Are HMO physicians more price sensitive in prescribing brand-name drugs?

Purpose - The purpose of this paper is to estimate whether health maintenance organizations (HMO) physicians are more price sensitive than non-HMO physicians in their prescribing behavior of brand-name substitutes. Design/methodology/approach - The study uses physician level data and a set of 13 drugs for the years 1997-2000 to estimate the price sensitivity of HMO and non-HMO physicians. A two-part model is used to measure the price elasticity of brand-name prescribing for HMO physicians. The first part uses a logit model to examine the physician's choice to prescribe the same drug to all patients with the same medical condition, or whether physicians alternate prescriptions among brand-name substitutes. The second part employs OLS to estimate the influence of managed care, i.e. HMOs, on physician price sensitivity. Findings - The results suggest that HMO physicians are less likely than non-HMO physicians to prescribe a common drug to all patients with a specific medical condition, but rather HMO physicians exhibit more diversified prescribing behavior. Correspondingly, HMO physicians are more price sensitive in prescribing brand-name substitutes, than non-HMO physicians, exhibiting price elasticities of prescribing ranging from -1.707 to -1.823. The analysis suggests that HMOs have a modest influence on encouraging physicians to be more price sensitive in their prescribing of brand-name substitutes. HMO physicians are more price sensitive in their prescribing behavior than non-HMO physicians. Originality/value - This paper provides insight into the effectiveness of HMOs in altering physician prescribing behavior and price sensitivity of pharmaceutical prices. The results provide suggestions on how HMOs can improve the cost-effectiveness of physician prescribing behavior.