The pharmaceutical market co-payment levels and welfare loss

If an upper limit is imposed on the amount to be paid by the user, the effect is similar. If the limit does not exceed the amount spent by the patient, given the price of the medicine and the co-payment rate, it is as if no limit had been imposed the effective co-payment rate is the nominal rate (c). In the opposite case, patients jump to consuming the quantity 0max, as if they were totally insured, without co-payment. In this case too, the contribution made by each party to foot the bill is affected. 

In the 1970s and 1980s in the USA, the need for health cost containment and the alarming empirical estimates on the extent of moral hazard advised an increase in the co-payment rate for health services. Thus, Feldstein5 estimated that if the co-insurance rate were raised from 33 per cent to 67 per cent, the costs incurred due to welfare loss would fall much more than the benefits derived from reducing the risk. Subsequently, Feldman and Dowd,6 using data from the Rand experiment in the 1980s, reached similar conclusions. 

The phenomenon of moral hazard, and the consequent welfare loss, occurs when the demand of the insured party shows price elasticity, and the greater the elasticity the greater the moral hazard. Recall that the price elasticity of demand is defined as follows  

Clearly, if the co-payment rate (c) is proportional to the price CP), the elasticity of demand with respect to the price paid (P = c P) coincides with the elasticity with respect to the co-payment rate c  

Furthermore, the price elasticities of demand for pharmaceuticals are likely to differ depending on individuals income. If low-income households have a more price-elastic demand, an increase in co-payment will cause them to make a proportionally larger reduction in their pharmaceutical consumption than high-income households. The same thing could happen if we make the comparison in terms of levels of health. We are faced with equity problems, to which we will return below. 

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Figure 7.2 The pharmaceutical market co-payment levels and welfare loss...

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