Assessing the Impact of Drug Use on Hospital Costs

To assess whether outpatient prescription drug utilization produces offsets in the cost of hospitalization for Medicare beneficiaries. The study analyzed a sample (N=3,101) of community-dwelling fee-for-service U.S. Medicare beneficiaries drawn from the 1999 and 2000 Medicare Current Beneficiary Surveys. Using a two-part model specification, we regressed any hospital admission (part 1: probit) and hospital spending by those with one or more admissions (part 2: nonlinear least squares regression) on drug use in a standard model with strong covariate controls and a residual inclusion instrumental variable (IV) model using an exogenous measure of drug coverage as the instrument. The covariate control model predicted that each additional prescription drug used (mean=30) raised hospital spending by $16 (p <.001). The residual inclusion IV model prediction was that each additional prescription fill reduced hospital spending by $104 (p <.001). The findings indicate that drug use is associated with cost offsets in hospitalization among Medicare beneficiaries, once omitted variable bias is corrected using an IV technique appropriate for nonlinear applications.