Conceptual Income Measurements and Determinants of U.S. Prescription Drug Expenditures: A Quantity-Quality Analysis

U.S. prescription expenditures (RxEXP), except momentarily in 2012, have grown rapidly from improved insurance coverage, Medicare Part D and medicinal intervention paradigm shifts. This innovative study decomposes income elasticity of RxEXP into quality and quantity aspects, using 2002-2011 annual panel data of the 50 US states. GDP per capita and median household housing values (permanent income) are used in empirical econometric modeling to test whether, how and to what extent the conceptual income measures affect income elasticity estimates. Our empirical strategy used lagged real per capita GDP and median home values to estimate short and long-run income elasticities, and reduce potential simultaneity and endogeneity. The Seemingly Unrelated Regressions (SUR) results show that the: (a) 0.633 short-run income elasticity comprises 0.447 and 0.186 quantity and quality aspects; (b) estimated long-run income elasticity of 0.214 comprises 0.044 and 0.170 quantity and quality components; (c) Medicare Part D increased the quantity of prescription drugs consumed during this period, but not total U.S. expenditures on pharmaceuticals. Prescriptions are necessities and a normal good with long run consumption shift towards quality. These novel findings are unique and timely for crafting future RxEXP cost control policies given current economic and health system design shifts.