Pharmaceutical pricing, price controls, and their effects on pharmaceutical sales and research and development expenditures in the European Union.

BACKGROUND: Each country in the European Union (EU) currently employs direct price controls or permutations of direct price controls, such as reference pricing or limitations on returns to capital. Some countries also use volume controls. A new proposal that is being discussed would have all of the countries in the EU adopt uniform pricing for each pharmaceutical. OBJECTIVE: This paper analyzes the economic effects of free-market pricing individual-country price controls, and uniform EU price controls. METHODS: Microeconomic and mathematical models were used to simulate and predict probable economic outcomes in a comparative static setting. RESULTS: Price controls may be in the form of price ceilings or price floors. Both forms of price control generate deadweight economic losses in the short run and long run. A uniform EU price for each pharmaceutical sold there would have elements of a price ceiling in some of the countries and of a price floor in other countries. The deadweight loss incurred would be a function of the level at which the uniform price was set by the EU and the price elasticity of demand for each pharmaceutical in each country. CONCLUSIONS: Economic efficiency is maximized in both the short run and long run when prices are set in freely competitive markets. An additional important dimension of Ramsey pricing within a competitive context is that it generates funds for investment in pharmaceutical research and development, which enhances economic efficiency in the long run.

Pharmaceutical patents and price controls.

BACKGROUND: Since 1995, every member-country of the World Trade Organization (WTO) has agreed to honor a 20-year patent-life, from the date of a pharmaceutical company's application for the patent, in the country of application. Patent protection retards competitive imitation of an invented product. This kind of protection is particularly important for pharmaceuticals, because pharmaceuticals that are not derived from biotechnology can be imitated easily and inexpensively. The economic function of a patent is to allow a period of above-normal profits for a technically and commercially successful product; these profits stimulate further investment and invention. However, direct price controls, or permutations of direct price controls on pharmaceutical compounds, can fully or partially circumvent the economic intent of patent agreements. OBJECTIVE: This paper formulates an economic model that takes into account demand and cost/supply dimensions of the output and pricing of a hypothetical pharmaceutical, extrapolating about the respective effects of direct price controls and lack of price controls, and describing permutations of direct price controls in different countries. RESULTS: The pharmaceutical industry depends on patents to fund the development and introduction of new products. A country can indirectly circumvent the economic logic of a patent by using price controls, but it cannot shift the economic costs of such a policy to another country that does not use price controls. Instead, less money is available for research and development (R&D). CONCLUSIONS: Pharmaceutical price controls allow some countries to avoid the constraints of patent agreements without breaking those agreements outright. This, in turn, reduces the amount of profit available for further R&D, which is a detriment to consumers worldwide.

A 3-stage model for assessing the probable economic effects of direct-to-consumer advertising of pharmaceuticals.

BACKGROUND: The pharmaceutical industry employs a variety of marketing strategies that have previously been directed primarily toward physicians. However, mass media direct-to-consumer (DTC) advertising of prescription drugs has emerged as a ubiquitous promotional strategy. OBJECTIVE: This article explores the economics of DTC advertising in greater depth than has been done in the past by using a 3-stage economic model to assess the pertinent literature and to show the probable effects of DTC advertising in the United States. METHODS: Economics literature on the subject was searched using the Journal of Economic Literature. Health services literature was searched using computer callback devices. RESULTS: Spending on DTC advertising in the United States increased from $17 million in 1985 to $2.5 billion in 2000. Proponents of DTC advertising claim that it provides valuable product-related information to health care professionals and patients, may contribute to better use of medications, and helps patients take charge of their own health care. Opponents argue that DTC advertising provides misleading messages rather than well-balanced, evidence-based information. The literature is replete with opinions about the effects of prescription drug advertising on pharmaceutical drug prices and physician-prescribing patterns, but few studies have addressed the issues beyond opinion surveys. The economic literature on advertising effects in other markets, however, may provide insight. CONCLUSION: DTC advertising indirectly affects the price and the quantity of production of pharmaceuticals via its effect on changes in consumer demand.