Piling Pills? Forward-looking Behavior and Stockpiling of Prescription Drugs

This paper uses register-based, individual level information about the universe of Danish prescription drug purchases from 1998-2010 to provide evidence of forward-looking behavior in demand for prescription drugs. We exploit that the consumer of prescription drugs faces a non-linear pricing scheme where subsidies increase as expenditures accumulates but that the account is reset exactly 12 months after the first purchase. This generates a discrete upwards jump in the price of drugs between the last day of the current subsidy year and the first day of the next. We see that consumers react to this future increase in spot price by stockpiling towards the end of the subsidy year. We find considerable heterogeneity in the degree of stockpiling: individuals who face more predictable future demand stockpile more, and particularly so if they have higher levels of education. We also find evidence of learning in the sense that more experience with the subsidy scheme increases stockpiling. We extend the model of Keeler, Newhouse & Phelps (1977) to a multiple accounting period model to calculate the actual benefits of the observed behavior. We find a substantial effect in terms of response given the actual limited benefits of stockpiling. This is either because (i) consumers respond to the true effective marginal price with a high elasticity or that (ii) they respond to the observed change in spot prices and confuse this with a benefit to stockpile.