Association for Public Policy Analysis & Management

Introduction: This paper investigates whether over-the-counter (OTC) and prescription drugs are substitutes or complements by exploiting increased prescription drug coverage brought about by the introduction of Medicare Part D in 2006. This new insurance coverage may have lowered individuals' purchases of OTC medicines through the substitution effect or increased purchases of OTC medicines via the income effect and exposure to physicians’ advice.

Data and Methods: I use the 2004 to 2008 Nielsen Household Consumer Panel, which contains self-reported consumption data from 40,000 households. Variables include household demographics, geographic identifiers (to the zip code level), and product characteristics (to the UPC code level). I apply a quasi-natural experiment design, comparing consumption patterns among the treatment group (households with members over the age of 65) and the control group (households in which all members are below age 65), before and after the introduction of Medicare Part D. I use a household-fixed effects regression model to estimate the effect of Medicaid expansion on Medicare eligibles’ monthly purchases of a comprehensive set of over-the-counter medicines.

Results: I find that the introduction of Medicare Part D led to reductions in Medicare eligibles’ purchases of certain over-the-counter medicines, pain remedies, sleeping aids, diet aids, vitamins. There was no significant change in purchases of most other products, including cough/cold medicines, oral hygiene, eye care, and first aid.

Conclusions: Medicare eligibles' reduced their purchases of certain OTC medicines in response to the introduction of Medicare Part D, suggesting that certain prescription drugs may have OTC substitutes. This finding has important policy implications. To the extent that the demand for OTC products falls in response to prescription drug coverage, the OTC market would become less desirable for drug companies, leading to a potential loss in OTC competition.

Relevance to Conference Theme: This paper contributes to the conference theme “Measurement Matters: Better Data for Better Decisions” by utilizing the Nielsen Household Consumer Panel, a dataset that has powerful applications in public policy but is not yet commonly used in the field.