New Estimates of the Demand for Physical and Mental Health Treatment Chad D. Meyerhoefer and Samuel Zuvekas

Agency for Healthcare Research and Quality Working Paper No. 06008 November 2006

Suggested citation: Meyerhoefer CD, Zuvekas S. New Estimates of the Demand for Physical and

Mental Health Treatment. Agency for Healthcare Research and Quality Working Paper No.

06008, November 2006, http://gold.ahrq.gov.

AHRQ Working Papers provide preliminary analysis of substantive, technical, and methodological

issues. The papers have not undergone external peer review. They are distributed to share

valuable experience and research. Comments are welcome and should be directed to the

authors. The views expressed are those of the authors and no official endorsement by the

Agency for Healthcare Research and Quality or the Department of Health and Human Services is

intended or should be inferred.
 

New Estimates of the Demand for Physical and Mental Health Treatment 

November, 2006 

ABSTRACT 

Consumers’ price responsiveness is central to current reform proposals to address rapidly 

escalating health care costs, but the best available estimates of price elasticities of demand are 

now more than 25 years old. We seek to provide more current estimates of the demand for both 

mental and physical health treatment using a health care demand model that incorporates the 

relevant costs influencing consumption decisions, including out-of-pocket payments (costsharing) for ambulatory services, out-of-pocket prescription drug costs, and insurance premiums. 

Following Ellis (1986) and Ellis and McGuire (1986), we use consumers’ out-of-pocket 

payments to derive theoretically appropriate expected end-of-year prices. The demand model is 

estimated using the 1996-2003 Medical Expenditure Panel Survey (MEPS), a nationally 

representative survey of the U.S. civilian, non-institutionalized population. We address the 

potential endogeneity of expected end-of-year prices and health insurance coverage (or adverse 

selection) by estimating a correlated random effects specification (Chamberlain, 1980). This 

allows us to relax the untenable assumption of standard random effect models that price and 

health insurance are uncorrelated with unobserved individual attributes. We find that the price 

responsiveness of ambulatory mental health visits has decreased substantially in the last 30 years 

and is now slightly less elastic than visits for physical health problems. However, the demand 

for both mental health and non-mental prescription drugs is substantially more price elastic. We 

discuss the implications of our results. 

Chad D. Meyerhoefer, Ph.D. 

(Corresponding Author) 

Center for Financing, Access and Cost Trends 

Agency for Healthcare Research and Quality 

540 Gaither Road 

Rockville, MD 20850 

cmyerhoe@ahrq.gov 

phone: (301) 427-1664 

fax: (301) 427-1276 

and 

Samuel H. Zuvekas, Ph.D. 

Center for Financing, Access and Cost Trends 

Agency for Healthcare Research and Quality 

540 Gaither Road 

Rockville, MD 20850 

szuvekas@ahrq.gov 

phone: (301) 427-1673 

fax: (301) 427-1276 

2
 
 

1. Introduction 

Optimal second-best insurance requires balancing the gains from risk-spreading with the 

welfare losses due to moral hazard (Zeckhauser, 1970). This balancing in health insurance 

coverage is analogous to Ramsey pricing (Besley 1988; Zeckhauser 1970; Baumol and Bradford 

1970). That is, the level of consumer cost-sharing (or the out of pocket price that consumers 

face) should be positively related to the price elasticity of demand—the higher the price 

elasticity, the higher the cost-sharing. Current proposals for health care reform, such as Health 

Savings Accounts, are predicated on the notion that shifting more costs directly to consumers 

will reduce unnecessary medical use and help restrain rapidly escalating health care costs (Fuchs 

and James, 2005). Price elasticites are also central to continued debates over benefit mandates, 

such as requiring insurers to cover particular services such as mammograms or to provide equal 

coverage for mental health treatment (or mental health parity). Therefore, the question of how 

elastic the demand for health care is and whether it varies by type of treatment has far reaching 

implications for private insurers and public policy makers. 

The best available evidence on price elasticities for health care comes from the RAND 

Health Insurance Experiment (HIE), a large-scale randomized experiment conducted from 1977 

to 1982 (Manning et al., 1987). The RAND HIE found price elasticities of around -.2 for all 

types of medical care, but considerable variation for different types of treatment. In particular, 

the demand for outpatient psychotherapy visits was found to be approximately three times more 

price elastic than for other medical visits (Keeler, Manning, and Wells, 1988). This important 

finding, consistent with observational studies from the same period (Horgan, 1986; McGuire 

1981), has been used to justify higher cost-sharing for mental health treatment in the years since 

(Frank, Goldman, and McGuire, 1992). 

3
 
 

Many question how relevant the RAND HIE estimates still are today given the rapid 

advances in medical technology that occurred over the last 25 years and the growth of managed 

care. Economists (Glied 2003; Cutler 2002; Newhouse 1993) generally credit medical advances 

with being the major force driving health care expenditures from $255 billion in 1980, or 10.4% 

of GDP to an estimated $2.1 trillion in 2006, or 16.0% of GDP (Heffler et al. 2005). The 

development of less-invasive surgical procedures that can be performed on an outpatient basis, 

new diagnostic and imaging procedures, and new treatments and therapies have all led millions 

more to seek treatment for their health conditions (Thorpe et al., 2004). Especially important was 

the introduction of many new classes of prescription drugs, such as lipid-lowering statins and 

new types of anti-depressants like Prozac and Paxil. As a result, prescription drug spending 

grew at twice the rate of other types of medical care spending over the last decade (Heffler et al. 

2005). Perhaps nowhere is the change in medical technology more evident than in the treatment 

of mental health problems. Traditional psychotherapy, the standard of treatment during the 

RAND HIE, has largely given way to prescription drug based treatment, practiced alone or in 

combination with newer talk therapies, such as cognitive behavioral therapy. As a result, the 

number of Americans in treatment nearly doubled from 16.5 million in 1987 (Zuvekas, 2001) to 

30.5 million in 2001 (Zuvekas, 2005). 

Clearly, the demand for mental health treatment and many other types of medical 

treatment shifted outwards since the RAND HIE twenty-five to thirty years ago. But we might 

expect the same medical advances that led to demand shifts to also change the shape of the 

demand curves. The demand for medical care is usually thought of as a derived demand for 

health, and therefore dependent on the current state of medical technology. In other words, 

consumers are purchasing entirely different bundles of goods now than they did decades earlier. 

4
 
 

 

 

Furthermore, changes in the institutional coverage for mental and physical health treatment and 

their associated prescription medications brought about by managed care and the expanding role 

of the public sector in health insurance markets could also influence relative demand levels and 

price responsiveness. 

We seek to provide current estimates of the demand for both physical and mental health 

treatment, and in particular the price elasticity of demand for different types of treatment 

including prescription drugs.1 Therefore, we derive a health care demand model that incorporates 

the relevant costs influencing consumption decisions, including out-of-pocket payments (costsharing) for ambulatory services, out-of-pocket prescription drug costs, and insurance premiums. 

Following Ellis (1986) and Ellis and McGuire (1986), we use consumers’ out-of-pocket 

payments to derive theoretically appropriate expected end-of-year prices for different types of 

medical care. The demand model is estimated using the 1996-2003 Medical Expenditure Panel 

Survey (MEPS), a nationally representative survey of the U.S. civilian, non-institutionalized 

population. 

We address the potential endogeneity of expected end-of-year prices and health insurance 

coverage (or adverse selection), which typically confound observational studies, by exploiting 

the longitudinal dimension of the MEPS to estimate a correlated random effects specification 

(Chamberlain, 1980). This allows us to relax the untenable assumption of standard random effect 

models that price and health insurance are uncorrelated with the unobserved individual attributes, 

such as unobserved physical and mental health status and preferences for treatment. The 

specification can also be seen as a reasonable way to account for time invariant measurement 

error processes. 

1 We differentiate physical and mental health treatment based upon household responses of the type of treatment 

received and the reasons for seeking care. 

5
 
 

 

 

 

m kit = q( p1t ,..., pKt, Yit ,ε it ; Zit ), ∀k = 1,...,K . 

The rest of the paper is organized as follows: A presentation of our underlying theoretical 

model and empirical specification is given in Section 2, followed by our econometric estimation 

procedure in Section 3. We describe the data used to estimate in empirical model in Section 4 

and present the estimation results Section 5. Section 6 concludes with a discussion of the results 

in light of past findings in this area and current policy issues. 

2. Theoretical and Empirical Approach 

Following the standard neoclassical approach to consumer demand, suppose that an 

individual i = 1,..., N in time period t = 1,...,T has preferences over their health, Ht , and a 

composite commodity of all other goods, Ct , defined by the following utility function: 

(1) Uit = U (Hit ,Cit ) . 

Further assume that health is a stock variable defined by an initial level of health carried over 

from the previous period, investments in health made through the consumption of medical 

services, mkit , k = 1,..., K, and random shocks, ε it , such that 

(2) Hit = h(Hit −1 , m1it ,..., mKit ,ε it ) . 

To determine the optimal investment in health and consumption of other goods, the individual 

maximizes (1) and (2) subject to a budget constraint, 

(3) ∑ pktmkit + Cit ≤ Yit , k 

where Yit represents total disposable income, and the price of the composite commodity has been 

normalized to one. The resulting demand equations for medical services, which can be easily 

modified to include exogenous socio-demographic determinants, Zt , take the form: 

(4) 

6
 
 

 

 

Although the above derivation is straightforward, complete specification of the demand 

equations is complicated by the presence of medical insurance and the nonlinear pricing 

schedules commonly applied to medical care. In particular, deductibles, coverage ceilings, and 

non-constant cost sharing between consumers and insurers make it difficult to determine the 

effective price of medical services. Newhouse, Phelps, and Marquis (1980) have shown that 

defining pkt in (4) as the average or marginal price of medical care is likely to lead to biased 

estimates. However, in the absence of wealth effects and risk aversion, Ellis (1986) and Ellis 

and McGuire (1986) demonstrated that the expected end-of-year price is the effective shadow 

price for medical care in the presence of nonlinear budget constraints caused by health 

insurance.2

 For a consumer facing a nonlinear price schedule for medical care with distinct 

segments s = 1,..., S , if their expectation regarding which of these segments their final plan-year 

medical transaction will fall can be summarized by the probability, π s , then their expected endof-year price is defined as 

e p = ∑π kis p . kit kts 

s 

(5) 

The empirical model for a demand system composed of K types of medical services can 

thus be specified to take the form 

e e mkit = α k +∑η kh zhit +∑(γ kl log plit + δ kl pdlit ) + β k logYit + ci + ε kit , h l 

(6) 

e where pdkit is a binary variable = 1 if the individual i’s expected end-of-year price for medical 

service k is equal to zero and = 0 otherwise, and ci is a stochastic time-invariant individual 

2

 Even after allowing for risk aversion, the expected end-of-year price remains close to the shadow price of medical 

services. Note that the use of expected end-of-year prices allows one to incorporate supply constraints imposed by 

insurers into the model that limit the number of covered visits. This is done by estimating each consumer’s 

expectation, or probability, that the coverage limit is exceeded and subsequent expenses not reimbursed. 

7
 
 

 

specific effect measuring unobserved heterogeneity.3

 We interpret ci as unobserved mental and 

physical health status and propensity to consume treatment; in cross-sectional formulations of the 

model, ci is typically either assumed to be zero or uncorrelated with all other regressors. If the 

vector of disturbances εit = (ε 1it ,...,ε Kit )′ is assumed to be jointly distributed N (0,σ ε

2 ) , then the 

system of K equations defined by (6) is correlated through both ci and εit . 

The logarithmic specification of price and income variables in (6) is similar to other 

commonly used specifications in the empirical demand literature, and is necessary to account for 

the skewed distributions of these variables. The distribution of medical care prices (expected 

out-of-pockets costs), however, is not only skewed to the right, but contains a large mass at zero 

due to the fact that many individuals are enrolled in health insurance plans where the majority of 

their out-of-pocket costs are zero after paying an annual premium. This may occur, for example, 

if the some types of medical services require no co-payment (e.g. preventive services), or an 

individual’s expenditures within a plan-year are large enough to exceed a stop-loss provision, 

whereby all remaining services in any service category do not require a co-payment. We 

account for this feature of the price distribution through the use of the binary variables to indicate 

zero expected end-of-year prices and logged positive prices. In contrast to out-of-pocket costs, 

the health insurance premium is an anticipated expense not linked to any particular health care 

transaction, and therefore, has been subtracted from total disposable income (that is, 

Y = Y Total

it it − Premium ).

Given our interpretation of ci as the individual’s unobserved physical and mental health 

status and propensity to consumer care, we cannot assume that factor is uncorrelated with either 

e log pkit

e pkit

3

 Under this specification is set to zero when is equal to one. 

8
 
 

 

 

expected end-of-year prices or several of the socio-demographic variables in the model. 

Therefore, ci is modeled as a correlated random effect (CRE), and assumed to be potentially 

correlated with all the regressors in each time period: 

1 2 e 3 e 4

c = ∑∑λ z +∑∑(λ log p + λ pd ) +∑λ logY +υ , i lt hit lt lit lt lit t it i 

h t l t t 

(7) 

where υi is assumed to be independent of the exogenous regressors and εit and is distributed 

N(0,σ υ

2 ) .4

 This specification was originally derived by Chamberlain (1980) and has been 

applied to demand systems by Meyerhoefer, Ranney and Sahn (2005). Defining xit as a row 

vector containing all the model regressors for time period t (plus a constant for the intercept), (7) 

is substituted into (6) to derive the demand system with reduced form parameter vector 

πkt = (π′

kt1 ,..., π′ktT ) and normally distributed disturbance ukit = ε kit +υi : 

(8) m = x′ π + x′ π +L+ x′ π + u . kit i1 kt1 i2 kt 2 iT ktT kit 

Econometric estimation of the CRE model generally proceeds by first obtaining consistent 

estimates of the reduced form parameters in (8) followed by identification of the structural 

parameters of interest in (6). 

3. Econometric Estimation 

In comparison to most commodities and many other services, medical services are 

difficult to measure in homogeneous units. Not only is there wide variation in the quality of 

medical care, but some medical procedures are very resource intensive while others are easily 

administered. In order to limit heterogeneity in the type of services provided we focus on 

ambulatory care and exclude inpatient treatment. We also follow the approach of previous 

1 λ = 0 4

 If ci is assumed to be orthogonal to a subset of the demographic variables, then restriction should be 

imposed for this subset in (7). 

9
 
 

 

studies (such as Horgan 1986; Zuvekas, 1999; Winkelmann, 2004) in measuring ambulatory 

medical service use through the number of visits to physicians or other medical personnel, and 

analogously, measure pharmaceutical consumption through the number of prescription drug fills 

and/or re-fills during a one year time period. Finally, we disaggregate outpatient treatment into 

mental health ambulatory care, physical health ambulatory care, mental health related 

prescription pharmaceuticals, and physical health related prescription pharmaceuticals. 

Irrespective of whether the medical service provided is an ambulatory visit or prescribed 

medicine, the distribution of consumption is highly skewed, particularly for the treatment of less 

common chronic conditions, such as mental illness. This is because most individuals have very 

few visits and prescription fills in a given year, while some individuals have a large number. In 

addition, for services such as mental health care there are a high proportion of non-consumers of 

both ambulatory treatment and prescription drugs. We use a zero-inflated ordered probit (ZIOP) 

specification, developed by Harris and Zhao (2004) to model the demand for medical services in 

the presence of this skewed distribution for ambulatory visits and prescription fills. Doing so 

allows us to capture the large probability mass at zero as well as define discrete categories 

containing a range of visit/fill enumerations at the upper end of the consumption distribution 

rather than just a single number of total visits. 

Other popular empirical specifications used to model this type of data generating process 

include count data models, such as the zero-inflated Poisson or negative binomial specifications. 

Our choice of the ZIOP model stems primarily from the desire to incorporate correlated random 

effects into the model, which is more tractably done using an index function with normally 

distributed disturbances. In addition, we find the ordered probit framework conceptually 

attractive when modeling numbered outcomes within specified ranges as well as individually. 

10
 
 

 

 

 

~∗ B B ⎧0 if mk = x′πk + uk ≤ 0 ⎪ ~∗ 1 if 0 < m ≤ μ ⎪ k 1

∗ ⎪ ~∗ m k = ⎨2 if μ1 < m k ≤ μ 2 ⎪

M

⎪ ~∗ ⎪⎩J if μ J −1 < mk

rk = 1, mk 

∗ = 0

Both Cameron and Trivedi (1998) and Wooldridge (2002) propose the ordered probit as an 

alternative to count data models, with the former demonstrating that it fits selected data on the 

number of doctor visits at least as well as a negative binomial model. 

Underlying the ZIOP specification is a latent model of the demand for medical care in 

which observed consumption levels, mk , are generated as 

(9) mk = rk ⋅ mk 

∗ . 

The variable rk is a binary indicator dividing individuals into “consumers” and non-consumers” 

and is itself defined by the latent process 

~ A A ⎧0 if r = x′π + u ≤ 0 k k k rk = ⎨ . ~ ⎩1 if rk > 0 (10) 

Likewise, m

* 

k indicates the chosen consumption level of the individual (including zero 

consumption) through the latent process: 

(11) 

where j = 1,..., J indexes ambulatory visit or prescription fill number. Although there is no 

requirement that the data vector x be the same in (10) and (11), in our application there are no 

variables which effect the likelihood of consuming medical services, but not effect the level of 

their consumption (or vice versa). Under the above formulation a zero outcome is observed if 

either the individual is a non-consumer of the service in question (rk = 0 ) or is a consumer, but 

an infrequent one ( ). Likewise, to observe a non-zero outcome the individual must 

11
 
 

A A B ⎧Pr(m = 0 | x) = [1− Φ(x′π )]+ Φ(x′π ) ⋅Φ(x′π ) k k k k

⎪ A B B Pr(mk = 1| x) = Φ(x′πk ) ⋅[Φ(μ1 − x′πk ) − Φ(−x′πk )] ⎪

⎪ A B B Pr( j) = ⎨Pr(mk = 2 | x) = Φ(x′πk ) ⋅[Φ(μ 2 − x′πk ) − Φ(μ1 − x′πk )] ⎪ M ⎪
 

⎪Pr(m J | ) ( ′ ) [1 (μ ′ )] ⎩ k = x = Φ x πk

A ⋅ − Φ J −1 − x πkB 

 

 

be a consumer, or market participant, and have a positive consumption level during the 

respective time period. 

Under the assumption that uk

A and ukB are both independently and identically distributed 

N(0,1) , the full unconditional probabilities of the ZIOP model take the form: 

(12) 

As Harris and Zhao point out, this specification is analogous to other Zero Inflated models (see, 

for example, Mullahy (1986, 1997), Greene (1994), and Pohlmeier and Ulrich (1995)) and is 

directly comparable to the double hurdle models following from Craig (1971). 

Estimation of the medical services demand system using the ZIOP specification is a 

multi-step process in which the reduced form parameter estimates in equation (8) are obtained in 

two stages. In the first stage the ZIOP model is used to generate predicted probabilities for 

different numbers of visits or fills that are multiplied by consumers reported out-of-pocket costs 

to construct the expected end-of-year prices in (5). The price variables are then added to the 

model and it is re-estimated equation-by-equation to obtain the full set of reduced form 

parameter estimates. Because some of the data on out-of-pocket costs is imputed, we add labor 

market variables for industry category, occupation category, and whether the individual works in 

a firm with a retirement plan to the first stage model in order to strengthen identification in the 

second stage estimation of the reduced form.5

 These variables are assumed appropriate for this 

5

 Note that the reduced form expected price parameters are identified through the non-imputed data even without 

these exclusion restrictions. The power of the exclusions is high due to the large number of observations used to 

estimate the model (N=201,166). Under the null hypothesis that the coefficient vector corresponding to the industry 

and occupation variables is zero, the Wald statistics for the ambulatory mental health equation, mental health drug 

12
 
 

 

 

purpose because they influence medical care demand primarily through price (because they are 

correlated with the generosity of health insurance coverage). Assuming that the model 

regressors in equation 8 are exogenous after substituting the right-hand-side of equation 7 for ci , 

single equation ZIOP estimation yields consistent estimates of the reduced form parameters. The 

structural parameters of interested are then identified using the panel dimension of the data. 

Meyerhoefer, Sahn, and Ranney demonstrate how identification of the structural 

parameters in equation (6) is achieved through the use of a minimum distance estimator of the 

form: 

−1 min D(ψ) = [πˆ − Hψ]′Ωˆ (13) [πˆ − Hψ]. 

Here ψ denotes the vector of structural parameters, Ωˆ is the estimated covariance matrix of the 

reduced form parameter estimates, and H is a design matrix mapping the structural parameters 

to the reduced form estimates. In this case, the estimated covariance matrix Ωˆ is adjusted using 

the formulae derived by Wooldridge (2002, pp.354-56) to account for the first-stage estimation 

of the predicted probabilities used to construct the expected price variables. The minimum 

distance framework provides a means of testing the validity of restrictions on the model as well 

as other nested or non-nested specifications through the use of the chi-squared distributed test 

statistic ND(ψˆ ) . 

4. Data 

The data source for our empirical application is the 1996 – 2003 Medical Expenditure 

Panel Survey (MEPS). The MEPS is a comprehensive, nationally representative survey of the 

equation, ambulatory physical health equation and physical health drug equation are 3756, 3078, 3417, and 2608, 

2 respectively. The corresponding critical value is χ 22 = 40 at the 1 percent level of significance. 

13 
 

 

U.S. civilian non-institutionalized population, conducted annually since 1996 using a rotating 

panel design. Respondents are interviewed about their characteristics and health care use and 

expenses over the course of two years through five interview rounds. In addition, information 

from the household survey is supplemented by expenditure data collected directly from 

respondents’ medical service providers and pharmacies through a Medical Provider Component 

(MPC). 

Appendix Table A1 lists descriptive statistics for all of the variables used in the medical 

services demand model. Socio-demographic controls include race, gender, age and its square, 

years of completed education, self-reported physical and mental health status, the Columbia 

impairment scale for children, and a deterministic time trend. The insurance variables are 

dichotomous and indicate whether the respondent was fully or partially enrolled in a private 

insurance program (including TRICARE), or one of two categories of public insurance: 

Medicare or Medicaid / other state program.6

 We also include an indicator for whether the 

private or public insurance program was administered through an HMO or managed care 

organization. Employment related variables include indicators for whether the respondent 

received paid sick leave and paid vacation at their current job. All of the price variables and 

logged family income have been adjusted for inflation and are reported in 2003 USD. In 

addition, the family’s annual out-of-pocket premium has been subtracted from income, which is 

deflated by the square root of household size in order to adjust for household economies of scale. 

We do not age-restrict the sample, and therefore, use the parent’s labor market and education 

information for respondents under the age of 18. Variables marked by an * in Table A4 are 

those that we have specified as correlated with the random effect in our empirical specification. 

6

 Due to similarities in cost-sharing and the incidence of illness we include the Medicare/Medicaid dual eligible 

population and the under-65 Medicare population in the Medicaid / other public program category. 

14
 
 

 

 

Table A2 contains detailed distributions on the components of expected end-of-year prices for 

the full sample. These include (pre-imputation) unit prices at each point on the eight segment 

price schedule as well as the predicted probabilities of facing an end-of-year price on each 

segment. 

The dependent variables in the correlated random effects ZIOP model are the number of 

mental health and physical health ambulatory visits and prescription drug fills.7

 Because some 

respondents report very large numbers of visits and fills, while the majority report zero or a 

handful of visits, we define the dependent variable categories of the model as listed in Table 1. 

The categorization of larger numbers of visits is designed to correspond to changes in the price 

schedules of typical insurance plans. For example, many privately administered plans increase 

cost sharing after 5 visits and impose a coverage limit of 20 mental health visits per year. The 

expected end-of-year prices also correspond to these segments of the pricing schedule, so that 

out-of-pocket costs (prior to probability weighting) for categories 7, 8, and 9 are averages of the 

per visit or per prescription costs faced by consumers over the respective ranges. 

Although every respondent has a non-zero probability of facing the end-of-year price 

associated with each of the categories in Table 1, out-of-pocket costs are only observed for 

events that actually transpired. Therefore, we impute the out-of-pocket costs respondents would 

have faced had they consumed ambulatory medical services or prescription drugs at each level of 

the pricing schedule. This is done separately for the privately insured, uninsured, Medicare 

recipients, and Medicaid recipients on each segment of the pricing schedule in Table 1 using a 

two-stage regression-based imputation procedure. 

7 We omit inpatient care because it is quite rare in the community population in the case of mental health, and we 

suspect that most insurance plans has separate deductibles and cost controls for inpatient services. 

15
 
 

 

 

In the first stage of the imputation procedure, a probit model is estimated on the sample 

of consumers with observed out-of-pocket costs to determine the probability of facing positive 

out-of-pocket costs for the respective visit or prescription fill. The estimates are subsequently 

used to generate an unbiased estimated of the latent outcome variable underlying the probit 

~r model (analogous to k in (10)) for the sample of non-consumers. This is done by multiplying 

the estimated coefficients by each non-consumer’s data vector and adding the value of a random 

draw from the distribution N(0,1) . Non-consumers with a predicted latent outcome less than or 

equal to zero are imputed an out-of-pocket cost of zero for the respective visit, while those with a 

positive latent outcome are run through a second imputation regression. This regression, also 

estimated on the sample of consumers, is an OLS model of segment-specific logged out-ofpocket cost on a variety of labor market and socio-demographic variables.8

 In addition, price 

variables from up to five previous segments of the pricing schedule are included to ensure 

imputed prices lie along a consistent trajectory. The imputation procedure preserves the 

distributional characteristics of observed out-of-pocket prices for each category of insurance 

coverage. 

5. Estimation Results 

Our principal purpose in estimating the demand models is to provide new estimates of the 

responsiveness of health care consumption to changes in health care prices so that they may be 

used in policy analysis. Therefore, we present own and cross-price effects of out-of-pocket 

prices for the four types of health care included in our empirical demand system: mental health 

8

 The probit and OLS imputation regressions include controls for age, race, sex, education level, marital status, 

family income, urbanization, census region, self-reported physical and mental health status, generosity of employer 

benefits, unionization, industry and occupation classification, employer size, HMO or managed care enrollee, and 

dummy variables for year of interview. Since the imputations are insurance- specific, no controls for insurance 

status are necessary. 

16
 
 

visits, mental health drugs, physical health visits, and physical health drugs. For ease of 

interpretation, we compute two different price elasticity measures. First, arc elasticities between 

$0 and $5 dollars, $5 and $25, $25 and $75, and $75 and $100, are estimated by simulating the 

percentage change in the number of visits or prescription fills when out-of-pocket costs are 

constant over the range of expected demand and change (in percentage terms) by the specified 

dollar amounts. Second, we compute the average point elasticity, by taking derivatives of the 

expected quantity demanded with respect to the log of expected end-of-year price and dividing 

by expected demand. Both elasticity concepts are computed for each individual in the sample 

and averaged using sample weights to provide unbiased population estimates. Full regression 

results are reported in Table A3 for the cross-sectional model and in Table A4 for our preferred 

correlated random effects specification. All standard errors are adjusted for the complex design 

of the MEPS. 

Own price effects 

We present estimates of the own (out-of-pocket) price effects from our preferred 

correlated random effects (CRE) specification in Table 2. The estimated average own-price 

elasticity for mental health visits is -.06, with arc elasticities changing little across price levels. 

Ambulatory visits for physical health problems exhibit a slightly higher price elasticity of -.12. 

The difference in physical and mental health visit price elasticities is statistically significant at 

the .001 level, but in economic terms they are similar in magnitude. 

The demand for prescription drugs is substantially more price responsive. Mental health 

drugs are 10 times more price responsive than mental health visits, with an average elasticity of -

.61. Furthermore, mental health drugs show an increasing arc elasticity of demand as the price 

level increases. The positive estimated arc elasticity in the range of $0-$5 is likely due to the 

17
 
 

 

 

small number of people facing $0 expected out-of-pocket cost for prescription drugs.9 

Paralleling mental health, drugs for physical health problems have a higher price elasticity than 

physical health ambulatory visits, at -.29, but this is about half the estimated price elasticity for 

mental health drugs (difference is statistically significant at the .001 level). Like mental health 

drugs, however, physical health drugs elasticity of demand is increasing in out-of-pocket price. 

We also compare own price effects from our CRE specification with estimates from the 

cross-sectional model in Table 2. For mental health visits, the own price effects are identical. 

However, the own price-effects for mental health drugs, physical health visits, and physical 

health drugs estimated are all smaller in our CRE specification compared to the cross-sectional 

estimates. Specification tests of whether the random effect term is orthogonal to the regressors 

strongly reject orthogonality, and the estimated λ parameters in the correlated random effects 

equation specification are also individually significant (see Table A4). Thus, we prefer the CRE 

specification. 

Own price effect variations by health insurance coverage 

While estimates of price effects across the entire population are of clear policy interest, 

public and private decision-makers also need to know price-responsiveness for particular 

populations defined by health insurance coverage. We therefore estimate our CRE specification 

separately for those covered by private insurance, Medicare, and Medicaid, as well as the 

uninsured, and present price elasticity estimates in Table 3. Depending on the subgroup reported 

we have made small changes to the set of explanatory variables. For example, the dummy 

9 When we estimate the model on subgroups in some cases there are almost no individuals that report a zero 

expected price for mental and physical health drugs. In these cases, the $0-$5 forecasts for drugs are outside of the 

range of the data. 

18
 
 

variables indicating a zero expected end-of-year price for mental and physical health drugs have 

been dropped from all sub-categories except Medicaid. 

In general, price responsiveness was greatest among the privately insured population. 

Average own-price elasticities of demand for mental health and physical health visits were 

nearly identical at -.17 and -.16, respectively. However, mental health drugs were substantially 

more price elastic with an average elasticity of -.92, while the average elasticity for physical 

health drugs is -.26. Arc elasticities increased with price for both physical and mental health 

drugs. 

Average price elasticities were lower among the Medicare population, with the exception 

of the large own-price elasticity of mental health drugs, -.89. However, physical health drugs did 

show some price responsiveness at higher out-of-pocket price levels. For example, the arc 

elasticity between $75 and $100 dollars was -.52. Estimated own-price elasticities for the 

Medicaid population were uniformly small across all four types of health care. This is not 

particularly surprising given the consistently low levels of cost sharing built into the Medicaid 

program. 

For the uninsured, the own price effects for mental health and physical health visits were 

similar compared to the privately insured, although the former was not precisely estimated. 

However, in contrast to the Medicare and privately insured population the demand for mental 

health drugs (-.28) was less price responsive than the demand for physical health drugs (-.51). 

Cross-price elasticities: Substitutes or Complements? 

A key question is whether pharmacotherapies serve as complements or substitutes for 

outpatient treatment. To answer this question, we compute cross-price elasticities across the four 

types of medical care and present these in Table 4. For the entire population, the percentage 

19
 
 

 

 

 

 

 

change in the demand for physical health visits with respect to a one percent change in physical 

health drug price is -.07, while the analogous cross price elasticity of drug demand is -.03. 

Therefore, our estimates suggest that physical health visits and drugs are gross complements, a 

result that is consistent within each different insured population. For example, the cross-price 

elasticities between physical health visits and drugs in the privately insured population are also -

.07 and -.03. Mental health visits and drugs are also gross complements, although the symmetry 

is weaker. For the entire population, the percentage change in the demand for mental health visits 

with respect to a one percent change in mental health drug price is -.17, while the analogous 

cross price elasticity of drug demand is -.01. The general symmetry with respect to signs is a 

strong indication of the consistency in our demand estimates.10 

Did price elasticities change between 1996 and 2003? 

The MEPS data we use span an 8 year time period between 1996 and 2003, so it is 

natural to ask whether price elasticities changed over this period. Our base model includes a 

deterministic time trend as a regressor, but this cannot fully capture changes in elasticities 

because it is not interacted with the price variables. Instead, we split our sample into an early 

period with panels 1-4 (1996-2000) and a later period representing panels 5-7 (2000-2003) and 

re-estimate the CRE model for each. The results are presented in Table 5. In general, the signs 

and magnitudes of both the own-price and cross price effects are quite similar in the early and 

more recent time periods, which increases confidence in the robustness of our approach. For 

example, the own price effects for physical health visits (-.11 for panels 1-4 vs. -.12 for panels 5-

10 The symmetry restriction from economic theory implies that the cross price derivatives of the Hicksian demand 

functions are equivalent. Using the Slutsky equation one can derive an analogous condition for the Marshallian 

demands. We do not statistically restrict the cross price derivatives in our system of (Marshallian) demands to be 

symmetric, as many researchers do. However, our finding that symmetry generally holds with respect to sign 

suggests the model conforms to theory even without such a restriction. 

20
 
 

 

7) and drugs (-.27 vs. -.32) are quite close in the early and more recent periods and not 

statistically different. The own price effects for mental health treatment, especially mental health 

drugs were somewhat higher in the more recent time period (-.55 in panels 1-4 vs. -.75 in panels 

5-7, t-statistic=2.27). 

Robustness 

While we find that the price elasticity of demand for physical health visits to be similar in 

magnitude to estimates from the RAND Health Insurance Experiment, our results also imply that 

the demand for outpatient mental health visits has become substantially less price elastic since 

the 1970s/early 1980s when the RAND study was conducted. Because of the potential policy 

importance of this finding, we want to be sure of its robustness. Obviously, the cost of a new 

randomized experiment is prohibitive. We also could not properly identify an instrumental 

variables model, a long-standing problem in health economics research. However, as we noted 

earlier, observational studies using data from the same time period as the RAND HIE also found 

substantial price responsiveness. We take advantage of the fact that one of these key studies by 

Horgan (1986) used data from an earlier predecessor of the MEPS data we use, the 1977 

National Medical Care Expenditure Survey (NMCES). 

Horgan estimated a standard two-part cross-sectional model of the demand for outpatient 

specialty mental health visits, predicting the probability of any use with a logit regression and 

modeling the log of the number of specialty mental health visits using an OLS regression. We 

are unable to replicate the first (logit) part of the model because we lack an equivalent price 

variable to the one Horgan used. However, we can estimate the second part of Horgan’s crosssectional model using data from the 2002 MEPS, which collects information on physician 

specialty. Horgan uses two alternative price concepts: the average percentage paid out-of21
 
 

pocket of the total cost of outpatient specialty mental health visits and the average per visit outof-pocket dollar amount. We also estimate the second part of her model with data from the 1987 

National Medical Expenditure Survey (NMES), which followed the 1977 NMCES used by 

Horgan, and the immediate predecessor to the MEPS. Because the three nationally 

representative surveys are similar in design and content, we are able to replicate Horgan’s 

specification almost exactly; providing consistent estimates of how price-responsiveness 

changed in her model over the 25 year period from 1977 to 2002. 

Table 6 reports Horgan’s original findings along with our re-estimation of her model 

using the 1987 NMES and 2002 MEPS data. In the first column, we see the priceresponsiveness that Horgan originally reported using the 1977 data, with own-price elasticities of 

-.44 for the average out-of-pocket percentage price specification and -.30 for the average out-ofpocket dollar amount. These elasticities diminished somewhat when we re-estimated her model 

with the 1987 NMES data in the second column, but a clear degree of price responsiveness 

remains. However, when we re-estimated her model with the 2002 MEPS data we no longer see 

any significant price effect. 

Thus, our re-estimation of Horgan’s model with more current data yields similar results 

to our preferred specification. Namely, the demand for outpatient mental health visits appears to 

have become substantially less elastic over time. We still note that both our measure of expected 

price, which is theoretically more consistent than using observed prices, and our CRE 

specification to correct for potential endogeneity and time-invariant measurement error 

processes, are improvements over Horgan’s model. 

We performed a further robustness check on our results by investigating whether the use 

of expected end-of-year prices produces consistent elasticity estimates throughout the year. 

22
 
 

Keeler, Newhouse, and Phelps (1997) have shown that the true shadow price of healthcare varies 

throughout the year as consumers update their information about how close they are to a 

discontinuity in their price schedule. Ellis (1986) demonstrates that the expected end-of-year 

price tracks the true shadow price of healthcare quite closely under fairly realistic assumptions, 

and shows empirically that estimates of the price responsiveness of demand are similar using 

expenditures from the first 30, 60, and 90 days of year. In a similar manner to Ellis, we reestimated our demand system using utilization data from round 1 of the MEPS, corresponding 

roughly to the first half of the year, and found that our own-price elasticities of demand varied by 

only 7 percent, on average. Therefore, the expected end-of-year price provides consistent 

measure of the consumers’ perceived health care price. 

6. Discussion and Conclusions 

Several clear findings emerge from the correlated random effects estimates of our health 

care demand model. Most importantly, the estimates imply that the demand for outpatient 

mental health visits has become substantially less price-elastic over the last 25 years. The 1977-

1982 RAND Health Insurance Experiment, consistent with observational studies from the same 

period, found the demand for mental health visits to be substantially more price elastic than for 

physical health visits. Keeler, Manning and Wells (1988) report an ambulatory mental heath 

own-price elasticity of -.59 and Manning et al. (1987) report arc own-price elasticities of 

physical health treatment in the range of -.13 to -.21 from the RAND HIE. Our point estimate of 

the own-price elasticity for mental health visits during the period 1996-2003 for the full U.S. 

population is -.06, lower even than our estimate of -.12 for the own-price elasticity for physical 

health visits. For different insured subpopulations, there were no statistically significant 

differences in elasticities between physical and mental health visits. 

23
 
 

One of the reasons why our elasticity estimates are lower than those found by the RAND 

investigators may be due to structural and institutional changes to health care markets over the 

past twenty to thirty years, such as the diffusion of managed care. Although we control for 

different types of insurance and enrollment in an HMO or managed care plan, all types of health 

care services are more highly managed than they once were. This is particularly true of mental 

health services, where the distinction between managed and traditional plans is blurred by the 

common use of carve-out arrangements to control costs. Therefore, our elasticity estimates 

should be interpreted as conditional on the current institutional environment, and are more 

appropriate for forecasting price changes within this environment than wholesale changes to the 

environment itself. 

If it is indeed true that the price responsiveness of mental health ambulatory treatment is 

less than or equal to physical health treatment, then the justification for higher cost-sharing for 

mental health based purely on efficiency grounds would no longer hold. This has significant 

implications for private health insurance plans and Medicare (and to a lesser extent Medicaid), 

where mental health treatment continues to be covered much less generously on average than 

other medical services. It also suggests that increasing the generosity of outpatient mental health 

coverage would not lead to large cost increases, which is consistent with studies of the impact of 

state legislative mandates for mental health parity, that is, equal coverage for mental health and 

physical health treatment (Zuvekas et al. 2002; Sturm, 1997; Goldman et al, 2006). 

Our results also point to the importance of prescription drug treatment in the overall 

demand for mental health care. Estimates of the own-price elasticity of demand for mental 

health drugs are substantially higher than for outpatient mental health visits (with the exception 

of the Medicaid population). We also note the high, negative cross-price elasticities between 

24
 
 

mental health drugs and visits. Together, this suggests that many mental health visits are for 

medication management and that individuals’ overall demand for mental health treatment is now 

more strongly tied to prescription drug than ambulatory costs than it was during the RAND HIE. 

In other words, the decision to begin and continue mental health treatment is now more heavily 

influenced by the expected costs of the appropriate course of mental health drugs than the 

associated ambulatory costs. 

Turning to physical health treatment, our estimates of the own-price elasticity of demand 

for visits are similar in magnitude to those reported from the RAND HIE. That is to say, price 

elasticities appear to remain small, but they are also not zero as the RAND HIE investigators 

point out (Manning et al 1987). Because spending on ambulatory visits exceeds $300 billion 

annually (MEPS Compendia of Tables, 2003), the scope for significant aggregate welfare losses 

is substantial. 

Our findings suggest, however, that concerns about efficiency losses from moral hazard 

resulting from insurance coverage are better focused on prescription drug coverage rather than 

coverage for ambulatory care. We found the elasticity of expected out-of-pocket price to be 

substantially greater for prescription drugs: -.61 for mental health drugs and -.29 for physical 

health drugs. In contrast, the RAND HIE found little difference in the price elasticity of demand 

for prescription drugs and other services (Newhouse et al., 1993). Health insurers clearly believe 

there is substantial consumer price responsiveness for prescription drugs, as they continue to 

increase consumer out-of-pocket cost-sharing and introduce multi-tiered pricing schedules to 

encourage substitution of therapeutically equivalent, but cheaper medications, in attempt to 

restrain rapidly escalating prescription drug costs. Price elasticity estimates from the literature 

for physical health drugs support this conception, ranging from -.15 up to -.5. While the number 

25
 
 

of studies that investigate the price responsiveness of mental health drugs is few, estimates range 

from -.26 and (Goldman et al, 2004; Landsman et al., 2005) -.28 for SSRI antidepressants to -

1.15 (Landsman et al. AJMC, 2005) for tricyclic antidepressants. Huskamp et al. (2005) also 

find substantial price sensitivity for ADHD medications. 

In sum, price responsiveness remains heterogeneous in type of health care treatment, 

although it also appears that price responsiveness for particular treatments changed in the last 25-

30 years. We find that there are no longer differences in price effects between ambulatory 

mental health and physical health visits, but substantially higher price responsiveness in 

prescription drugs, especially mental health drugs. The theory of optimal second-best insurance 

coverage suggests that health insurance plans, including those combined with Health Savings 

Accounts, may need to adjust coverage to reflect changes in the underlying demand for medical 

services. 

Limitations and Future Research 

It is quite possible that radical changes in the treatment technology for mental health, 

such as the move away from outpatient psychotherapy towards pharmacotherapy, explain the 

observed decrease in the own-price responsiveness of mental health ambulatory treatment. 

However, we must also consider the impact of managed behavioral healthcare in constraining 

supply. The price elasticity estimates of 25-30 years ago come largely from a fee-for-service 

world unconstrained by managed care organizations that may restrict access to or the supply of 

mental health services. For example, a managed behavioral healthcare organization may 

authorize and pay for 5 outpatient treatment visits, but no more. In this case, the consumer faces 

the full marginal cost of any additional treatment visits. We model the resulting nonlinearity in 

consumers’ price schedules by computing expected end-of-year prices. However, the validity of 

26
 
 

this measure rests in our ability to accurately model the consumer’s expectations. If the 

covariates in our model do not accurately characterize consumer’s information set, then our 

predictions will be biased. 

 Price schedules for prescription drugs have also become increasingly nonlinear. 

Prescription drug plans today typically require the lowest consumer cost-sharing for generic 

medications no longer covered by patents, higher cost-sharing for favored drugs (often as a result 

of negotiations with pharmaceutical companies), and still higher cost-sharing for non-favored 

drugs. Further disaggregating prescription drugs to explicitly correspond to these types of tiered 

pricing schedules that differentiate between generic versus non-generic medications (as well as 

among non-generics) represents a promising extension of our empirical approach. 

The MEPS data make it difficult to fully sort out medication management visits from 

traditional psychotherapy and from newer forms of behavioral therapy. Data for the 1996 

through 2001 period also do not allow us to distinguish whether mental health visits were to 

primary care physicians or psychiatrists. Beginning in 2002, the MEPS added questions about 

physician specialty, but we do not yet have enough years of data to apply our panel data 

estimation techniques. It is quite possible that price elasticities differ for these different forms of 

mental health treatment, which is something we intend to explore in future work. 

 Another limitation of our modeling approach is that our method for accounting for 

endogeneity and meaurment error is not fully general. We assume that the endogeneity of price, 

health insurance status, and self-reported measures of physical and mental health is generated by 

correlation with a component of the residual that is time invariant. This is logical given the 

supposition that unobserved physical and mental health status and propensity of consume 

treatment are the primary confounders of these variables. However, it is also possible that there 

27
 
 

 

exists a correlation between the regressors with time varying error components that we cannot 

capture. The same is true of measurement error considerations. If the process generating 

differences between consumers’ true expected end-of-year price and our construct is not time 

invariant, then our parameter estimates will be attenuated.11

 Finally, we identify the correlation 

between the random effect and included regressors using just two time periods, so that the effect 

of regressors three periods removed is present in the model’s residual. If the included regressors 

exhibit strong serial correlation then some endogeneity bias may persist despite our attempt to 

“integrate out” the random effect. However, the lack of suitable instruments for price and 

insurance makes our approach to correcting for endogeneity and measurement error attractive. 

The prospects for another large-scale randomized experiment remain dim given current 

federal budget forecasts—the RAND HIE cost $136 million to conduct in 1984 dollars (Manning 

et al., 1987). Thus, more current estimates of price elasticities must come from observational 

studies. We believe our correlated random effects approach, correcting for the clear endogeneity 

of prices and health insurance and applied to multiple years of data from the nationally 

representative MEPS, offers a second-best solution. 

11 Note, however, that one would expect greater measurement error in the physical health price than mental health 

price given the heterogeneous nature of the former, so it is unlikely that measurement error alone is responsible for 

“pulling” the ambulatory mental health care elasticity below the physical health care elasticity. 

28
 
 

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31
 
 

Table 1. Health Care Consumption and Expected End-of-Year Price Categories 

Percentage of Full Sample 

Category Visit / Fill No. MH Visits MH Drugs Non-MH Visits Non-MH Drugs 

1 0 93.6 92.0 30.7 39.7 

2 1 2.0 1.4 17.4 11.6 

3 2 0.9 0.9 11.5 8.1 

4 3 0.6 0.7 8.0 5.2 

5 4 0.5 0.6 5.7 3.9 

6 5 0.3 0.5 4.4 2.8 

7 6 – 10 1.0 1.9 11.4 9.5 

8 11 – 20 0.7 1.4 7.0 8.8 

9 > 20 0.5 0.7 3.8 10.5 

Source: Authors’ estimates from 1996-2003 Medical Expenditure Panel Survey. 

32
 
 

 

Arc Elasticity Average Elasticity 

$0-$5 $5-$25 $25-$75 $75-$100 estimate std. err.

 

 

 

Table 2. Cross-Sectional and Correlated Random Effects Estimates of Own-Price Elasticities: 

Full Population (N=100,583, T=2) 

Cross-Sectional Estimates 

Mental Health Visits -.032 -.067 -.063 -.059 -.056 .012 

Mental Health Drugs .413 -.593 -.911 -1.104 -.868 .031 

Physical Health Visits -.053 -.219 -.209 -.197 -.184 .005 

Physical Health Drugs .042 -.395 -.832 -1.186 -.513 .013 

Correlated Random Effects Estimates 

Mental Health Visits -.049 -.076 -.071 -.065 -.063 .010 

Mental Health Drugs .202 -.424 -.676 -.792 -.609 .029 

Physical Health Visits -.071 -.139 -.130 -.122 -.115 .005 

Physical Health Drugs .018 -.213 -.522 -.741 -.288 .016 

Source: Authors’ estimates from 1996-2003 Medical Expenditure Panel Survey. 

Note: Standard errors adjusted for complex survey design of the MEPS. 

33
 
 

 

Average Elasticity 

Privately Insured (N=58,414) 

Mental Health Visits .018 -.191 -.188 -.178 -.166 .024 

Mental Health Drugs .623 -.767 -1.012 -1.164 -.916 .088 

Physical Health Visits -.123 -.185 -.176 -.165 -.156 .021 

Physical Health Drugs -.083 -.202 -.534 -.762 -.256 .025 

 

Medicare (N=10,930) 

Mental Health Visits -.011 -.049 -.047 -.043 -.039 .017 

Mental Health Drugs .966 -.559 -.880 -1.044 -.894 .057 

Physical Health Visits -.034 -.062 -.059 -.055 -.051 .007 

Physical Health Drugs -.081 -.040 -.220 -.524 -.129 .025 

 

Medicaid (N=16,837) 

Mental Health Visits -.052 -.112 -.105 -.098 -.091 .028 

Mental Health Drugs .013 -.013 -.103 -.137 -.042 .020 

Physical Health Visits -.102 -.065 -.060 -.055 -.053 .007 

Physical Health Drugs -.065 -.081 -.089 -.089 -.065 .011 

 

Uninsured (N=14,402) 

Mental Health Visits -.044 -.082 -.184 -.241 -.154 .208 

Mental Health Drugs .333 -.127 -.246 -.286 -.279 .069 

Physical Health Visits -.112 -.155 -.147 -.137 -.132 .015 

Physical Health Drugs .309 -.103 -.628 -1.034 -.512 .085 

Table 3. Correlated Random Effects Estimates of Own-Price Elasticities: 

Privately Insured, Medicare, Medicaid, and Uninsured Populations 

$0-$5 

Arc Elasticity 

$5-$25 $25-$75 $75-$100 estimate std. err.

Source: Authors’ estimates from 1996-2003 Medical Expenditure Panel Survey. 

Note: Standard errors adjusted for complex survey design of the MEPS. 

34
 
 

Full Population (N=100,583) 

Mental Health Visits -.063 -.165 .028 .026 

(.010) (.017) (.011) (.017) 

Mental Health Drugs -.010 -.609 .014 .085 

(.006) (.029) (.008) (.015) 

Physical Health Visits -.002 .010 -.115 -.070 

(.002) (.003) (.005) (.010) 

Physical Health Drugs -.001 .009 -.029 -.288 

(.003) (.003) (.003) (.016) 

Privately Insured (N=58,414) 

Mental Health Visits -.166 -.344 .065 .097 

(.024) (.044) (.018) (.027) 

Mental Health Drugs .0001 -.916 .003 .099 

(.010) (.088) (.012) (.027) 

Physical Health Visits -.009 -.006 -.156 -.073 

(.004) (.005) (.021) (.032) 

Physical Health Drugs .0004 -.002 -.034 -.256 

(.003) (.004) (.005) (.025) 

Medicare (N=10,930) 

Mental Health Visits -.039 -.634 .103 .147 

(.017) (.043) (.028) (.037) 

Mental Health Drugs .007 -.894 .047 .226 

(.010) (.057) (.017) (.031) 

Physical Health Visits .0006 .0004 -.051 -.022 

(.003) (.005) (.007) (.013) 

Physical Health Drugs -.002 -.0002 -.015 -.129 

(.022) (.003) (.004) (.025) 

Medicaid (N=16,837) 

Mental Health Visits -.091 -.047 .002 .016 

(.028) (.014) (.021) (.020) 

Mental Health Drugs -.061 -.042 -.016 -.024 

(.018) (.020) (.021) (.018) 

Physical Health Visits .015 .027 -.053 -.010 

(.008) (.005) (.007) (.007) 

Physical Health Drugs .004 .020 -.030 -.064 

(.008) (.005) (.009) (.011) 

Uninsured (N=14,402) 

Mental Health Visits -.154 -.077 -.058 .054 

(.208) (.097) (.089) (.141) 

Mental Health Drugs -.010 -.279 .058 -.298 

(.058) (.069) (.064) (.172) 

Physical Health Visits -.004 .022 -.132 -.135 

(.009) (.016) (.015) (.042) 

Physical Health Drugs -.013 .007 -.038 -.512 

(.009) (.014) (.012) (.084) 

Table 4. Correlated Random Effects Estimates of Cross-Price Elasticities (Average) 

MH Visits MH Drugs Non-MH Visits Non-MH Drugs 

Source: Authors’ estimates from 1996-2003 Medical Expenditure Panel Survey. 

Note: Standard errors in parenthesis adjusted for complex design of the MEPS. 

35 
 

Table 5. Correlated Random Effects Estimates of Cross-Price Elasticities (Average): 

Panels 1-4 vs. Panels 5-7 

Panels 1-4 (N=54,131) 

Mental Health Visits 

MH Visits MH Drugs Non-MH Visits Non-MH Drugs 

-.046 

(.014) 

-.126 

(.014) 

.029 

(.015) 

.018 

(.021) 

Mental Health Drugs -.001 

(.009) 

-.547 

(.037) 

.004 

(.011) 

.077 

(.020) 

Physical Health Visits -.001 

(.003) 

.018 

(.004) 

-.113 

(.007) 

-.060 

(.013) 

Physical Health Drugs -.002 

(.003) 

.014 

(.004) 

-.029 

(.005) 

-.269 

(.021) 

Panels 5-7 (N=46,452) 

Mental Health Visits -.088 

(.014) 

-.346 

(.029) 

.025 

(.013) 

.072 

(.028) 

Mental Health Drugs -.014 

(.010) 

-.745 

(.079) 

.014 

(.014) 

.077 

(.026) 

Physical Health Visits -.001 

(.004) 

.008 

(.005) 

-.121 

(.008) 

-.090 

(.017) 

Physical Health Drugs .002 

(.003) 

.006 

(.005) 

-.032 

(.005) 

-.318 

(.025) 

Source: Authors’ estimates from 1996-2003 Medical Expenditure Panel Survey 

Note: Standard errors in parenthesis adjusted for complex design of the MEPS. 

36
 
 

 

 

Table 6. Results of Re-estimating Horgan’s (1986) Model of Demand for Outpatient Specialty 

Mental Health Visits: Weighted OLS estimates for the Log of Number of Visits for Users with 

Out-of-Pocket Expenses 

OLS Coefficient Estimate 1977a

 1987b 2002c 

Model 1: Log of the average percent paid out-of- -.436 -.293 -.034 

pocket per visit (5.22) (4.53) (.79) 

Model 2: Log of the average amount paid out-of- -.296 -.226 -.049 

pocket per visit (5.55) (5.57) (1.22) 

a

Source: Horgan (1986), Table 2. Estimate with data from the 1977 National Medical Care 

Expenditure Survey (NMCES). 

b

Source: Authors’ estimates of Horgan’s model with data from the 1987 National Medical 

Expenditure Survey (NMES). 

c

Source: Authors’ estimates of Horgan’s model with data from the 2002 Medical Expenditure 

Panel Survey (MEPS). 

Note: t-statistics in parenthesis reported for comparability with Horgan (1986), adjusted for 

complex design of the NMCES, NMES, and MEPS surveys. 

37
 
 

Table A1. Sample Descriptive Statistics (N=100,583, T=2) 

 Mean S. D. Minimum Maximum 

Mental Health Visits 0.234 1.097 0 8 

Mental Health Prescription Fills 0.366 1.416 0 8 

Physical Health Visits 2.577 2.595 0 8 

Physical Health Prescription Fills 2.755 3.015 0 8 

Hispanic 0.243 0.429 0 1 

Black 0.147 0.354 0 1 

Female 0.525 0.499 0 1 

Urban 0.781 0.413 0 1 

Northeast 0.168 0.374 0 1 

Midwest 0.204 0.403 0 1 

South 0.369 0.483 0 1 

Age 34.667 22.408 0 90 

Age Squared (Divided by 100) 17.038 18.086 0 81 

Education (Years) 12.461 3.077 0 17 

Paid Sick Leave 0.331 0.471 0 1 

Paid Vacation 0.454 0.498 0 1 

Deterministic Time Trend 4.02 1.96 1 8 

Private Insurance* 0.579 0.494 0 1 

Medicare* 0.112 0.315 0 1 

Medicaid / Other State Program* 0.167 0.373 0 1 

HMO / Managed Care* 0.465 0.499 0 1 

Log of Disposable Family Income* 9.899 1.599 0 13.023 

Poor / Fair Physical Health Status* 0.094 0.292 0 1 

Poor / Fair Mental Health Status* 0.060 0.237 0 1 

Columbia Impairment Scale* 0.028 0.164 0 1 

Log of MH Ambulatory Price* -0.262 1.796 -11.784 9.307 

Log of MH Drug Price* 0.410 1.940 -13.478 6.263 

Log of Non-MH Ambulatory Price* 2.076 1.648 -9.007 8.040 

Log of Non-MH Drug Price* 2.244 1.129 -7.560 6.724 

MH Ambulatory Price is Zero* 0.214 0.410 0 1 

MH Drug Price is Zero* 0.045 0.207 0 1 

PH Ambulatory Price is Zero* 0.125 0.331 0 1 

PH Drug Price is Zero* 0.012 0.111 0 1 

Source: Authors’ estimates from 1996-2003 Medical Expenditure Panel Survey. Means are 

unweighted. * Denotes variable is specified as correlated with random effect. 

38
 
 

Table A2: Sample Descriptive Statistics for End-of-Year Prices and Associated 

Probabilities 

Category N Mean S.D. Min 25 

Pctl. 

50 

Pctl. 

75 

Pctl. Max 

Mental Health Ambulatory Price (Pre-Imputation) 

1 14,819 24.199 96.757 0.000 0.000 3.387 20.000 33,454.21 

2 10,227 18.711 46.138 0.000 0.000 0.000 18.000 1,466.25 

3 8,094 17.833 40.192 0.000 0.000 0.000 17.913 1,055.70 

4 6,759 17.908 59.809 0.000 0.000 0.000 17.104 2,649.60 

5 5,702 17.966 54.579 0.000 0.000 0.000 17.190 2,071.59 

6 4,961 17.730 36.871 0.000 0.000 1.069 20.780 725.95 

7 2,745 17.197 30.544 0.000 0.000 1.782 21.611 300.83 

8 1,162 20.628 37.202 0.000 0.000 3.113 25.945 573.00 

Mental Health Ambulatory Price Probability 

0 201,166 0.936 0.070 0.265 0.926 0.956 0.976 1.000 

1 201,166 0.020 0.018 0.000 0.009 0.015 0.024 0.113 

2 201,166 0.009 0.009 0.000 0.004 0.007 0.010 0.061 

3 201,166 0.006 0.006 0.000 0.002 0.004 0.007 0.045 

4 201,166 0.004 0.005 0.000 0.002 0.003 0.005 0.039 

5 201,166 0.003 0.003 0.000 0.001 0.002 0.004 0.031 

6 201,166 0.010 0.011 0.000 0.003 0.006 0.011 0.122 

7 201,166 0.007 0.009 0.000 0.002 0.004 0.008 0.132 

8 201,166 0.005 0.009 0.000 0.001 0.002 0.005 0.207 

Mental Health Drug Price (Pre-Imputation) 

1 18,696 27.359 39.828 0.000 4.931 11.460 34.363 884.74 

2 15,455 27.183 40.536 0.000 4.584 11.460 32.770 885.00 

3 13,459 26.952 39.546 0.000 4.404 11.460 32.112 509.38 

4 11,901 26.670 40.468 0.000 3.660 11.460 30.895 659.00 

5 10,516 26.784 40.494 0.000 3.519 11.460 31.219 658.10 

6 9,378 26.072 36.384 0.000 4.682 12.815 32.818 658.10 

7 4,909 24.773 36.897 0.000 3.387 11.688 30.426 509.38 

8 1,601 23.485 39.785 0.000 2.342 10.230 27.149 616.42 

Mental Health Drug Price Probability 

0 201,166 0.921 0.087 0.226 0.892 0.948 0.979 1.000 

1 201,166 0.014 0.011 0.000 0.005 0.011 0.020 0.050 

2 201,166 0.009 0.007 0.000 0.003 0.007 0.013 0.035 

3 201,166 0.007 0.006 0.000 0.002 0.005 0.010 0.031 

4 201,166 0.006 0.005 0.000 0.002 0.004 0.008 0.029 

5 201,166 0.005 0.005 0.000 0.001 0.003 0.007 0.027 

6 201,166 0.019 0.020 0.000 0.005 0.012 0.026 0.137 

7 201,166 0.014 0.020 0.000 0.002 0.007 0.017 0.192 

8 201,166 0.007 0.017 0.000 0.001 0.002 0.006 0.353 

Physical Health Ambulatory Price (Pre-Imputation) 

1 161,941 28.907 157.197 0.000 0.000 9.520 19.482 16,879.50 

2 120,846 26.264 155.597 0.000 0.000 5.645 16.035 14,322.00 

39 
 

 Category N Mean S.D. Min 25 

Pctl. 

50 

Pctl. 

75 

Pctl. Max 

Physical Health Ambulatory Price (Pre-Imputation) 

3 93,839 23.797 127.504 0.000 0.000 5.115 15.585 9,179.57 

4 75,128 22.623 131.674 0.000 0.000 2.854 15.345 8,313.00 

5 61,668 22.092 142.429 0.000 0.000 0.000 15.000 16,880.00 

6 51,468 19.916 78.025 0.000 0.000 5.645 16.368 6,085.37 

7 24,900 16.804 58.350 0.000 0.000 4.874 15.249 2,700.00 

8 8,740 13.597 38.681 0.000 0.000 3.680 13.858 1,558.92 

Physical Health Ambulatory Price Probability 

0 201,166 0.306 0.171 0.002 0.182 0.279 0.401 0.895 

1 201,166 0.175 0.059 0.008 0.136 0.175 0.219 0.314 

2 201,166 0.115 0.026 0.017 0.101 0.119 0.132 0.164 

3 201,166 0.081 0.020 0.009 0.072 0.086 0.095 0.115 

4 201,166 0.058 0.017 0.004 0.048 0.062 0.072 0.087 

5 201,166 0.045 0.016 0.003 0.034 0.047 0.059 0.072 

6 201,166 0.115 0.057 0.004 0.071 0.108 0.157 0.231 

7 201,166 0.068 0.054 0.001 0.028 0.052 0.093 0.250 

8 201,166 0.038 0.051 0.000 0.008 0.019 0.044 0.499 

Physical Health Drug Price (Pre-Imputation) 

1 140,597 19.943 42.750 0.000 5.000 10.230 21.380 3,244.00 

2 113,062 20.990 40.023 0.000 5.115 10.390 23.448 3,243.95 

3 94,198 22.183 42.516 0.000 5.163 10.864 25.290 3,244.00 

4 82,075 22.799 44.177 0.000 5.195 11.040 25.975 3,244.00 

5 72,938 22.819 40.989 0.000 5.195 11.253 26.588 3,243.95 

6 66,344 22.991 33.199 0.000 6.720 14.021 28.634 1,958.73 

7 4,401 24.048 33.037 0.000 7.574 15.273 30.143 1,665.26 

8 24,194 24.113 29.044 0.000 8.175 16.065 31.428 956.91 

Physical Health Drug Price Probability 

0 201,166 0.398 0.188 0.002 0.261 0.399 0.528 0.893 

1 201,166 0.116 0.058 0.000 0.071 0.116 0.162 0.263 

2 201,166 0.078 0.026 0.001 0.061 0.081 0.096 0.145 

3 201,166 0.052 0.015 0.001 0.042 0.054 0.063 0.092 

4 201,166 0.040 0.012 0.002 0.032 0.041 0.049 0.070 

5 201,166 0.029 0.010 0.002 0.022 0.030 0.037 0.052 

6 201,166 0.099 0.044 0.003 0.061 0.099 0.139 0.188 

7 201,166 0.092 0.067 0.001 0.034 0.071 0.147 0.233 

8 201,166 0.098 0.133 0.000 0.013 0.037 0.128 0.909 

Source: Authors’ estimates from 1996-2003 Medical Expenditure Panel Survey. Means are 

unweighted 

40
 
 

Inflation 

constant -0.609 

(0.416) 

-1.212 

(0.214) 

0.955 

(0.118) 

1.556 

(0.090) 

Hispanic -0.239 

(0.087) 

-0.248 

(0.072) 

-0.220 

(0.025) 

-0.320 

(0.031) 

Black -0.321 

(0.092) 

-0.203 

(0.083) 

-0.310 

(0.038) 

-0.495 

(0.037) 

Female -0.661 

(0.080) 

-0.550 

(0.052) 

0.642 

(0.030) 

0.659 

(0.021) 

Urban -0.144 

(0.060) 

-0.064 

(0.051) 

-0.152 

(0.027) 

-0.102 

(0.024) 

Northeast 0.219 

(0.085) 

0.180 

(0.069) 

0.122 

(0.035) 

0.039 

(0.035) 

Midwest 0.249 

(0.100) 

0.342 

(0.073) 

0.195 

(0.030) 

0.160 

(0.036) 

South 0.165 

(0.093) 

0.271 

(0.066) 

0.209 

(0.028) 

0.301 

(0.029) 

Age 0.075 

(0.007) 

0.079 

(0.005) 

-0.043 

(0.005) 

-0.019 

(0.002) 

Age Squared/100 -0.066 

(0.011) 

-0.068 

(0.007) 

0.070 

(0.007) 

0.048 

(0.003) 

Education (Years) -0.012 

(0.014) 

0.026 

(0.008) 

0.054 

(0.004) 

0.049 

(0.004) 

Paid Sick Leave 0.046 

(0.109) 

0.172 

(0.090) 

0.039 

(0.023) 

0.008 

(0.026) 

Paid Vacation 0.186 

(0.111) 

0.042 

(0.080) 

0.046 

(0.023) 

0.021 

(0.027) 

Time Trend 0.011 

(0.012) 

0.000 

(0.009) 

0.028 

(0.004) 

0.037 

(0.004) 

Medicare 0.083 

(0.286) 

0.490 

(0.145) 

0.414 

(0.066) 

0.570 

(0.049) 

Medicaid / Other State -0.019 

(0.133) 

0.124 

(0.108) 

0.803 

(0.055) 

0.896 

(0.046) 

Private Insurance 0.542 

(0.138) 

0.691 

(0.111) 

0.438 

(0.032) 

0.262 

(0.030) 

HMO / Managed Care 0.068 

(0.058) 

0.055 

(0.050) 

0.121 

(0.020) 

0.015 

(0.019) 

Log Disp. Family Income 0.003 

(0.020) 

0.032 

(0.011) 

0.014 

(0.006) 

-0.005 

(0.006) 

Poor /Fair Physical Health 0.078 

(0.085) 

0.074 

(0.054) 

0.429 

(0.031) 

0.649 

(0.030) 

Poor / Fair Mental Health Status 0.222 

(0.113) 

0.039 

(0.068) 

0.132 

(0.041) 

0.216 

(0.040) 

Columbia Impairment Scale 0.470 

(0.110) 

0.267 

(0.109) 

0.439 

(0.179) 

0.009 

(0.086) 

Table A3 Cross Sectional Zero-Inflated Ordered Probit Coefficient Estimates 

(N·T=201166) 

MH Visits MH Drugs Non-MH Visits Non-MH Drugs 

41
 
 

 

MH Visits MH Drugs Non-MH Visits Non-MH Drugs 

Log MH Visit Price -0.064 

(0.023) 

-0.046 

(0.012) 

0.017 

(0.004) 

0.014 

(0.004) 

Log MH Drug Price 0.326 

(0.047) 

0.528 

(0.015) 

0.018 

(0.007) 

0.027 

(0.006) 

Log Non-MH Visit Price -0.016 

(0.022) 

-0.044 

(0.015) 

-0.035 

(0.007) 

-0.049 

(0.006) 

Log Non-MH Drug Price -0.052 

(0.024) 

-0.236 

(0.018) 

-0.503 

(0.021) 

-0.907 

(0.019) 

MH Visit Price is Zero 0.111 

(0.109) 

0.158 

(0.052) 

-0.051 

(0.021) 

-0.068 

(0.016) 

MH Drug Price is Zero -0.543 

(0.174) 

-0.968 

(0.111) 

0.223 

(0.081) 

0.272 

(0.068) 

PH Visit Price is Zero 0.078 

(0.073) 

0.039 

(0.057) 

-0.240 

(0.032) 

-0.154 

(0.027) 

PH Drug Price is Zero 0.237 

(0.165) 

0.292 

(0.177) 

-1.170 

(0.120) 

-2.395 

(0.108) 

Ordered Probit 

constant -2.327 

(0.138) 

-2.517 

(0.153) 

0.048 

(0.072) 

-0.243 

(0.066) 

Hispanic -0.381 

(0.045) 

-0.651 

(0.060) 

-0.223 

(0.021) 

-0.237 

(0.019) 

Black -0.563 

(0.051) 

-0.955 

(0.063) 

-0.479 

(0.019) 

-0.308 

(0.021) 

Female 0.395 

(0.024) 

0.568 

(0.026) 

0.287 

(0.009) 

0.283 

(0.011) 

Urban 0.139 

(0.030) 

0.065 

(0.039) 

0.017 

(0.016) 

-0.081 

(0.017) 

Northeast 0.047 

(0.036) 

0.009 

(0.056) 

0.079 

(0.022) 

0.048 

(0.029) 

Midwest 0.022 

(0.041) 

0.110 

(0.060) 

0.060 

(0.024) 

0.191 

(0.027) 

South 0.085 

(0.037) 

0.325 

(0.050) 

0.073 

(0.021) 

0.275 

(0.024) 

Age 0.023 

(0.004) 

0.042 

(0.004) 

0.005 

(0.001) 

0.022 

(0.001) 

Age Squared/100 -0.023 

(0.004) 

-0.030 

(0.005) 

0.016 

(0.002) 

0.013 

(0.002) 

Education (Years) 0.037 

(0.004) 

0.005 

(0.006) 

0.042 

(0.002) 

0.010 

(0.003) 

Paid Sick Leave 0.045 

(0.033) 

-0.018 

(0.043) 

0.036 

(0.013) 

0.039 

(0.016) 

Paid Vacation -0.184 

(0.033) 

-0.223 

(0.042) 

-0.061 

(0.015) 

-0.052 

(0.017) 

Time Trend 0.030 

(0.006) 

0.087 

(0.007) 

0.020 

(0.003) 

0.038 

(0.003) 

Medicare 0.086 

(0.066) 

0.203 

(0.088) 

0.210 

(0.042) 

0.044 

(0.034) 

42
 
 

MH Visits MH Drugs Non-MH Visits Non-MH Drugs 

Medicaid / Other State 0.755 

(0.050) 

0.989 

(0.070) 

0.176 

(0.027) 

0.217 

(0.032) 

Private Insurance 0.011 

(0.045) 

-0.039 

(0.067) 

0.371 

(0.022) 

0.292 

(0.024) 

HMO / Managed Care -0.048 

(0.021) 

-0.073 

(0.028) 

-0.048 

(0.012) 

0.008 

(0.012) 

Log Disp. Family Income -0.023 

(0.006) 

-0.032 

(0.007) 

0.010 

(0.003) 

0.006 

(0.004) 

Poor /Fair Physical Health 0.245 

(0.028) 

0.340 

(0.034) 

0.421 

(0.015) 

0.455 

(0.014) 

Poor / Fair Mental Health Status 0.932 

(0.035) 

1.130 

(0.034) 

0.130 

(0.018) 

0.253 

(0.018) 

Columbia Impairment Scale 1.151 

(0.072) 

1.572 

(0.085) 

-0.282 

(0.031) 

-0.145 

(0.041) 

Log MH Visit Price -0.012 

(0.006) 

0.013 

(0.004) 

0.006 

(0.003) 

0.006 

(0.003) 

Log MH Drug Price -0.232 

(0.019) 

-0.502 

(0.014) 

0.002 

(0.003) 

-0.004 

(0.004) 

Log PH Visit Price -0.021 

(0.006) 

-0.018 

(0.005) 

-0.159 

(0.005) 

-0.062 

(0.004) 

Log PH Drug Price -0.030 

(0.010) 

0.035 

(0.009) 

-0.051 

(0.006) 

-0.119 

(0.005) 

MH Visit Price is Zero 0.047 

(0.031) 

-0.080 

(0.022) 

-0.056 

(0.011) 

-0.037 

(0.012) 

MH Drug Price is Zero 0.032 

(0.083) 

0.146 

(0.106) 

-0.076 

(0.024) 

-0.140 

(0.023) 

PH Visit Price is Zero -0.063 

(0.034) 

-0.066 

(0.028) 

-0.033 

(0.016) 

-0.072 

(0.018) 

PH Drug Price is Zero -0.121 

(0.103) 

-0.319 

(0.117) 

-0.085 

(0.038) 

0.169 

(0.051) 

0.226 0.140 0.757 0.622 

μ1 (0.003) (0.002) (0.022) (0.012) 

0.353 0.239 1.163 0.980 

μ2 (0.005) (0.004) (0.027) (0.015) 

0.450 0.327 1.451 1.210 

μ3 (0.007) (0.005) (0.028) (0.016) 

0.534 0.410 1.670 1.390 

μ4 (0.009) (0.006) (0.030) (0.017) 

0.602 0.487 1.853 1.523 

μ5 (0.009) (0.007) (0.030) (0.017) 

0.883 0.879 2.451 2.020 

μ6 (0.015) (0.012) (0.033) (0.019) 

1.248 1.450 3.098 2.628 

μ7 (0.020) (0.021) (0.034) (0.020) 

Source: Author’s calculations from 1996-2003 Medical Expenditure Panel Survey (1996-2003) 

Standard errors in parentheses adjust for complex design of survey. 

43 
 

Appendix Table A4 Correlated Random Effect Zero-Inflated Ordered Probit Coefficient 

Estimates 

MH Visits MH Drugs Non-MH Visits Non-MH Drugs 

Inflation 

constant -0.657 

(0.374) 

-1.218 

(0.221) 

1.022 

(0.126) 

1.609 

(0.085) 

Hispanic -0.368 

(0.098) 

-0.288 

(0.089) 

-0.222 

(0.025) 

-0.322 

(0.028) 

Black -0.274 

(0.104) 

-0.142 

(0.100) 

-0.307 

(0.038) 

-0.500 

(0.033) 

Female -0.805 

(0.078) 

-0.608 

(0.058) 

0.638 

(0.034) 

0.662 

(0.021) 

Urban -0.102 

(0.063) 

-0.030 

(0.054) 

-0.152 

(0.028) 

-0.104 

(0.023) 

Northeast 0.154 

(0.104) 

0.140 

(0.087) 

0.132 

(0.035) 

0.038 

(0.032) 

Midwest 0.120 

(0.113) 

0.254 

(0.084) 

0.209 

(0.029) 

0.163 

(0.033) 

South 0.192 

(0.105) 

0.239 

(0.079) 

0.230 

(0.028) 

0.305 

(0.028) 

Age 0.075 

(0.007) 

0.081 

(0.005) 

-0.040 

(0.005) 

-0.019 

(0.002) 

Age Squared/100 -0.055 

(0.011) 

-0.067 

(0.006) 

0.065 

(0.008) 

0.046 

(0.003) 

Education (Years) -0.008 

(0.014) 

0.024 

(0.008) 

0.056 

(0.004) 

0.051 

(0.004) 

Paid Sick Leave 0.073 

(0.114) 

0.195 

(0.088) 

0.037 

(0.021) 

0.006 

(0.023) 

Paid Vacation 0.323 

(0.120) 

0.151 

(0.081) 

0.040 

(0.022) 

0.022 

(0.024) 

Time Trend 0.012 

(0.012) 

-0.015 

(0.010) 

0.023 

(0.004) 

0.029 

(0.004) 

Medicare -0.051 

(0.303) 

0.556 

(0.152) 

0.432 

(0.074) 

0.558 

(0.053) 

Medicaid / Other State -0.466 

(0.134) 

-0.182 

(0.112) 

0.553 

(0.065) 

0.698 

(0.052) 

Private Insurance 0.209 

(0.140) 

0.488 

(0.116) 

0.252 

(0.033) 

0.071 

(0.027) 

HMO / Managed Care 0.109 

(0.062) 

0.098 

(0.054) 

0.154 

(0.022) 

0.057 

(0.019) 

Log Disp. Family Income -0.014 

(0.020) 

0.026 

(0.012) 

0.014 

(0.005) 

-0.001 

(0.005) 

Poor /Fair Physical Health 0.025 

(0.087) 

-0.134 

(0.052) 

0.142 

(0.030) 

0.332 

(0.028) 

Poor / Fair Mental Health 0.073 -0.288 -0.066 0.040 

Status (0.099) (0.066) (0.037) (0.035) 

44
 
 

 

MH Visits MH Drugs Non-MH Visits Non-MH Drugs 

Columbia Impairment Scale 0.141 

(0.120) 

-0.213 

(0.133) 

0.492 

(0.159) 

0.086 

(0.084) 

Log MH Visit Price -0.044 

(0.024) 

-0.040 

(0.012) 

0.006 

(0.004) 

0.002 

(0.003) 

Log MH Drug Price 0.177 

(0.034) 

0.498 

(0.015) 

0.014 

(0.006) 

0.023 

(0.005) 

Log Non-MH Visit Price 0.024 

(0.022) 

-0.003 

(0.014) 

0.002 

(0.008) 

-0.012 

(0.006) 

Log Non-MH Drug Price 0.019 

(0.023) 

-0.168 

(0.021) 

-0.414 

(0.027) 

-0.797 

(0.024) 

MH Visit Price is Zero 0.080 

(0.113) 

0.180 

(0.054) 

0.000 

(0.021) 

-0.018 

(0.016) 

MH Drug Price is Zero -0.031 

(0.151) 

-0.638 

(0.132) 

0.233 

(0.079) 

0.314 

(0.069) 

Non-MH Visit Price is Zero 0.173 

(0.076) 

0.056 

(0.063) 

-0.172 

(0.034) 

-0.087 

(0.027) 

Non-MH Drug Price is Zero -0.116 

(0.153) 

0.139 

(0.219) 

-1.041 

(0.119) 

-2.175 

(0.115) 

Ordered Probit 

constant -1.727 

(0.128) 

-1.732 

(0.150) 

0.090 

(0.086) 

-0.162 

(0.079) 

Hispanic -0.277 

(0.044) 

-0.570 

(0.062) 

-0.223 

(0.025) 

-0.231 

(0.021) 

Black -0.445 

(0.051) 

-0.835 

(0.070) 

-0.507 

(0.022) 

-0.336 

(0.025) 

Female 0.397 

(0.024) 

0.531 

(0.028) 

0.303 

(0.011) 

0.288 

(0.014) 

Urban 0.104 

(0.030) 

0.042 

(0.038) 

0.001 

(0.019) 

-0.086 

(0.019) 

Northeast 0.017 

(0.039) 

-0.023 

(0.049) 

0.081 

(0.025) 

0.057 

(0.033) 

Midwest 0.025 

(0.043) 

0.096 

(0.054) 

0.065 

(0.027) 

0.194 

(0.031) 

South 0.051 

(0.040) 

0.299 

(0.045) 

0.080 

(0.024) 

0.282 

(0.028) 

Age 0.004 

(0.004) 

0.017 

(0.005) 

0.004 

(0.002) 

0.021 

(0.001) 

Age Squared/100 -0.007 

(0.004) 

-0.007 

(0.005) 

0.018 

(0.003) 

0.015 

(0.002) 

Education (Years) 0.032 

(0.005) 

-0.001 

(0.006) 

0.046 

(0.003) 

0.012 

(0.003) 

Paid Sick Leave 0.035 

(0.033) 

-0.042 

(0.040) 

0.037 

(0.014) 

0.040 

(0.017) 

Paid Vacation -0.210 

(0.034) 

-0.237 

(0.039) 

-0.057 

(0.016) 

-0.050 

(0.018) 

Time Trend 0.020 

(0.006) 

0.072 

(0.006) 

0.014 

(0.003) 

0.024 

(0.003) 

45
 
 

MH Visits MH Drugs Non-MH Visits Non-MH Drugs 

Medicare -0.002 

(0.065) 

0.043 

(0.075) 

0.200 

(0.060) 

0.021 

(0.046) 

Medicaid / Other State 0.471 

(0.050) 

0.689 

(0.065) 

-0.026 

(0.033) 

-0.026 

(0.037) 

Private Insurance -0.101 

(0.039) 

-0.200 

(0.053) 

0.202 

(0.025) 

0.113 

(0.026) 

HMO / Managed Care -0.009 

(0.020) 

-0.047 

(0.023) 

0.006 

(0.015) 

0.051 

(0.014) 

Log Disp. Family Income -0.010 

(0.006) 

-0.015 

(0.006) 

0.007 

(0.004) 

0.005 

(0.004) 

Poor /Fair Physical Health 0.014 

(0.023) 

0.140 

(0.024) 

0.155 

(0.015) 

0.139 

(0.013) 

Poor / Fair Mental Health 0.424 0.636 -0.040 0.044 

Status (0.029) (0.031) (0.018) (0.017) 

Columbia Impairment Scale 0.676 

(0.072) 

0.940 

(0.089) 

-0.333 

(0.033) 

-0.205 

(0.041) 

Log MH Visit Price -0.020 

(0.006) 

0.004 

(0.003) 

-0.003 

(0.003) 

-0.002 

(0.003) 

Log MH Drug Price -0.111 

(0.012) 

-0.422 

(0.020) 

0.007 

(0.003) 

0.002 

(0.003) 

Log Non-MH Visit Price 0.008 

(0.006) 

0.008 

(0.005) 

-0.111 

(0.006) 

-0.024 

(0.004) 

Log Non-MH Drug Price 0.008 

(0.010) 

0.082 

(0.010) 

0.015 

(0.006) 

-0.038 

(0.006) 

MH Visit Price is Zero 0.074 

(0.030) 

-0.042 

(0.021) 

-0.016 

(0.010) 

0.004 

(0.011) 

MH Drug Price is Zero -0.016 

(0.067) 

0.168 

(0.126) 

-0.023 

(0.024) 

-0.063 

(0.024) 

Non-MH Visit Price is Zero -0.034 

(0.032) 

-0.014 

(0.028) 

0.048 

(0.017) 

0.012 

(0.018) 

Non-MH Drug Price is Zero 0.060 

(0.094) 

-0.156 

(0.138) 

0.034 

(0.036) 

0.211 

(0.049) 

0.227 0.144 0.743 0.588 

μ1 (0.003) (0.002) (0.030) (0.015) 

0.358 0.244 1.147 0.937 

μ2 (0.004) (0.004) (0.037) (0.019) 

0.456 0.331 1.437 1.167 

μ3 (0.007) (0.005) (0.040) (0.021) 

0.537 0.415 1.656 1.346 

μ4 (0.009) (0.006) (0.041) (0.021) 

0.604 0.489 1.840 1.478 

μ5 (0.009) (0.008) (0.042) (0.022) 

0.877 0.868 2.440 1.976 

μ6 (0.016) (0.014) (0.045) (0.023) 

1.229 1.412 3.089 2.584 

μ7 (0.023) (0.028) (0.046) (0.026) 

46
 
 

-0.102 

Medicare period 1 λ (0.043) 

0.129 

Medicare period 2 λ (0.041) 

0.140 

Medicaid period 1 λ (0.024) 

0.128 

Medicaid period 2 λ (0.024) 

0.106 

Private insurance period 1 λ (0.018) 

0.108 

Private insurance period 2 λ (0.017) 

HMO period 1 λ -0.020 

(0.011) 

HMO period 2 λ -0.040 

(0.011) 

Log fam income period 1 λ 0.003 

(0.003) 

Log fam income period 2 λ -0.003 

(0.003) 

Poor/fair health period 1 λ 0.193 

(0.012) 

Poor/fair health period 2 λ 0.228 

(0.012) 

Poor/fair MH period 1 λ 0.180 

(0.017) 

Poor/fair MH period 2 λ 0.205 

(0.016) 

CIS period 1 λ 0.047 

(0.029) 

CIS period 2 λ 0.074 

(0.028) 

Log MH Visit Price period 1 λ 0.010 

(0.002) 

Log MH Visit Price period 2 λ 0.009 

(0.002) 

Log MH Drug Price period 1 λ -0.002 

(0.003) 

Log MH Drug Price period 2 λ -0.006 

(0.003) 

Log Non-MH Visit Price period 1 λ -0.025 

(0.003) 

Log Non-MH Visit Price period 2 λ -0.037 

(0.003) 

Log Non-MH Drug Price period 1 λ -0.046 

(0.004) 

MH Visits MH Drugs Non-MH Visits Non-MH Drugs 

Correlated Random Effects 

47
 
 

MH Visits MH Drugs Non-MH Visits Non-MH Drugs 

Log Non-MH Drug Price period 2 λ -0.057 

(0.005) 

MH Visit Price=0 period 1 λ -0.045 

(0.010) 

MH Visit Price=0 period 2 λ -0.043 

(0.010) 

MH Drug Price=0 period 1 λ -0.051 

(0.022) 

MH Drug Price=0 period 2 λ -0.041 

(0.023) 

Non-MH Vis Price=0 period 1 λ -0.070 

(0.013) 

Non-MH Vis Price=0 period 2 λ -0.073 

(0.013) 

Non-MH Drug Price=0 period 1 λ -0.062 

(0.035) 

Non-MH Drug Price=0 period 2 λ -0.102 

(0.035) 

Source: Author’s calculations from 1996-2003 Medical Expenditure Panel Survey (1996-2003) 

Standard errors in parentheses adjust for complex design of survey. 

48