Which preferred providers are really preferred? Evidence of a Discrete Choice experiment

1. Which preferred providers are really preferred?Evidence of a Discrete Choice experiment Lieke BoonenErik Schut Xander Koolman l.boonen@erasmusmc.nl

2. Background Dutch pharmacy market (1) Price regulation gives pharmacies strong incentives to bargain with pharmaceutical firms for discounts on the regulated list prices Until recently, pharmacies had no incentive to charge insurers/consumers less than the regulated list prices, because: • consumers were fully covered for most prescription drugs • consumers had free choice of pharmacy (no selective contracting by health insurers) Result: • huge profits for pharmacies • high drug prices for consumers/insurers

3. Background Dutch pharmacy market (2) Since 2003 some health insurers started with experiments to channel consumers to preferred pharmacies with lower prices Consumers are motivated to visit these preferred pharmacies through the use of positive (financial) incentives. The experiments showed that about 15-25% of all drug users were willing to visit the preferred supplier at least once. With the introduction of the new health insurance system in 2006, health insurers have more incentives (strong price competition) and options to bargain with pharmacies over the price and quality of drugs.

4. Channeling consumers towards preferred pharmacies Health insurers also have more options to channel consumers towards preferred pharmacies. Two methods of channeling: • Ex-Ante channeling : restrictive provider networks • Ex-Post channeling: free choice Ex-ante channeling = cannot use health care outside the network Ex-post channeling = can use health care outside the network but consumers are stimulated to visit preferred providers

5. Focus on ex-post channeling • Ex-ante channeling in the US led to a “managed care backlash”: consumers dislike restrictions in provider choice • Ex-post incentives may be a viable alternative to ex-ante channeling • But: effectiveness of ex-post incentives may be limited due to the presence of a status-quo bias (consumers may be reluctant to leave their current pharmacy) • Little is known about the effectiveness of ex-post consumer channeling

6. Research question Policy question What could be the effects of ex-post channeling on pharmacy choice? Research Questions 1. How sensitive are consumers to different channeling incentives and preferred provider characteristics? 2. Are consumers actually willing to leave their current provider (estimation of the status-quo bias)? 3. What is consumers’ willingness to pay for various attributes? 4. Is the willingness to pay and the willingness to switch dependent on the financial channeling mechanism used (positive or negative)?

7. Method • Limited experience and data about revealed preferences for preferred pharmacies • Therefore: a Discrete Choice Experiment (DCE) was set up • DCE is a method to elicit consumers’ preferences by confronting consumers with hypothetical choice scenarios

8. DCE pharmacy choice • A pharmacy is described in terms of several characteristics, the so-called attributes. • We vary these attributes to construct various different pharmacies • Respondents are asked to choose between two hypothetical pharmacies. • Respondents are also asked to describe their current pharmacy and to choose between the hypothetical pharmacies and their current pharmacy.

9. Pharmacy attributes 1. Availability of an Internet service (2 levels) 2. Extended opening hours (2 levels) 3. Extra service elements (2 levels) 4. Distance from the home address to the pharmacy (4 levels) 5. Distance from the pharmacy to the GP (4 levels) 6. Financial incentive, either positive or negative (4 levels)

10. Design of DCE Used an orthogonal main effects fractional factorial design The design resulted in 32 choice scenarios that are blocked into four sets of 8 choices. Each respondents faced 8 choices between two pharmacies. After each choice respondents were asked to choose between the preferred pharmacy and their current pharmacy to estimate the status-quo bias. We also collected background characteristics of the respondents

11. Example

12. Analysis • The data are analysed using a conditional logit model • Willingness to pay values are computed to estimate how much consumers are willing to pay for various attributes • Three models are estimated: • 1. Models in which one of the pharmacy attributes is a bonus • 2. Models in which one of the pharmacy attributes is a co-payment • 3. Models including the current pharmacy of the respondent

13. WTP: 2 methods I Traditional method: ‘state-of-the-world’ models Marginal Rates of Substitution (MRS) = βi/ βp II Method proposed by Lancsar (2004, HE) ‘multiple alternative models’ Compensating Variation (CV)

14. CV method Hypothetical choice scenarios (forced choice) • * not significant

15. WTP How calculated? • WTP values are based on a price per prescription • Confidence intervals are computed with the bootstrap procedure (percentile based confidence intervals) Main findings • WTP values higher in case of bonus than in case of co-payment: consumers are willing to give up more of their bonus for a higher valued attribute than they are willing to pay for it • WTP calculated by CV method is lower than by MRS method:MRS method yields the upper bound on WTP

16. Status-quo bias: how investigated? • Respondents we asked to define their current pharmacy by specifying the attribute levels of the pharmacy they use most frequently • Next, respondents were asked to choose between hypothetical pharmacies and their current pharmacy • Ex-ante preference (‘loyalty parameter’) for the current pharmacy is measured by estimating an alternative specific constant

17. Status-quo bias: results (based on CV method) ‘Bonus version’: * Respondents are willing to accept a lower bonus of 4.92 euro per prescription to stick with their current pharmacy. * Even when consumers are confronted with a ‘best alternative’ 50% switches from their current pharmacy to the ‘best alternative’. About 20% still sticks with the current alternative. ‘Co-payment version’: * Respondents are willing to pay 4.51 euro per prescription to remain with their current pharmacy * Even when consumers are confronted with a ‘best alternative’ about 40% switches from their current pharmacy to the ‘best alternative’. About 35% sticks with the current alternative.

18. Conclusions • Consumers are sensitive to different ex-post channeling incentives • Bonus less effective channeling device than co-payment • CV method produces lower WTP values than MRS method (upper bound) • Evidence of a substantial status-quo bias: this may limit effectiveness of ex-post channeling in the short run