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Estimates of the price elasticity of demand for prescription drugs are usually in the

range of –0.1 to expenditures, and

  • 0.6.

the

The introduction of multi-tier formularies

demand

for

some

drugs

(e.g.,

those

treating

reduces drug symptomatic

conditions) may be more price elastic than the demand for direct-to-consumer advertising may significantly reduce demand for at least some prescription drugs.

other drugs. However, the price elasticity of

The demand for inpatient services may be less price sensitive than the demand for

outpatient services. However, the evidence suggests that inpatient

are complementary to, not substitutes for, inpatient care is consistent with greater use of

one another. outpatient care.

That

and is,

outpatient care greater use of

  • The limited evidence on price elasticity of demand for mental health care, dental services, and long-term care services suggests the demand for these services among insured consumers may be more price elastic than the demand for other types of care.

Estimates of the income elasticity of demand for health care services based on observational

studies consistently range from 0.0 to 0.2, suggesting that consumers do not use more health care as their income rises. However, some studies that have estimated income elasticity by using time-series or aggregated state- or country-level data have produced higher estimates of income

elasticity—in the range of 0.2 to 1.5.

METHODOLOGICAL CHALLENGES

At least four methodological challenges are common in estimating the elasticity of demand for health insurance or health care services:

  • Price cannot be observed among consumers who do not purchase insurance or do not use health care services, and may be systematically higher for such consumers.

  • It is difficult to avoid an endogenous price variable. That is, price may reflect factors that are correlated with demand, and it is difficult to specify a model that adequately controls for these factors in estimating the elasticity of demand.

  • The inability to observe some determinants of demand results in underspecified models and probably biased estimates of demand.

  • Models of demand typically do not account for provider-induced or other supply-side behavior changes that may alter demand.

GAPS IN THE LITERATURE

A number of gaps in the literature with respect to estimating or applying elasticity estimates make it difficult to anticipate the effects of public policy proposals to either expand coverage or improve the efficient use of health care services. Specifically:

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