Cost-Effectiveness Analysis of Branded Drugs With Market Demand and Insurance.

OBJECTIVES: Cost-effectiveness analysis of branded pharmaceuticals presumes that both cost (or price) and marginal effectiveness levels are exogenous. This assumption underlies most judgments of the cost-effectiveness of specific drugs. In this study, we show the theoretical implications of letting both factors be endogenous by modeling pharmaceutical price setting with and without health insurance, along with patient response to the prices that depend on marginal effectiveness. We then explore the implications of these models for cost-effectiveness ratios. METHODS: We used simple textbook models of patient demand and pricing behavior of drug firms to predict market equilibria in the drug and insurance markets and to generate calculations of the cost-effectiveness ratios in those settings. RESULTS: We found that ratios in market settings can be much different from those calculated in cost-effectiveness studies based on exogenous prices and treatment of all patients at risk rather than those who would demand treatment in a market setting. We also found that there may be considerable similarity in these market cost-effectiveness ratios across different products because drug firms with market power set profit-maximizing prices. CONCLUSIONS: We found that market cost-effectiveness ratios will always indicate an excess of benefits over cost. Insurance will lead to less favorable ratios than without insurance, but when insurers bargain with drug firms, rather than taking their prices as given, cost-effectiveness ratios will be more favorable.

Mergers and innovation in the pharmaceutical industry.

Conflicting trends confound the pharmaceutical industry. The productivity of pharmaceutical innovation has declined in recent years. At the same time, the cohort of large companies who are the leading engines of pharmaceutical R&D has become increasingly concentrated. The concurrent presence of these trends is not sufficient to determine causation. In response to lagging innovation prospects, some companies have sought refuge in mergers and acquisitions to disguise their dwindling prospects or gain R&D synergies. On the other hand, the increased concentration brought on by recent mergers may have contributed to the declining rate of innovation. In this paper, we consider the second of these causal relationships: the likely impact of the recent merger wave among the largest pharmaceutical companies on the rate of innovation. In other words, have recent mergers, which may have been taken in response to lagging innovation, represented a self-defeating strategy that only made industry outcomes worse?

Prices of pharmaceuticals in poor countries are much lower than in wealthy countries.

Keeping pharmaceuticals affordable in poor countries is important for public health. Economic models suggest that manufacturers should be able to charge substantially lower prices in those markets than in industrialized countries without drastically reducing their profits. We report the results of a study of thirty drugs in twenty-nine countries, showing that many prices are already substantially discounted in middle-income and developing countries, compared to prices in the United States and other industrialized countries, and do not exceed long-run marginal costs. We also argue that the so-called peak load pricing model offers an economic foundation for fair drug pricing in the case of developing countries, and is a better solution than other pricing models to the problem of how to reduce drug prices in these countries to the level of manufacturers' marginal costs.

Is the United States an outlier in health care and health outcomes? A preliminary analysis.

U.S. health care is often seen as an outlier, with high costs and only middling outcomes. This view implies a household production function for health, with both health care and lifestyle serving as inputs. Building on earlier work by Miller and Frech (2004), we make this argument explicit by estimating a production function from augmented OECD data. This allows us to determine whether the U.S. is literally an outlier; which turns on whether the United States is very far off the production surface. We find that the Unites States is somewhat less productive than the average OECD country, but that a substantial part of the observed difference results from poor lifestyle choices, particularly obesity.