a cost-benefit analysis of pseudoephedrine

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A Cost-Benefit Analysis of Pseudoephedrine DRUG POLICY IN INDIANA

by Srikant Devaraj, Michael Hicks, and Karthik Balaji

Center for Business and Economic Research Ball State University, Muncie, Indiana

March 11, 2015

© 2015. Center for Business and Economic Research. Ball State University.

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Table of ContentsExecutive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iiiIntroduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Methamphetamine and Its Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Recent Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Trend in the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Trend in Indiana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Cost-Benefit Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Effects of PSE Prescription-Only Policy on Medicaid Spending in Indiana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Simulation Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Insurance Coverage in Indiana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Symptoms Used in the Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Allergy and Sinus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Viral Respiratory Tract Infection (VRTI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Cost Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Cost to Indiana State Government in Lost Sales Tax Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Cost to Households Through Physician Office Visits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Cost to Employers Through Productivity Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

References and Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11About the Authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12This report was produced for Consumer Healthcare Products Association • 1625 I Street, NW, Suite 600, Washington, DC 20006 • ph 202-429-9260 • www.chpa.org

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Executive Summary Pseudoephedrine (PSE) is an ingredient commonly found in over-the-counter cold, cough,

allergy, and sinusitis relief medicines. However, PSE is also used as a precursor in the produc-tion of the illegal drug methamphetamine (commonly known as meth or crystal meth). As a consequence of this, many states have implemented different laws to counter the illicit use of PSE. These policies have led to research on the geographic distribution of meth production fol-lowing the law changes (Weisheit and Wells, 2011; Rhoades, 2014). Some states have tightened restrictions on PSE. For example, Oregon (in 2006) and Mississippi (in 2010) implemented an over-the-counter (OTC) to prescription-only policy of products containing PSE. These state-level policy differences create an experiment by which we can evaluate the efficacy of the more restrictive policies. To date, research on these OTC restrictions find little to no effect on meth use in Oregon (Stomberg and Sharma, 2012). To date, little research has focused on the fiscal and health care-related costs associated with restricting OTC medications in the state of Indiana.

The objective of this study is to estimate the impact of such law on these issues, including Medicaid spending, cost to households, loss in sales tax revenues to the state government, and productivity loss to the employers in Indiana using both models of historical data and simulation models of proposed changes. Our findings are isolated to two key areas.

PSE Prescription-Only Policy Impact on Medicaid Spending • We estimate a 24.4 percent increase in respiratory drug claims per Medicaid enrollee as a result

of this law.• We also find a $5.8 million (or 28.1 percent) increase in respiratory drug payments to each

Medicaid enrollee due to this law.• In terms of sub-classes of respiratory drugs, we find a 106 percent increase in antihistamine

drug payments, 47.8 percent increase in cough/cold/allergy drug payments and 54.4 percent increase in nasal agent drug payments to each Medicaid enrollees.

• Indiana will have to spend additional $1.8 million annually for Medicaid spending if it were to implement the OTC to prescription-only policy of PSE drugs.

Simulation Study of Households on Sales Tax, Out-of-Pocket Expenses, and Productivity • Cost to the state government in lost sales tax revenues is expected to be in the range of

$900,000 to $1.3 million per year. • Cost to households from out of pocket expenses (include amount co-paid for physician visit,

and transportation expenses) is projected to be in the range of $15.9 million to $61.2 million per year.

• Cost to uninsured individuals from increases in price of prescription drugs is expected to be in the range of $170,000 to $651,000 per year.

• Costs to employers due to lost productivity are estimated to be in the range of $9.5 million to $27.3 million per year on average.

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Introduction Pseudoephedrine (PSE) is a common ingredient found in over-the-

counter (OTC) cold, cough, allergy and sinus medicines to relieve congestion and other common symptoms. This ingredient is also misused for the illegal production of methamphetamine (meth or crystal meth). In addition to federal law mandating record keeping and gram limits on retail sales, several states have implemented laws that control the use of drugs containing PSE. Oregon was the first state to implement an OTC to prescription-only policy for products containing PSE in the year 2006. Mississippi followed this policy in 2010. This law requires the households to obtain a prescription (Rx) from a doctor’s office to obtain PSE drugs for cold, flu, or allergy symptoms when they otherwise would have purchased it over-the-counter. While there may be perceived advantages of passing the law in terms of a reduction in meth use and lab incidents, there are associated potential costs to state government, households, and employers.

We will estimate the economic impact of this law on residents and employers of Indiana and to the state government. Specifically, this paper presents a partial cost-benefit analysis of the implementation of Rx-only law for PSE drugs in Indiana on Medicaid claims, personal health care costs, sales taxes, and lost productivity using econometric and simulation methods.

This paper begins with background information, followed by Medic-aid spending impact, and a simulation study. We end with a discussion and final conclusion.

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Background Methamphetamine and Its Effects

Methamphetamine (commonly known as meth or crystal meth) is an extremely addictive stimulant drug. It has a very limited use as a prescription drug—mainly used in low doses to treat Attention Deficit Hyperactivity Disorder (ADHD). Because of the high potential for abuse, methamphetamine is classified as a Schedule II drug and is legally only available through a prescription that cannot be refilled.

The impact of meth abuse on an individual is extensive. One may experience anxiety, confusion, insomnia, mood disturbances, and violent misbehavior. Even small amounts can result in increased wake-fulness, increased physical activity, decreased appetite, increased respira-tion, rapid heart rate, irregular heartbeat, increased blood pressure, and increased body temperature (NIDA, 2014)

Recent Trends Trend in the United States

According to estimates by the Drug Enforcement Administration (DEA), 90 percent of the meth available in the U.S. is imported. Meth trafficking from Mexico has increased by roughly 200 percent over the past five years. Additionally, recent data (Figure 1) show a decrease in domestic lab incidents from 23,829 in 2004 to 6,858 in 2007—a 71 percent decrease.(1)

This change could be attributed to the federal enactment of the Com-bat Methamphetamine Epidemic Act (CMEA) under the USA Patriot Improvement and Reauthorization Act of 2005. The law set restrictions on the sale of PSE products, among other measures—requiring that they be sold behind the pharmacy counter and that purchasers display photo identification and sign a logbook.

However, there was a slight increase in meth lab incidents between 2005 and 2010, possibly due to the emergence of a crude meth produc-tion method known as the “one-pot method” (Davidson et al, 2012). By 2012, there were 11,210 incidents reported—a 16 percent decrease from the previous year.

A study by Cunningham et al (2012) examined the effects of OTC to Rx-only law on meth clandestine laboratory seizures and found mixed results. They found no effect of lab seizures in Oregon due to the switch, but they found declining effects in Mississippi. However, the results should be treated with caution because the authors’ method did not identify and disentangle the source of effects and also did not control for observable confounders that are associated with the change in lab seizures during the study period. This is evident from the trend graphs in Cunningham et al. (2012, pp 59-60), where, six months prior to Rx-only law enaction in July 2010, Mississippi experienced a sharp increase

followed by a sudden decline in lab seizures. Further, the lab seizures had risen after the passage of law in Mississippi.

Trend in Indiana In 2011, Indiana became the 11th state in the U.S. to implement the

use of the National Precursor Log Exchange (NPLEx) electronic track-ing system. This technology automatically blocks unlawful PSE sales and provides law enforcement officials with real-time information on sales. In one month’s time after NPLEx was brought online, the sale of more than 11,000 boxes of medicine (a total of 26,000 grams) containing PSE

1. See http://www.justice.gov/dea/resource-center/meth-lab-maps.shtml.

Figure 1: Number of Meth Lab Incidents in the United States

Figure 2: Number of Meth Lab Incidents in Indiana

Source: Drug Enforcement Administration, 2012

Source: Drug Enforcement Administration, 2012

0

250

500

750

1,000

1,250

1,500

201220112010200920082007200620052004

0

5,000

10,000

15,000

20,000

25,000

201220112010200920082007200620052004

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Effects of PSE Prescription-Only Policy on Medicaid Spending in Indiana

Using the Medicaid claims and payment data on respiratory drugs, we estimate the impact of OTC to prescription-only policy of drugs containing PSE using difference-in-difference estimation. We use Med-icaid Statistical Information System (MSIS) Drug Utilization Datamart published by Center for Medicare and Medicaid Services (CMS) to construct the drug payments and claim counts for each drug class by state from fiscal year 2004 through 2010. We use respiratory drug and its sub-class for analysis as PSE is contained predominantly in those drug classes. We find that such a policy increases the respiratory drug claims by Medicaid enrollees by 24.4 percent and respiratory drug payments to each Medicaid enrollees by $5.82 (a 28.1 percent increase). Among the sub-classes of respiratory drugs, we find that the policy would increase payments to each Medicaid enrollee by 47.8 percent for cough/cold/allergy drugs, 54.4 percent for nasal agent drugs, and 106.0 percent increase in antihistamine drugs. For detailed methodology and results, please see Appendix A of this document.

According to Current Population Survey (CPS), Indiana had an esti-mated 0.93 million Medicaid enrollees in 2014.(2) In terms of Medicaid reimbursements, the OTC to Rx-only policy would have increased $5.41 million (i.e., $5.82 x 0.93 million Medicaid enrollees). An increase in PSE drug price as a result of the policy (Avalere, 2014) may also have contributed to this increase in reimbursements. Because the Medicaid program is jointly funded by federal and state government based on Federal Medical Assistance Percentage (FMAP), this increase of $5.41 million from respiratory drug claims is also being shared by federal and state government. According to the Kaiser Family Foundation, in fiscal year 2012, Indiana’s FMAP share of Medicaid spending is 33 percent. Therefore, Indiana will have to spend additional $1.79 million annually if it were to implement the OTC to prescription-only policy of PSE drugs.

2. The 2014 estimates were derived from CPS 2012.

were blocked, and, in a span of six months, NPLEx blocked the sale of more than 17,000 boxes of PSE medicines from being sold illegally and kept 38,000 grams off the street in the Hoosier state (NADDI, 2011).

In 2013, Indiana led the country with 1,808 meth lab incidents, followed by Tennessee (1,500), Missouri (1,400) and Ohio (1,010). The top five counties for meth in Indiana in 2013 were Vanderburgh (115), Delaware (109), Noble (66), Allen (64) and Elkhart (63). Prior to 2013, Indiana had reported a comparatively fewer number of meth lab incidents. The number of incidents dropped from 1,488 in 2005 to 800 in 2006, a 46 percent decrease (Figure 2). However, this trend did not seem to continue when the number of meth lab incidents started increasing from 1,328 in 2009 to 1,429 in 2012.

Cost Benefit Analysis In order to evaluate whether or not restrictions on the sale of PSE

through OTC is effective in a cost-benefit setting, we would need to fully examine the effectiveness of the restrictions on illicit drug use and enforcement costs. These are the benefits of the regulation. We would also want to know what the costs of the legislation would be in terms of increasing costs to medical providers, patients and taxpayers. We have not independently evaluated the impact of OTC restrictions on meth use because Stomberg and Sharma (2012) concluded there was no reduction in meth use in Oregon following the state’s passage of pre-scription law. This should be unsurprising because 90 percent of meth is imported from Mexico (DEA). We assessed the evaluation as sufficiently

current and appropriate to assume away short-term impacts of this legislation. We instead focus on the fiscal effects (cost to Medicaid), household effects (extra health care costs and lost earnings) and busi-ness effects (lost productivity). As such, this is a partial analysis of the benefits and costs of further PSE restrictions on OTC sales in Indiana.

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Simulation Study Insurance Coverage in Indiana

The data for each health insurance type in Indiana was obtained from the United States Census Bureau’s Current Population Survey (CPS) for 2012. We then estimate the 2014 population by each insurance type by applying the weights from CPS 2012. With a projected of 6.6 million residents in Indiana in the year 2014, we estimate 931,812 (14 percent of the total Indiana population) are covered under Medicaid, 1 million population (15 percent of total) are covered under Medicare, 3.9 million (59 percent population) have private/employee sponsored health cover-age and 779,068 (12 percent of population) have no health insurance. Figure 3 shows the distribution of insurance coverage in Indiana.

Symptoms Used in the Study Allergy and Sinus

More PSE medicines are used in allergy and sinus treatments. Schaf-fer et al. (2012) estimate 20 percent population experiencing allergic rhinitis related symptoms each year and the average number of allergy episodes is two for adults and between six and eight for infants/young children. For the simulation analysis we use 20 percent of Indiana popu-lation to experience allergic rhinitis at an average four episodes per year. We also assume that 69.1 percent people-episodes rely on OTC medi-cines for treatment (Fendrick et al, 2003). According to IRI sales data, 9.6 percent of allergic rhinitis OTC medicines contain PSE (Table 1).

An estimated 14 percent of population experience sinusitis in a year (Pleis and Lethbridge-Çejku, 2007). The average number of sinusitis episodes is between two and four per year (Tewfik and Meyers, 2014). For our simulation analysis, we assume 14 percent of Indiana popula-tion experiencing sinus thrice a year. According to IRI sales data, 37.7 percent of sinusitis OTC medicines contain PSE.

Viral Respiratory Tract Infection (VRTI) Respiratory Tract Infections are a common cause of illness, infection

of the sinuses, throat, airways or lungs. The most widespread respira-tory tract illness among people is the common cold. According to a U.S. primary care practicing physician survey, 62 percent of respondents recommended an OTC product as first response treatment to relive the patients’ symptoms for ailments such as cold, headache, fever, and upset stomach (CHPA, 2010). In the US, an estimated 72.3 percent of the population will experience at least one episode of non-influenza related Viral Respiratory Tract Infections (VRTI) in any given year (Fendrick et al, 2003). The average number of episodes of non-influenza VRTI is per year is 2.48. It is estimated that 69.1 percent of people will rely on OTC medicine to treat their own and their children’s symptoms.

In our simulation study, we use non-flu VRTI episodes on Indiana population to estimate the cost impact of OTC to Rx-only policy on

Table 1: Number of Projected Yearly Allergy and Sinusitis Episodes in Indiana

Type of Insurance

Allergy Pop.

@20% w/ 4 Episodes per Person

Sinusitis Pop.

@14% w/ 3 Episodes per Person

Allergy Pop.

Episodes w/ OTC

Use @69.1%

Sinusitis Pop.

Episodes w/ OTC

Use @69.1%

Allergy + Sinusitis

Pop. Episodes w/ OTC Use w/

PSE

Total 5,287,753 2,776,071 3,653,838 1,918,265 1,072,666

Medicaid 745,450 391,361 515,106 355,938 183,449

Medicare 809,496 424,986 559,362 386,519 199,210

Private 3,109,553 1,632,515 2,148,701 1,484,752 765,234

Uninsured 623,254 327,208 430,669 297,592 153,377

Source: Author calculations

Table 2: Number of Projected Yearly Non-Flu Viral Respiratory Tract Infection Episodes in Indiana

Type of Insurance

# Pop. w/ Non-

Influenza Related VRTI

@ 72.3%

Total # of Episodes w/ 2.48

Episodes per Person

# Pop. w/ Episodes

Relying on OTC Use @

69.1%

# of VRTI Episodes

Replying on OTC Use w/ PSE @ 1%

Total 4,778,807 11,851,442 8,189,346 81,893

Medicaid 673,700 1,670,776 1,154,507 11,545

Medicare 731,582 1,814,324 1,253,698 12,537

Private 2,810,259 6,969,441 4,815,884 48,159

Uninsured 563,266 1,396,900 965,258 9,653


Figure 3: Share of Insured and Uninsured Population in Indiana, 2014

Source: Current Population Survey, U.S. Bureau of the Census

Uninsured12%

Medicaid14%

Medicare15%

Private59%

Indiana2014

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various stake holders. With a 72.3 percent incidence rate of non-flu VRTI in Indiana, 4.8 million of the residents will experience non-influ-enza VRTI episodes per year and yielding 11.9 million episodes annually at 2.48 episodes per person (Table 2). The table also shows that there are about 5.2 million episodes relying on OTC medicines in Indiana assuming that 69.1 percent rely on OTC medicine (Fendrick et al 2003). Further, according to IRI sales data, only 1 percent of OTC medicines for upper respiratory infections sold are PSE-based.

Cost Analysis In this section we specifically estimate the impact of OTC to Prescrip-

tion-only policy on the lost sales tax revenues, costs to households in the form of out-of-pocket expenses of physician visits, and costs to employ-ers through productivity declines.

Cost to Indiana State Government in Lost Sales Tax Revenues

Prescription-only medicines are subjected to tax exemption in Indi-ana, therefore if the OTC to prescription-only policy were in place, the sales tax revenues on PSE drugs would have to be foregone. To estimate the revenues, we assume the cost of a generic PSE drug to be $11.41 (from Fendrick et al 2003 and then adjusted for 2014 inflation). Also, Avalare (2014) estimate an increase in OTC PSE drug cost of 35 percent due to the OTC to prescription-only policy. Therefore, we use the resul-tant OTC PSE drug price of $15.4 to estimate the minimum tax revenue lost due to policy.

Avalere (2014) using Oregon and Mississippi historical data show that if the non-prescription PSE went away, there will not be full substi-tution of OTC population to prescription drugs. They estimate around 26 percent switch of OTC users going to the prescription (Rx) route if OTC PSE was not available. This means that out of 1.15 million total episodes of allergy, sinus and VRTI, around 300,186 episodes switch to prescription-only. The remaining 854,374 episodes are distributed into two plausible ways: a.) some people go out of state to procure PSE drugs as OTC; b.) some people substitute PSE with non-PSE OTC drugs.

These cases also contribute to losses in state sales tax revenue. Accord-ing to IRI sales data, the price of non-PSE OTC drugs is $4.09 less than PSE OTC drugs. We then simulate the non-switching episodes of 74 percent with different weights on the above mentioned two cases and estimate a range of tax revenues lost. We also simulate various switching percentages to find the range of lost tax revenues values.

With the 26 percent switching assumption, the number of popula-tion episodes who would be directly relying on prescription-only as a result of policy would be 300,186 episodes. Further, from the remain-ing 854,374 episodes, we first assume 50 percent to go out-of-state to purchase OTC PSE drugs and other 50 percent to obtain non-PSE substitute drugs from OTC. Using the sales tax rate of 7 percent, we then estimate that Indiana government is expected to lose about $906,000 annually in sales tax that otherwise would have gained from the sale of OTC medicines. Similarly, when the assume 100 percent switching assumption, we estimate the lost sales tax revenue to the state

government to be $1.25 million per year. Refer to Table 3 for the esti-mated results with various simulation cases.

Cost to Households Through Physician Office Visits Under a prescription-only model, households are the most impacted.

Any additional laws would have a direct and indirect impact on the households in the form of transportation costs, out-of-pocket physician cost and out-of-pocket expenses for the increased price of medicine.

We assume that the average distance traveled for a round trip for each physician visit is between 7.7 miles and 18.4 miles (Unal et al, 2007). The weighted average distance of rural and urban physician visits was estimated to be 10.6 miles for each visit. We assumed that a vehicle on an average gives 20 mpg and according to CNN Money that the average gas price in Indiana in 2014 is $3.51 per gallon. From these assumptions, we estimate an Indiana resident to spend a minimum of $1.86 for each physician visit in transportation costs.

While Medicaid recipients do not have to pay a co-pay, Medicare and private/employee sponsored programs have co-pays of 20 percent and 22 percent respectively. According to Agency for Healthcare Research and Quality’s Medical Expenditure Survey in 2009, the average expenses per office-based physician visit to primary care specialists in Midwest was found to be $152.5 (Davis and Carper, 2009). The transportation and out-of-pocket costs were then estimated for each payer types. With simulated switching share of 26 percent to 100 percent from OTC to prescription-only route, we find that the out-of-pocket expenses to households were in the range of $16 million to $61 million, after provisioning for both trans-portation cost per trip and amount co-paid for each visit to the physician. Table 4 shows the costs to households by payer types.

Table 3: Estimated Loss to State Government in Sales Taxes

Case #

Case Description

Sales Tax Lost from Rx Switch,

$M

Sales Tax Lost out of State,

$M

Sales Tax Lost on

Substitute Non-PSE

Drugs, $M

Total Sales Tax Lost, $M

1Switch = 26%; Out-of-state = 50%; Substitute = 50%

$0.32 $0.43 $0.43 $0.91


$0.32 $0.64 $0.21 $1.08


$0.62 $0.29 $0.29 $1.02


$0.62 $0.43 $0.14 $1.13


$0.93 $0.14 $0.14 $1.13


$0.93 $0.22 $0.07 $1.19


$1.25 - - $1.25


6

Besides having a significant financial impact on the insured, the transition to a prescription-only legislation affects uninsured population through increase in the price (a 35 percent increase) of PSE-containing medication (Avalere, 2014). In our analysis, the price of PSE drug increases by $4 per unit as a result of this policy. Because insurance absorbs this price increase, the insurers may pass it back to consumers through increased future premiums. Apart from the expenses for each physician visit, depending on the switching share of 26 percent to 100 percent of OTC to prescription-only policy, the price increase in the PSE medicines will create an additional burden in the range of $170,000 to $651,000 annually to households with no health insurance. See Table 5.

Cost to Employers Through Productivity Loss Consumers who rely on PSE-containing medication to relieve any

respiratory infections will have reduced access to the medicines under a prescription-only model. Many would potentially have to miss work in order to receive a prescription at a doctor’s office. Based on 2014 Indiana data from the U.S. Bureau of Labor Statistics, we estimate that 45.78 percent of the state’s population is employed. We apply the same percentage of state’s population irrespective of the insurance type. From our assumption of 26 percent switching share, we estimate an average of 165,000 employee episodes of non-influenza related VRTI, allergy and sinus each year. We exclude Medicare population in this analysis as the propensity of not working is higher in this group.

We assume that a typical worker in Medicaid and uninsured earns the state minimum wage of $7.25 per hour and the workers with private insurance earns an average $21.23 per hour (derived from BLS).(3) We also assume that the employee misses about 4 hours of work to visit a physician to get prescriptions for each VRTI/allergy/sinus-related epi-sode. With these assumptions and with 26 percent switching share, we come up with a conservative estimate of $9.5 million per year lost due to productivity. Table 6 shows the simulated results of lost productivity. The actual cost to employers would likely be higher because our estimate doesn’t take into account the missed time from work due to the VRTI/allergy/sinus episodes of dependents.

3. Not all employees receive minimum wage. Employees in private sector would earn much more than the minimum wage.

Table 6: Cost to Employers in Lost Productivity

Type of Insurance

w/ 26% Switch w/ 100% Switch

# of Employees

Experiencing Episodes

Productivity Loss to

Employers, $M

# of Employees

Experiencing Episodes

Productivity Loss to

Employers, $M

Total 139,431 $9.46 402,206 $27.28

Medicaid 23,210 $0.67 66,951 $1.94

Private 96,817 $8.22 279,278 $23.72

Uninsured 19,405 $0.56 55,976 $1.62


Table 5: Additional Costs to Uninsured

Case # Case DescriptionOut-of-Pocket Costs of Uninsured

Due to Prescription PSE Drug Price Increase, $M

1 Switch = 26%; $0.17

2 Switch = 50%; $0.33

3 Switch = 75%; $0.49

4 Switch = 100% $0.65


Table 4: Cost to Households for Physician Visit

Insurance Type

Out-of-Pocket Cost - Physician Visit, $M

Switch = 26%

Switch = 50%

Switch = 75%

Switch = 100%

Total $15.91 $30.59 $45.89 $61.18

Medicaid $0.09 $0.18 $0.27 $0.36

Medicare $1.78 $3.43 $5.14 $6.85

Private $7.49 $14.40 $21.60 $28.8

Uninsured $6.54 $12.58 $18.87 $25.17


7

Discussion This cost-benefit analysis calculates the direct and indirect costs

associated with a prescription-only law in Indiana for PSE-containing products. We find an increase in Medicaid spending by state government under a prescription-only model. Additionally, we find an overall annual cost range of $28.17 million to $92.15 million to various stakeholders in Indiana. Refer to Table 7 for the summary of costs. Table 8 shows a summary of all assumptions made in the simulation study. Cost to households is substantial due to out-of-pocket physician visits. Cost to employers in the form of productivity loss is also considerably higher.

Table 7: Summary of Costs to Various Stakeholders Due to PSE Prescription-Only Policy

Stakeholders in Indiana Estimate Cost, $M

Medicaid spending (Cost to state government) $1.7

Lost sales tax revenues (Cost to state government) $0.9–$1.3

Out-of-Pocket – Physician (Cost to all payer types) $15.9–$61.2

Out-of-Pocket – Prescription drug (Cost to uninsured) $0.17–$0.65

Productivity Loss (Cost to employers) $9.5–$27.3


Table 8: Summary of All Assumptions Made for the SimulationCategory Value Source

General

Insurance

Medicaid 14% U.S. Census Bureau, 2012

Medicare 15% U.S. Census Bureau, 2012

Private 59% U.S. Census Bureau, 2012

Uninsured 12% U.S. Census Bureau, 2012

VRTI incidence rate 71.1% Fendrick et al

VRTI episodes per person per year 2.48 Fendrick et al

Allergy incidence rate 20% Schaffer et al

Allergy episodes per person per year 4 Schaffer et al

Sinusitis incidence rate 14% Pleis and Lethbridge-Çejku

Sinusitis episodes per person per year 3 Tewfik and Meyers

OTC use 69.1% Fendrick et al

OTC with PSE drugs varies IRI sales data

Average cost of OTC medicine $15.4 Fendrick et al, BLS

Cost to state government

Sales tax in Indiana 7% in.gov

Cost to household

Transportation expense per round trip $1.86 Unal et al, CNN Money

Cost per physician visit $152.5 2012 MEPS

Copay

Medicaid 0

Medicare 20% Medicare.gov

Private 22% MEPS, 2012

Uninsured 100%

Increase in cost of the drug 35% Avalere

Cost to employers

Population employed 45.8% U.S. Bureau of Labor Statistics, 2014

Hours spent/lost for physician visit 4

Average wage $7.25 U.S. Bureau of Labor Statistics, 2012

8

Conclusion This study reports the findings of a partial benefit-cost analysis of implementing legislation to

restrict sales of pseudoephedrine (PSE) to prescription-only in Indiana. We did not perform an analysis of changes to meth use, since a similar study has recently been performed concluding no reduction in meth use occurred following Oregon’s passage of a prescription law (Stomberg and Sharma, 2012). Given the low share of domestc production, this should not be a surprising result. We explore the cost side of the legislation, examining costs to taxpayers, households, and businesses of eliminating OTC sales of PSE.

Using a difference-in-difference method, we find an increase in Medicaid claims for respira-tory drugs if the OTC to prescription-only law of pseudoephedrine drugs were in effect. Also, we find a significant increase in Medicaid spending on these drugs and its sub-classes due to the law. Non-influenza VRTI, allergy and sinus affects all strata of population and could be easily treated with OTC medicines. The illegal use of PSE-based products in the manufacture of meth have led to implementation of a prescription-only policy in two states, but such a policy affects a wide range of stakeholders such as households, state government and employers. The downside to the implementation of such law in Indiana is the increased cost to households, employers and the state government. This will lead to further burden on Indiana residents through increased taxes rates and health premiums. A better understanding of the benefits of such legislation is necessary to recommend any changes to the OTC sales of pseudoephedrine.

•••

9

Appendix A: Methodology and results for impact of switching from over-the-counter to prescription-only laws for drugs containing pseudoephedrine on Medicaid spending in Indiana

MethodologyWe estimate the effect of OTC to Rx-only law of drugs containing

pseudoephedrine (PSE) on the claims and payment of respiratory drugs by Medicaid enrollees in a state. In July 2006, Oregon had implemented prescription-only policy for drugs containing PSE. We use difference-in-difference method to isolate the policy’s impact from contemporaneous changes in the states. In this method, we compare the treatment group (Oregon) and a control group comprising of other states that did not have such laws.(4) Our empirical strategy relies on the assumption that the states in the control group will account for the unobserved time-varying factors that would have led the treatment group (Oregon) to experience differential rates of drug claims after the policy change.

We first examine how the OTC to Rx-only policy affected the claims and payment by Medicaid enrollees. Using the aggregated quarterly Medicaid claims and payment data on respiratory drugs, we estimate the following specification:

Ysyq =

α + β Treats + δ Implementyq + η (Treats x Implementyq) + γ pctMedicaidsy

+ μ Nplexsyq + λ nonNplexsyq + Time + States + Yeary + Qtrq + εsyq

Where Y represents the outcome variable of interest such as drug claims by Medicaid enrollee and drug payments by Medicaid enrollee for state s, year y and quarter q. All the drug payments are adjusted for 2010 consumer price index of prescription drugs.

• Treat is a binary variable (=1) for treatment group Oregon.• Implement represents a dummy variable (= 1) for the period after the

law was implemented in July 2006 (i.e., from third quarter of 2006 to fourth quarter of 2010).The interaction of Treat and Implement captures the average impact

after the OTC to prescription-only policy was implemented July 2006 in Oregon by comparing the Medicaid drug claims per enrollee during this period to claims per enrollee before the enactment of policy among the treatment group (Oregon) relative to the control group (other states). • pctMedicaid represents the share of Medicaid population in a state and

in a year.• Nplex and nonNplex are dummy variables for states using the National

Precursor Log Exchange (NPLEx) systems and those using non-NPLEx systems respectively. We include linear time trends, Time to capture state-specific unob-

served factors that vary linearly over time and affect the Medicaid drug claims. We include state fixed effects to control for time-invariant unob-served heterogeneity between states (such as life styles, weather, cost of living, etc.). We also include year and quarter fixed effects to account for time and seasonality. We cluster the standard errors by state to account for correlation of state-level errors over time due to common factors.

Summary statistics are shown in Appendix Table A1.

Table A1: Descriptive StatisticsVariable Description Obs Mean Std. Dev Min Max

resp_claimbyenroll Respiratory drug claims by Medicaid enrollees 1260 0.385 0.256 0.001 2.287

resp_paybyenroll Respiratory drug payments by Medicaid enrollees 1260 $20.695 12.592 0.029 72.950

antiasthma_paybyenroll Anti-asthma drug payments by Medicaid enrollees 1260 $14.044 8.081 0.022 48.865

antihist_paybyenroll Antihistamine drug payments by Medicaid enrollees 1260 $2.376 2.395 0.001 17.695

coughcold_paybyenroll Cough/cold/allergy drug payments by Medicaid enrollees 1260 $1.581 1.799 0.001 10.929

nasal_paybyenroll Nasal agents drug payments by Medicaid enrollees 1256 $2.047 1.469 0.000 10.872

pctMedicaid Share of Medicaid population in the state 1260 13.322 3.562 5.500 23.500

NPLEx National Precursor Log Exchange (NPLEx) systems 1260 0.012 0.109 0 1

nonNPLEx Non- National Precursor Log Exchange (NPLEx) systems 1260 0.021 0.145 0 1


4. We exclude Mississippi from our sample because the state passed the OTC to Rx-only law for drugs containing pseudoephedrine effective from July 2010.

10

ResultsAppendix Table A2 shows the effect of OTC to Rx-only law of PSE

drugs on the number and payment of respiratory drug claims by Medic-aid enrollees. In specification (1), we find that such a law increases the number of claims by 9.39 percentage points, i.e., a 24.4 percent increase in Medicaid claims related to respiratory drugs relative to the mean. Specification (2) shows that the OTC to Rx-only law has increased respiratory drug payment to Medicaid enrollees by 5.82 points, which is a 28.1 percent increase relative to mean. Both the results are statistically significant at 1 percent level.

Appendix Table A3 shows the effect of OTC to Rx-only law of PSE drugs on the sub-classes of respiratory drug payment claims to Medicaid enrollees. Specification (1) depicts the overall respiratory drug pay-ments, specification (2) shows anti-asthma drug payments, specification (3) shows the results for antihistamine drug payments, specification (4) shows the cough/cold/allergy medications payments, and specification (5) shows the nasal agents drug payments.

The average respiratory drug payment to each Medicaid enrollee is $20.70. We find that the policy of shifting drugs containing PSE from OTC to Rx-only have increased the payments per Medicaid enrollee for all sub-classes of respiratory drugs. We find that the policy has increased antihistamine drug payments per Medicaid enrollee by 2.52 points (i.e., 106.0 percent increase relative to the mean), cough/cold/allergy drug payments by 0.76 points (i.e., 47.8 percent increase relative to the mean), nasal agents drug payments by 1.11 points (i.e., 54.4 percent increase relative to the mean). These results are statistically significant at 1 percent level. However, we also see a positive, but insignificant effect of such a law on anti-asthma drug payments.

Table A3: Effects of PSE Prescription-Only Policy on Sub-Classes of Respiratory Drug Payments by Medicaid Enrollees

(1) resp_

paybyenroll

(2) antiasthma_paybyenroll

(3) antihist_

paybyenroll

(4) coughcold_paybyenroll

(5) nasal_

paybyenroll

Treat x Implement 5.8231*** 1.4392 2.5174*** 0.7553*** 1.1144***

(1.4411) (0.9686) (0.2915) (0.1607) (0.2184)

Treat -30.0440*** -16.6895*** -4.2633*** -4.7664*** -3.8685***

(0.7697) (0.4281) (0.3067) (0.1191) (0.0974)

Implement -3.9301*** -1.6952** -1.5861*** -0.1040 -0.5794***

(1.0093) (0.6561) (0.2062) (0.1000) (0.1652)

pctMedicaid -0.7908* -0.5885** -0.0583 -0.0090 -0.0910

(0.4066) (0.2577) (0.0800) (0.0479) (0.0579)

Time -1.0569*** -0.5570*** -0.1564*** -0.2758*** -0.0797***

(0.1367) (0.0854) (0.0232) (0.0407) (0.0136)

NPLEx -3.4097 -1.8532 -1.0660* 0.4088* -0.6886***

(2.7151) (1.8840) (0.5735) (0.2060) (0.2359)

nonNPLEx 6.7172** 3.7459 0.9567 0.8282*** 1.0113***

(3.0551) (2.4721) (0.7942) (0.1371) (0.2184)

R-squared 0.797 0.766 0.757 0.823 0.756

N 1260 1260 1260 1260 1256

DepVar Mean 20.695 14.044 2.376 1.581 2.047

Note: Standard errors clustered by state in parentheses; State, Year and Quarter fixed effects are also included

* p<0.10, ** p<0.05, *** p<0.01


Table A2: Effects of PSE Prescription-Only Policy on Respiratory Drug Claims and Payment by Medicaid Enrollees

(1) resp_claimbyenroll

(2) resp_paybyenroll

Treat x Implement 0.0939*** 5.8231***

(0.0263) (1.4411)

Treat -0.6120*** -30.0440***

(0.0164) (0.7697)

Implement -0.0350* -3.9301***

(0.0196) (1.0093)

pctMedicaid -0.0134* -0.7908*

(0.0078) (0.4066)

Time -0.0251*** -1.0569***

(0.0034) (0.1367)

NPLEx -0.0797 -3.4097

(0.0495) (2.7151)

nonNPLEx 0.1021** 6.7172**

(0.0439) (3.0551)

R-squared 0.717 0.797

N 1260 1260

DepVar Mean 0.385 20.695

Note: Standard errors clustered by state in parentheses; State, Year and Quarter fixed effects are also included

* p<0.10, ** p<0.05, *** p<0.01


11

CreditsReferencesAvalere. (2014). “Managing Access to PSE/ Potential Impacts of a

Prescription-Only Policy versus Real-Time Stop Sale Technol-ogy.” Available online at: http://www.avalerehealth.net/research/docs/20120221-CHPA.pdf.

Consumer Healthcare Products Association. (2013). “Understanding Trust in OTC Medicines: Consumer and Healthcare Provider Per-spectives.” Prepared by Nielsen and IMS. Retrieved from http://www.yourhealthathand.org/images/uploads/CHPA_OTC_Trust_Sur-vey_White_Paper.pdf.

Consumer Healthcare Products Association. (2010). “Your Health at Hand: Perceptions of over-the-Counter Medicine in the U.S.” CHPA. http://www.yourhealthathand.org/images/uploads/CHPA_YHH_Survey_062011.pdf.

Cunningham, J.K., Callaghan, R.C., Tong, D., Liu, L.M., Li, H.Y., and Lattyak, W.J. (2012). “Changing over-the-counter ephedrine and pseudoephedrine products to prescription only: Impacts on meth-amphetamine clandestine laboratory seizures.” Drug and Alcohol Dependence, 126(1), 55-64.

Davidson, S.B., Blostein, P.A., Walsh, J., Maltz, A.B., Elian, A., and VandenBerg, S.L. (2012). “Resurgence of methamphetamine related burns and injuries: A follow-up study.” Burns. 39(1) pp: 119-125.

Davis, K. and Carper, K. (2012). “Use and Expenses for Office-Based Physician Visits by Specialty, 2009: Estimates for the U.S. Civilian Noninstitutionalized Population.” Statistical Brief #381. Agency for Healthcare Research and Quality, Rockville, MD. http://www.meps.ahrq.gov/mepsweb/data_files/publications/st381/stat381.pdf.

Fendrick A, Monto AS, Nightengale B, Sarnes M. (2003) “The Eco-nomic Burden of Non–Influenza-Related Viral Respiratory Tract Infection in the United States.” Arch Intern Med., 163(4):487-494. doi:10.1001/archinte.163.4.487.

Floyd W. Denny, Jr. (1995). “The Clinical Impact of Human Respiratory Virus Infections”, American Journal of Respiratory and Critical Care Medicine, 152(4) pt_2, pp. S4-S12.

Kennedy, Martin D. (2014). “The Economic Impact of Adopting a Prescription-Only Model for Pseudoephedrine in Tennessee.”

Kaiser Family Foundation. (2012). “Federal and State Share of Medic-aid Spending”. Available at http://kff.org/medicaid/state-indicator/federalstate-share-of-spending/.

NADDI. (2011). “Indiana Stop-Sale System Shows Effectiveness Of Real-Time, Blocking Technology In The Fight Against Illegal Sales Of Pseudoephedrine.” National Association of Drug Diversion Investigators.

National Association of Boards of Pharmacy. Available at http://www.nabp.net/meetings/assets/FreedomFromMethWichern.pdf.

National Institute on Drug Abuse. (2014). Available at http://www.drugabuse.gov/publications/drugfacts/methamphetamine.

NHS. “Respiratory Tract Infections” Available at http://www.nhs.uk/conditions/respiratory-tract-infection/pages/introduction.aspx.

Nicosia, N., Pacula, R.L., Kilmer, B., Lundberg, R., and Chiesa, J. (2005). “The economic cost of methamphetamine use in the United States” No. MG-829-MPF/NIDA. RAND Health, Santa Monica CA, 2009.

Pleis, J.R., and Lethbridge-Çejku.,M. (2007). “Summary health statistics for U.S. adults: National Health Interview Survey, 2006”. National Center for Health Statistics. Vital Health Stat 10(235).

Rhoades, C. P. (2014). “Supply side: effects of restricting methamphet-amine precursors in south central Missouri.” PhD diss., University of Central Missouri.

Schaffer, T.C., Lamb, M.P., Weaver-Agostoni, J., and Wolfe, S.R. (2012). “Congestion”, in Signs and Symptoms in Family Medicine–A literature based approach Chapter 15. Mosby Inc.

Stomberg, Christopher and Arun Sharma. (2012). “Making Cold Medi-cine RX Only Did Not Reduce Meth Use.” Cascade Policy Institute, 2012 pp 1-15.

Tewfik, T.L., and Meyers, A.D. (2014). “Medical Treatment for Acute Sinusitis”. Available at http://emedicine.medscape.com/article/861646-overview.

Unal, E, Chen, S.E., and Waldorf, B.S. (2007). “Spatial accessibility of health care in Indiana.” Dept. of Agricultural Economics Purdue Uni-versity, Working Paper: 07-07.

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Production Credits Center for Business and Economic Research. (2015). Ball State University.

Available at http://www.bsu.edu/cber and http://www.cberdata.org.

AuthorsSrikant Devaraj, MS, MBA, PMP, senior research associate and project

manager.Michael Hicks, PhD, director of CBER and George and Frances Ball

distinguished professor of economics, Miller College of Business.Karthik Balaji, MS, graduate research assistant.

DesignVictoria Meldrum, manager of publications and web services.Gerrod Jones, undergraduate design assistant.

Photo CreditsFlickr Creative Commons. i: (middle photo) Matty Ring. iii: Erin

DeMay. 3: Elvert Barnes. 7: Daniel Foster.

12

About the Authors Srikant Devaraj, MS, MBA, PMP

Srikant Devaraj is senior research associate and project manager at Ball State’s Center for Business and Economic Research. He holds mas-ter’s degrees in business administration and information and communi-cation sciences from Ball State University in Muncie, Indiana. He earned his bachelor’s degree in mechanical engineering from the University of Madras (India). He is also a PMI-certified project management profes-sional (PMP).

Prior to joining the center, Devaraj was a graduate research assistant for the Center for Media Design at Ball State. He also worked as a proj-ect engineer at VA Tech Wabag Ltd (India) for three years in the field of project management.

Michael J . Hicks, PhD Michael J. Hicks is the George and Frances Ball distinguished

professor of economics and the director of the Center for Business and Economic Research at Ball State University. He previously served on the faculty of the Air Force Institute of Technology’s Graduate School of Engineering and Management and at research centers at Marshall University and the University of Tennessee.

Hicks’ research interest is in state and local public finance and the effect of public policy on the location, composition, and size of eco-nomic activity. His work has been highlighted in such outlets as the Economist, Wall Street Journal, New York Times, and Washington Post. He has appeared nationally on CSPAN, MSNBC, NPR’s “All Things Considered,” and Fox Business News, and his weekly column on economics and current events is syndicated in several outlets across the state.

Hicks earned doctoral and master’s degrees in economics from the University of Tennessee and a bachelor’s degree in economics from Virginia Military Institute. He is a retired army reserve infantryman having served in combat and peacekeeping operations in North Africa, Southwest Asia, Korea, and Japan.

Karthik Balaji, MS Karthik Balaji was a graduate research assistant at the Center for Busi-

ness and Economic Research at Ball State University. In December 2014, he earned a master’s degree in actuarial science. His research interests include life insurance and financial planning.

Before joining the center, Balaji worked in software testing for IBM India and was an actuarial associate for WNS Global Services. He holds a bachelor’s degree in mathematics from the University of Madras (India).

© 2015. Center for Business and Economic Research. Ball State University.

13

About the Center The Center for Business and Economic Research (CBER) is an economic policy and forecasting research center at Ball State

University. CBER research includes public finance, regional economics, manufacturing, transportation, and energy sector studies.The Center produces the CBER Data Center (a suite of web-based data tools) and the Indiana Business Bulletin (a weekly newsletter

with commentary on current issues and regularly updated data for dozens of economic indicators).In addition to research and data delivery, CBER serves as a business forecasting authority in Indiana’s east central region—holding

the annual Indiana Economic Outlook luncheon and quarterly meetings of the Ball State University Business Roundtable.

Center for Business and Economic ResearchBall State University2000 W. University Ave. (WB 149)Muncie, IN 47306765-285-5926 • [email protected] • www.bsu.edu/cber • www.cberdata.org • www.facebook.com/BallStateCBER

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