Affordability of Medicines and Patients' Cost Reduction Behaviors: Empirical Evidence Based on SUR Estimates from Italy and the United Kingdom

Abstract

This chapter presents the econometric methods that are used in health economics to model individuals health care costs. These methods are used for prediction, projection and forecasting, in the context of risk adjustment, resource allocation, technology assessment and policy evaluation. The chapter reviews the literature on the comparative performance of the methods, especially in the context of forecasting individual health care costs, and concludes with an empirical case study.

Full text

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Affordability of medicines and patients cost reduction behaviours:
empirical evidence based on SUR estimates from Italy and the United Kindom

V.Atella, K.Hassell, P. Noyce, E. Schafheutle.



CEIS Tor Vergata - Research Paper Series, Vol. 24, No. 71, April 2005



This paper can be downloaded without charge from the
Social Science Research Network Electronic Paper Collection:
http://papers.ssrn.com/abstract=648009



RESEARCH PAPER SERIES
CEIS TOR VERGATA

Working Paper No. 71 April 2005

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Affordability of medicines and patients’ cost reduction behaviours

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Affordability of medicines and patients’ cost reduction behaviors:
empirical evidence based on SUR estimates
from Italy and the United Kingdom(*)


Vincenzo Atella (a)
Ellen Schafheutle (b)
Peter Noyce (b)
Karen Hassell (b)


Abstract
The aim of the paper is to shed some light on consumers’ attitudes to adopting strategies to contain the
cost of medication. Using micro-data from an ad hoc survey conducted in Italy and the UK, several
hypotheses are tested regarding patients’ decision-making behavior and how it is influenced by health
status, socio-demographic characteristics and the novel concept of a self-rated affordability measure.
Results show that there is a discernable tendency for both UK and Italian patients to use cost reducing
strategies and that these strategies are strongly influenced by income and drug affordability problems.
These are important findings in two countries, where the National Health System (NHS) should
provide health care services that are accessible to all citizens in need, and provide interesting insights
for policy makers in other countries, such as USA, where patients have to pay a large share of their
drugs out-of–pocket.

KEYWORDS:
Health policy reform, health services demand, re-distributive
impact, prescription charge, co-payment.
JEL classification codes: C35, C81,D12, I12.


This version 27 April 2004


(*) This paper stems from research activity conducted as part of a wider research project sponsored by the BIOMED
program (Framework IV) of the European Union, contract number BMH4 – 98 – 3576. A special thank you is due to
Roberto Chiaverini and Giulio Nati who helped organize and run the surveys with patients and physicians. FIMMG,
the Italian federation of general practitioners, provided an invaluable logistic support. We would like to thank staff in
the 21 UK community pharmacies, who assisted with patient recruitment, and all respondents to this survey. The
usual disclaimers apply.
(a) CEIS – SEFEMEQ, Faculty of Economics, University of Rome Tor Vergata, Fax +39 06 2020687, Ph +39 06
72595635, atella@uniroma2.it, Via Columbia 2 - 00133 Roma - Italy.
(b) School of Pharmacy & Pharmaceutical Sciences, University of Manchester, Oxford Road, Manchester M13 9PL

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1. – Introduction
The continuous increase in the cost of health care services recorded over the last
two decades in many countries produced a vast concern among policy makers, who
have been forced to adopt new restrictive measures in order to reduce the public budget
deficits. The European Union (EU) governments have been particularly sensitive to this
issue, given the strict requirements imposed on their budgets by the Maastricht Treaty
signed in 1991. Even though prescription drugs represent only a relatively small part of
healthcare spending in most OECD countries, their increasing trends in both volumes
and prices have been higher than other major components of healthcare spending
(Jacobzone 2000).
A variety of co-payment systems, where patients have to contribute in some way
towards the cost of their medication and health care use, have therefore been introduced
by most countries in order to reduce demand for non-essential drugs and thus manage
drug expenditure. Several empirical contributions1 (mostly from the USA and the UK)
confirm that the demand for prescription drugs is reduced by a direct contribution from
the patient, even though the overall impact of co-payment remains quite limited, with
price elasticity ranging between –0.1 to –0.6. As noted by Freemantle and Bloor (1996),
the key concern with policies on drug reimbursement is that they will, besides reducing
the use of non-essential drugs, also result in a reduction of the use of essential drugs.
Even though the reduction in “discretionary” (or non-essential) drugs has been shown

1 Main studies on the topic include Leibowitz et al (1985), Soumerai et al (1987), O’Brien (1989), Harris
et al (1990), Ryan and Birch (1991), Huttin (1994), Hughes and McGuire (1995), Atella (1999 and
2003), Atella and Rosati (2002).

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to be differentially greater than the reduction in uptake of essential prescribed
medicines (McManus et al 1996), the concern remains that essential medication is
affected.
What we know very little about is in what way the cost of medication (through co-
payment systems) affect individual patients, and how they manage medication cost.
We also know little about certain characteristics that would make certain patients more
likely to reduce drug consumption in certain ways.
The goal of this paper is to explore empirically how and to what extent costs
incurred by patients influence their decision-making behavior to access medicines. An
in-depth analysis of the influence of costs on patient decision-making through an ad
hoc survey to inform descriptive and empirical analysis makes this study novel
compared to previous studies. Besides socio-economic factors and health attributes that
influence patient decision-making, this survey uses several questions and statements
about patients’ ability to afford medication and their use of strategies to reduce
medication costs.
The definition of costs2 given in this study is costs paid for medicines, given that in
both Italy and the UK visits to General Practitioners (GPs) are free of charge3. Costs
associated with medicines would therefore include prescription charges, co-payments
on medicines and the expense for over-the-counter (OTC) products purchased in
pharmacies and other retail outlets.
The paper is organized as follows. Section 2 presents relevant background

2 All costs and nominal values expressed in this paper refer to the period June-November 2000, when the
field study was conducted.
3 In Italy, visits to specialists may incur a relatively high charge (about 35 Euros) for the patient. In the
UK these are free of charge if patients are treated under the NHS.

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information on the prescription charges systems in Italy and the UK. Section 3
describes instrument development and the dataset. Section 4 introduces the theoretical
framework. Section 5 presents the results on patient affordability, and the determinants
and use of cost containment strategies. Section 6 discusses some policy implications for
Italy, the UK and the wider European and international community. Finally, in section
7 conclusions are drawn.

2. – The prescription charge systems in Italy and the UK4
Italy and the UK are countries that provide a good basis for comparison in terms of
their health care and prescription charge systems. The principle of free access based on
need underlies the National Health Services (NHS) in both countries. In the Italian
NHS, the majority of funds are generated through payroll taxes, whereas in the UK the
largest source is general taxation (Ham C 1999).
In terms of prescription charges the two countries are also not dissimilar. The
current UK prescription charge is a fixed, flat fee, payable for each item prescribed,
irrespective of actual drug cost, the amount prescribed, or the type of pharmaceutical
preparation. The Italian prescription charge is rather more complicated. In 1995
products were classified into three reimbursement groups: Class “A” drugs contained
medicines considered “essential”, and the patient had to pay a prescription charge of
ITL 3000 (1.7 Euros), which applied to each single package and was independent of
amount and price. For drugs in class “B” the patient paid 50% of the retail price, and

4 For more detail on the history and current organizations of the health services in Italy and the UK see
Hassell et al 2003.

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for Class “C” 100%. Given the reduced importance of the class “B” category of drugs
(8.2% of total specialties reimbursed by the Italian NHS), the Italian system is not
dissimilar to the UK system. This means that in most cases Italian patients either pay
the full cost of medicines or a fixed charge, just like UK patients. The ITL 3000 (1.7
Euros) flat rate charge for Class "A" drugs in Italy, was considerably lower than the UK
prescription charge, even if the data are adjusted for ‘Purchasing Power Parity’. In
2000, when this survey was conducted, UK patients incurred a prescription charge of
GBP 5.90 (9.80 Euros) per item. This cost is also high in comparison to many other
countries in the EU (Noyce et al 2000).
In both countries a number of exemptions exist. In Italy, disabled persons were fully
exempt from paying any charges on both class “A” (fixed charge) and class “B” drugs.
In the UK, exemptions exist on the basis of age (up to 16 and from 60 years), income
and benefit related reasons, and a number of medical conditions. Approximately 85%
of prescription items are now exempt from charges, covering approximately 50% of the
adult population (Department of Health 2002). Furthermore, pre-payment certificates
(PPC) exist, which can be bought to cover the cost of all prescriptions dispensed during
a subsequent period of four or twelve months5.

3. – The dataset: The methodological issues, questionnaire design and description
of the relevant variables
In order to explore consumer decision-making behaviors in a non-hypothetical

5 The cost of PPCs, at the time of the study, was GBP 31.40 (52.00 Euros) and GBP 86.20 (144.00
Euros) respectively. They make financial sense for people who receive two or more prescription items
per month.

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manner, patients with two distinctly different conditions were targeted: hypertension
and dyspepsia. These provide examples of conditions with very different symptom
profiles, long-term health implications, and treatment options (both for GPs and
patients). Hypertension is an example of a chronic condition with important long-term
morbidity and mortality implications, affecting about 20-22% of the adult population in
both countries (Office for Population Censuses and Surveys 1997). As hypertension is
an asymptomatic condition, i.e. patients do not generally feel ill because of high blood
pressure, yet medication can have side-effects, compliance with antihypertensives is
often problematic (McInnes 1999). Further to this, treatment is generally long-term. In
terms of cost this means that patients will receive regular, sometimes multiple,
prescriptions, thus incurring regular prescription charges.
Dyspepsia is a condition presenting acute symptoms in the upper gastro-intestinal
tract, caused by a range of pathologies (Nathan 1996). The prevalence of dyspepsia is
about 30% (Jones and Lydeard 1989). Besides using prescribed medication, many
patients self-medicate with OTC products, which are available in both Italy and the UK.
In the UK, 75% of dyspepsia sufferers do not consult their General Practitioner (GP)
(Jones and Lydeard 1989).
To inform the design of the survey instrument a series of focus groups were
conducted with physicians (Weiss et al 2001; Hassell et al 2003; Huttin and Andral
2000; Atella 2003) and patients (Schafheutle et al 2002a; Huttin 2003).The
questionnaire was structured into four sections, containing information on the patient’s
general health status and their use of medical services, condition-related questions (not
presented here), questions and statements addressing the patient’s behavior and views

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with respect to medication cost issues, and, finally, information on demographics and
income. Attitude statements explored strategies patients used to cope with medication
cost, and they were grouped into two types: i) those that were patient initiated, and ii)
those where patients used self-medication, with products purchased OTC. Patient
affordability was measured “subjectively”. Some of the questions asking for health
status and socio-demographic characteristics were based on existing large-scale
surveys, such as the ISTAT Multi-purposes survey (Italy 1998); European Community
Household Panel (ECHP); and ‘The Health Survey for England 1999’; ‘the National
Survey of NHS Patients 1998’, ‘Survey of Activity and Health’) (UK).
In Italy, 550 dyspepsia and 600 hypertension questionnaires were distributed to
eligible patients through 51 physicians during July and November 2000. Of these, 122
and 153 questionnaires were returned, which made for a response rate of 22.2% and
25.5% respectively6. In the UK, 296 dyspepsia and 277 hypertension questionnaires
were distributed through 21 community pharmacies, between June and September
2000, targeting dyspepsia sufferers who bought OTC, and dyspepsia and hypertension
patients who had to pay prescription charges or had a PPC. 110 and 134 questionnaires,
respectively, were returned, giving response rates of 37.2% and 48.4%.
The main socio-demographic characteristics of the sample are reported in Table 1.
The majority of respondents in both countries were non-exempt7. In Italy this is due to
the relatively low prevalence of full exemption, whereas in the UK this is because of

6 In this respect it is useful to note that the Italian response rate may be considerably underestimated. In fact, in
several circumstances we have not been able to recollect the undistributed questionnaires from GPs, and in four cases
GPs decided to withdraw from the study after receiving the questionnaires (accounting for 100 questionnaires)
7 We define an exempted patient as a patient with full exemption from any payment towards any
prescribed medicine.

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the sampling, where non-exempt patients were specifically targeted.
It is quite difficult to assess how these figures compare with official Italian and UK
data. In fact, our sample was drawn from limited areas that refer to the cities of Rome
and Manchester and parts of their suburbs. Furthermore, the samples only comprise
people that suffer from either dyspepsia or hypertension and can therefore not be
compared to national statistics such as census data. Of course, this does not imply that
our sample is not representative of the local epidemiological condition, provided we
also take exclusion criteria (such as age related exemption, for example) into account.
[Insert Table 1 about here]

4. – The theoretical framework
The data gathered through the survey allow us to explore several aspect of patients’
behavior. For illustrative purposes the theoretical framework was developed in the form
of a flow chart (Figure 1). This details a summary of the main factors that can be
expected to influence patients’ decision-making with respect to the use of medication.
Some of these relationships (such as income and health) have been widely researched in
previous studies and evidence is available in the published literature. Some other
relationships were identified in the exploratory focus groups performed as part of the
preliminary stages of this project. There is little, if any, published evidence about these,
and our survey questionnaire was developed to address these gaps in knowledge.
Among them is the relationship existing between patient “affordability” and patient
“cost reducing strategies”. Furthermore, as shown in Figure 1, the data obtained from
the survey allow the testing of an even more complex structure of determinants that

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can influence patients’ decision behavior. Here below, the different relationships (as
detailed in Figure 1) will be discussed in more detail, using six hypotheses formed
during method development.

H1. Income level (Y) is one of the main factors influencing patient’s level of
affordability (AF). It is assumed that lower income groups are more likely to have
affordability problems.
This hypothesis is crucial for our study. In our knowledge, the concept of a self-rated
measure of patient affordability is rather new in this kind of analysis. It is then
important to check the relationship between this measure and an indicator such as
income, where income is only likely to be one of several factors that could influence
patient affordability. Conditioning patient affordability on a wider set of variables could
be important for policy reasons. In fact, individual demographic characteristics (age,
sex, education, etc.) could provide more important determinants than income.

H2. Income level (Y) influences patient’s health status. It is assumed that lower
income groups are more likely to have health problems.
There is an extensive literature on the links between income and health8. Many
researchers have also questioned if there is a reverse causation between health and
income (this is why in Figure 1 we have a dashed line with arrows on both ends),
basically that people with bad health status can work less and therefore have a lower

8 - Some of the best known of these include the writings of Alan Williams, Alan Maynard, A.
Donabedian, A. J. Culyer, and Julian LeGrand. See the references in the volume edited by van Doorslaer,
Wagstaff, and Rutten (1993); Wolfe (1994); and the recent Future of Children (1998) volume on child
health and managed care. Also see Blackburn (1991) and Blaxter M (1990).

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income. In this study we take as the main assumption that the causation goes from
income to health and will empirically test it. In order to test this hypothesis, a number
of indicators were used in the questionnaire to measure health status and co-morbidity
of respondents. Three “subjective” health status variables were based on existing and
validated large-scale national surveys (see under 2.1), and two further health status
variables measured the number of acute and chronic conditions, besides dyspepsia or
hypertension.

H3. The level of affordability (AF) influences patients’ health status (HS). It is
assumed that patients with affordability problems have poorer health status.
As already discussed, while there is an extensive literature on the links between income
and health, no similar evidence seems to exist on the relationship between patient
affordability and health status.

H4. The level of affordability (AF) influences cost reducing strategies (CRSs). It is
assumed that patients with affordability problems are higher users of cost reducing
strategies.
Very little is known about if and how medication cost affects patients in how they deal
with their condition and if they do anything to help them cope with medication cost
issues, particularly if they experience affordability problems. This study is unique in
addressing this, and sections 5 and 6 will concentrate on reporting the relevant results
as obtained with this questionnaire survey.

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H5. Income level (Y) influences the use of cost reducing strategies. It is assumed
that lower income groups are higher users of cost reducing strategies.
Even though in H4 we have already discussed the relationship between patient
affordability and patient cost reducing strategy behavior, we believe that it is interesting
to understand what is the direct effect of income level on patient cost reducing strategy
behavior. Nevertheless, we believe that a subjective measure of patient affordability
may constitute a better explanatory variable than income in explaining cost reducing
strategy behavior. In fact, we know that income measures normally include errors due
to under-reporting in surveys, while patient affordability, being a subjective, self-rated
variable, should be more dependable. Furthermore, we believe that our affordability
measure may represent a multidimensional indicator of patients’ economic, financial
and social situations compared to the unidimensionality of income.

H6. Health status (HS) influences the use of cost reducing strategies. It is assumed
that patients with bad health status are higher users of cost reducing strategies.
What is known from the literature is that a poor health status is found to have a positive
effect on demand for hospitalization (Wagstaff 1986; Cameron et al 1988; Windemeijer
and Santos Silva 1997) and on physician visits (Atella et al 2004). No evidence seems
to exist on the relationship between health status and medication cost reducing
strategies adopted by patients.

5. – Patient affordability and cost reduction strategies: some stylized facts
Our self-rated affordability measure showed that quite a large percentage of patients

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have to think about the cost of medicines at least sometimes in both UK and Italy
(70.3% and 66.5% respectively). As many as 24.3% and 16.3% said they always have
to think about how much money they have available to spend when they obtain
medicines. Nearly two-thirds of patients declared a level of household income that is on
or below the average of the income distribution (see Table 2).
[Insert Table 2 about here]
Table 2 describes the proportion of respondents that used the individual strategies to
reduce the cost of medication, which are split into i) those that are initiated by patients,
and ii) those that involve self-medication. The results show that patients with
affordability problems adopt numerous strategies more frequently than those without.
In the UK this phenomenon appears to be more accentuated compared to Italy. These
differences emerge particularly when patients decide not to get their drug(s) dispensed.
According to the results shown in Table 2, the patient-initiated strategy most
commonly used by Italian patients with affordability problems seems to be not to get a
medicine dispensed. In the UK, patients with affordability problems most commonly
delay the dispensing of drugs until they get paid. Other relatively commonly used
strategies among patients with affordability problems were that patients say the cost of
medication prevents them from visiting a GP they reduce the drug dose to save money.
More important findings emerge when looking at the use of self-medication
strategies. Both Italian and UK respondents were cost conscious when choosing
strategies involving OTC products. Patients with affordability problems were more
likely to consider the price of an OTC product before buying it, or they would ask for
something cheaper if they could not afford one OTC product. Nevertheless,

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affordability appears to have a stronger effect on UK than Italian patients.
This may, firstly, be due to the different ways in which Italian and UK patients were
sampled. Italian dyspepsia patients were only sampled through GPs and may therefore
be those more severely affected and/or less likely to be strong users of self-medication.
Secondly and importantly, in Italy OTC products are much more expensive in relation
to the relatively low prescription charge than they are in the UK, where the prescription
charge is high (Noyce et al 2000)9. This may also explain the finding that, independent
of affordability, about half of all Italian patients stated they get a prescription, because
buying an OTC product is too expensive.
In Figures 2 and 3 we report the percentage of patients who adopt a certain number
of patient-initiated and self-medication strategies, by country and income level.
According to this analysis, we see that in both Italy and the UK, patients with a below
average household income use more strategies. Furthermore, in the UK patients
generally use a larger number of strategies than in Italy. This phenomenon is more
accentuated for self-medication strategies.
Based on these evidence we ran an econometric analysis that has allowed to test the
theoretical hypotheses discussed in section 3. The results obtained for Italy and the UK
clearly (see table 3 and 4) confirm the theoretical framework presented in Figure 1 in
almost all its parts, even though significant differences exist between patients’ behavior

9 In the UK, prices for OTC products for dyspepsia vary between approximately 0.60 Euros and 3.50
Euros for small packs of antacids, alginates and peppermint water, and approximately 3.30 to 4.00 Euros
for a small course of H2 antagonists (Chemist and Druggist Monthly Price List August 2000). Italian
prices for the cheapest OTC products range from 4.20 Euros for antacids to 5.90 Euros for H2
antagonists.

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in Italy and UK10.

6. – Discussion
Our econometric model has allowed us to test several hypotheses. As a measure for
respondents’ ability to pay for their medication, referred to as “affordability”
throughout the paper, we have introduced the novel concept of a self-rated measure,
rather than simply relying on proxy measures such as income. In fact, even though our
self-rated affordability measure is linked to income, we have found it to be a stronger
predictor for respondents’ use of cost reduction strategies than income. The fact that the
same survey questionnaire was applied in two European countries, i.e. Italy and the
UK, has allowed us to explore and compare respondents’ adoption of drug cost
containment strategies with an international perspective.
We explored two types of strategies that patients use to cope with medication cost;
i) those they initiated themselves in relation to prescribed medication, and ii) those
involving self-medication with OTC products. The latter adds an innovative dimension,
particularly in terms of the detail explored in this survey. Self-medication can be an
important alternative to prescribed medication, like in the case of dyspepsia, and may
provide an important way of managing cost (Schafheutle et al 2002b).
There is a large tendency for both Italian and UK patients to use medication cost
reduction strategies, and this is strongly influenced by income and cost related
difficulties (i.e. patient affordability problems). Even though important in both

10 The discussion of the full set of results is available in Atella V., Hassell K., Schafheutle E., Noyce P
(2004)