A Structural Analysis of Physician Agency and Pharmaceutical Demand

Published in under submission, 2019

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This paper estimates the effect of physician agency on physicians’ prescription choices. The data consist of millions of prescriptions for diabetes patients in Taiwan, which is unique because Taiwan adopts a universal healthcare system and allows physicians to both prescribe and dispense drugs. Physician agency was proxied by the average markup of a drug that was recovered from the regulation pricing formula, and it is allowed to be endogenous in the estimation. A structural discrete choice model was applied and accounted for physician heterogeneity in their agency. The results show that physician-owners in private institutions were more likely to prescribe the drugs with higher markups. Empirical results also show that the demand of a drug increases with its markup. Counterfactual analysis shows that the size of agency could be as much as about 10% of the total expenditure, or an amount of $15,394,166.