Research

The Impact of Drug Profit Margins on Medical Providers, Patients, and the Government

This paper examines hospital--patient agency issue in the context of Taiwan's prescription drug market, in which hospitals receive profit by both prescribing and dispensing drugs. Using Taiwanese claim-based, outpatient-visit data and proprietary market survey data from 2013 to 2018, I identify an empirically important dimension of variation in drug profit margins in how much hospitals profit by prescribing the same drug, accounting for more than 50% of total variation. In particular, I find that private hospitals and those with large order volumes enjoy higher profit margins for a given drug, and the relationship is more pronounced among drugs with weaker market positions. I use the average reimbursement price of each drug as an instrument, and use 2SLS to demonstrate that a 10 percentage point increase in the drug profit margin is associated with a 1-3 percent increase in drug demand, suggesting a hospital's agency problem. I then show a significant increase in drug expenditures paid by the government and number of drugs dispensed to patients, but with no significant change to copayments paid by patients. These findings provide evidence of over-prescription of high-margin drugs and substantial impact on Taiwan's drug spending under current regulation.