUTE CARE
A number of studies have measured consumers’ price responsiveness with respect to use of
acute care, such as inpatient hospital care (including emergency department services), physician
services, dental services, and mental health services. Collectively, they suggest that the price
elasticity of demand varies with the urgency of the care being sought, but the variation is less
17 Grootendorst et al. (1997) is the only other study we found that examined prescription drug use among the elderly population, though in Canada. The authors examined drug expenditures before and after a Canadian drug subsidy program introduced reference pricing, which limited reimbursement for non-preferred drugs. They found that expenditures for prescription drugs dropped by about half, mostly due to substitution of low-cost drugs for more costly alternatives.