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This paper presents an empirical study of endogenous treatment effects in the presence of heterogeneous responses. We estimate the incentive and selection effects of having prescription drug coverage on total drug expenditures using a sample from the Medicare Current Beneficiary Survey (MCBS). A Dirichlet process mixture (DPM) model is used to model the heterogeneity in treatment effects. Rather than estimating a finite mixture model with a fixed number of components, we specify a DP prior on the parameters, thus allowing the data and prior knowledge to determine the number of components. Endogeneity is modeled by the covariance of the error terms of the selection and the outcome equations in a two-equation selection model. We find that there are strong incentive and advantageous selection effects, with the average treatment effect and the average treatment effect for the treated estimated at $1132 and $858, respectively. Substantial heterogeneity is found to exist in the selection effects, particularly for those having lower drug expenditures.

This paper studies the effect of managed care on medical expenditure using a model in which the insurance status is assumed to be endogenous. Insurance plan choice is modeled through the multinomial probit model. The medical expenditure variable, the outcome of interest, has a significant proportion of zeros that are handled using the two-part model, extended to handle endogenous insurance. The estimation approach is Bayesian, based on the Gibbs Sampler. The model is applied to a sample of 20 460 individuals obtained from the Medical Expenditure Panel Survey. The results provide substantial evidence of selectivity. Copyright © 2006 John Wiley & Sons, Ltd.