Economic Incentives and Contracts: The Use of Psychotropic Medications

The advent of novel psychotropic medications has revolutionized treatments for mental illnesses over the past few decades. Concurrently, changes in mental health coverage, particularly for Medicaid patients, created economic incentives for insurance carriers to shift costs and to encourage the use of psychotropic drugs. To quantify these effects, based on the framework in Griliches’ seminal study on hybrid corn, we estimate logistic diffusion models using a longitudinal data set on Medicaid drug utilization. We find that financial incentives played a significant role in encouraging use of new medications that have lower physician specialty skill requirements. (January 2008)