Monday, August 3, 2009

Prescription drug coverage in Denmark

When I was at a conference in Copenhagen last month, I got to this this paper, which makes use of kinks in the reimbursement schedule of the Danish prescription drug insurance scheme to get a handle on the price elasticity of drugs.

What really struck me was not the analysis (which is very nice) but the system itself, and how starkly it contrasts with the system produced by congress and Bush II. The Danish system has the following features:

(1) a step function subsidy that starts at zero and ends at 100 percent for a very high level of annual drug expenditures.

(2) when there is a generic, the subsidy only applies to the price of the generic, though individuals can pay out of their own pocket to get the branded drug

(3) there is no coverage of recreational drugs such as Viagra

The one oddness to the system, which is not really completely avoidable, is that the expenditure total that determines the subsidy amount cumulates over calendar years, so that there is an incentive to concentrate drug expenditures in every other year by buying stocks where possible, so as to maximize the subsidy received under the non-linear schedule.

I am also not sure exactly how the system determines whether or not to cover certain drugs. I expect there is some sort of expert agency that does this, which is not ideal but likely better than having politicians directly involved.

The US system (called Medicare Part D), though its political motivation was news stories about old people eating pet food because their prescription drugs were so costly, includes first dollar coverage, which then disappears over a certain range of expenditures - the famous donut hole.

First dollar coverage makes no sense from any sort of economic standpoint or even from any sort of equity standpoint. It is pure and simple vote-buying. One way to reduce the deficit or to afford universal coverage (or a convex combination of the two) would be to reform Medicare Part D by making it look like the Danish system. Even a proposal along these lines would show some seriousness on the fiscal side and a willingness to taken on the narrow self-interest of a powerful constituency.

Change you could believe in, anyone?