20 July 2018 - Empirical estimates of price elasticities of demand for pharmaceuticals suggest that they are relatively price inelastic. 

However, in many settings, a medication and its substitutes and complements face simultaneous differential changes in prices that affect the observed “composite” price elasticities of demand (PED). We exploit an implementation of a value‐based formulary (VBF) that utilised drug‐specific incremental cost‐effectiveness ratios to inform drug copayments, resulting in increases in copayments for some medications and decreases in copayments for others. 

We first show theoretically that by changing the price of a medication and its substitute in opposite directions, VBF designs can leverage cross‐price effects to increase the range of composite PEDs. We then empirically estimate PED and welfare effects using a consumer surplus approach.

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