Free Distribution or Cost-Sharing Free Distribution or Cost-Sharing? Evidence from a Randomized Malaria Prevention Experiment Jessica Cohen, Brookings Institution Pascaline Dupas, Dartmouth College & MIT JPAL

Background Health products with positive externalities are often subsidized Can non-zero prices reduce wastage? Selection effect: those who won’t use the good won’t buy it Psychological effect: “sunk cost” might encourage utilization Signal effect: if price indicates quality, might encourage both purchases and use

Research Questions What is the relationship between price and demand for insecticide-treated nets (ITNs)? What is the relationship between price and usage of ITNs? Do higher prices target ITNs to those who need them most? Are there psychological effects of price on usage?

Intervention Randomized price at which 20 rural prenatal clinics could sell ITNs Control group (prevailing subsidized price of 70 Ksh) Treatment groups (0, 10, 20, and 40 Ksh) Offered free hemoglobin test to all clients on survey days No other changes in normal procedures at clinics Often includes discussion of need to use bed net

Sample & Timing Program clinics selected from 70 health centers based on size, services offered, and distance from each other Program phased in between March and May 2007 Program ran for at least 3 months at each clinic

Data Administrative records of ITN sales 3-4 random survey days per clinic All prenatal visit patients (n=545) Basic background questions Net purchase decision Hemoglobin level measured Follow-up home visit 3-10 weeks after net purchase Random sample of 246 patients who got net (n=226 visited) Net use questions Observed net usage Hemoglobin as indicator of malaria Compare reported & observed net usage

Price-Elasticity of Demand Demand not very sensitive to small increases in price from zero, but even moderate degree of cost-sharing leads to large decreases in demand Robustness checks Control for enrollment at prenatal clinics (could be affected by subsidized ITNs) Use both administrative and survey data Restrict sample to first visits Restrict sample to first pregnancies

Price-Elasticity of Usage No evidence that higher prices encourage selection of those more likely to use the ITN Cost-sharing programs did not make up for dampened demand through increased usage Robustness checks Restrict sample to first visits Restrict sample to first pregnancies Use both self-reported & observed usage

Prices & Selection Effects Compare hemoglobin levels among clients who got nets and those at control clinics Women who got free nets are significantly healthier; no statistical differences between those at other prices and control Proportion of anemic women w/ ITN significantly lower than free distribution when price ≥ 40 Confounded by incentive effect of free nets? Free net beneficiaries more likely to be repeat visit Suggestive evidence that they paid more for transportation, too

Prices & Psychological Effects Separate selection and psychological effects with a second price randomization At clinics with positive price, subsample of women who decided to buy participated in lottery for lower price Holds willingness to pay constant while varying sunk cost No evidence that actual price paid is related to usage

Institutional Issues Financial incentives for clinics to carry out program Conditional $75 cash bonus per month Random spot checks of record books Visits to random sub-sample of beneficiaries Leakages & mismanagement still observed No problems with altered prices Some nets sold to ineligible clients Theft No cases of nets being re-sold

External Validity ITNs heavily advertised in the region Pregnant women in particular targeted by malaria prevention messages Most people are aware that unsubsidized price of ITNs is high “These results thus do not speak to the debate on optimal pricing for health products that are unknown to the public.”

Cost-Effectiveness Analysis Lots of assumptions Differences in costs only from subsidy Externality thresholds Physical barrier effectiveness Share of eligible households in population Free distribution saves more lives in all scenarios Imprecise estimates, but cost-sharing is at best marginally more cost-effective than free distribution

Scaling Up “As with most randomized evaluations, we are unable to characterize or quantify the impact of these distribution schemes when they have been scaled up and general equilibrium effects have set in.”

Conclusion In this case, clear that increased prices dampen demand No evidence that higher prices improve welfare by encouraging use By means of either selection or psychological effects But findings are very context-specific High existing valuations Purchase decisions influenced by both willingness and ability to pay