ECON 440 Lecture Notes - Lecture 22: Opportunity Cost, Bioequivalence, Co-Insurance
13 Jun 2018
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Department
Course
Professor
Cost effectiveness of drugs - a function of the incremental cost of the new drug relative to the
old drug, and the health benefit of the new drug relative to the old drug
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Is high and increasing spending on drugs valuable? Why approve new, expensive drugs if we're
already spending $$ on Rx?
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Insurance coverage and regulation regarding pricing
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Static vs. dynamic tradeoff
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Low prices today vs innovation tomorrow: risk, return, profits, and prices
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Policy options to affect access, prices, innovation
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The economics of pharmaceuticals
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Outline
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e.g. hypertension medication: big market, and being on patent its prices are high
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Some spending increase attributable to new "blockbuster" drugs
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Is this prices, quantity, more new drugs?
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What is driving spending?
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Per Capita Pharmaceutical Spending
The rate of increase in spending on drugs is greater than the increase in spending on
healthcare overall
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Compares with 5 - 6% growth in healthcare spending, 2 - 3% inflation
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How much is prices?
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Quantity? Of this quantity, how much is old vs new drugs?
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Attempt to decompose this rate of increases spending
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US Rx spending growth averaged about 18% from 1997 to 2001
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Price increases for existing drugs - 5%
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Changes in the volume and mix of existing drugs - 7%
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New products - 6%
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…we're using more medications that are already on the market
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So, it's not just that we're spending more because we're developing new drugs that are expensive…
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Utilization
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What's Driving the Increase in Drug Spending?
Flu, bacterial infections
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Drugs treat formerly serious diseases that we now consider relatively minor
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Serious chronic diseases that previously required a lot of medical and surgical intervention can now be
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Are Prescription Drugs Valuable?
Lecture 22 - Pharmaceuticals
Wednesday, April 4, 2018
10:06 AM
ECON 440 Page 1
Cardiovascular disease, diabetes, depression
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Serious chronic diseases that previously required a lot of medical and surgical intervention can now be
managed
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Cancer
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New drugs are developed that lengthen or save lives (formerly untreatable diseases)
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Acid reflux, erectile dysfunction, toenail fungus
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New drugs are developed to improve quality of life
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"Me-too" drugs: reformulate to extend patent
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Small marginal benefit from convenience or reduction in side effects
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Orphan drugs - small market or large market but very low prices
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Drug makers are incentivized to produce drugs for a large market; drugs that will be consumer
in high-income rather than low-income countries
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Incentive to develop profitable drugs, regardless of the disease burden of treated disease
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But, pricing structure also provides incentives for drugs with lower value
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Drugs and improved diet
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Drugs and physician input
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Perfect substitutes? Or complements?
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Which combination of inputs leads to the biggest improvement in health for the lowest possible
cost?
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Which health inputs are most productively efficient?
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Health behaviors fall more on the patient
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Implications for cost? Outcomes?
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Incentives facing the patient to consume a certain combination of these inputs are different
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How does the physician externalize this?
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Canada: generous and complete insurance for physician and hospital services, less generous for Rx
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What capacity does the ways in which different inputs are covered by insurance have to affect the
choices people make?
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Unequal insurance of drugs and other inputs
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How does insurance coverage of Rx - and the amount of cost sharing relative to insurance for other health
services - affect the use of different health inputs?
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Can Drugs Substitute for Medical Care in Health Production
The structure, different phases, rules and regulations, of Rx production are determined by
these federal agencies
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When drugs are approved, federal agencies make decisions on how cost effective and valuable
the new Rx is
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Responsibility of the Federal government in both the US (FDA) and Canada (Health Canada)
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Patents give company exclusive right to make, use and sell the drug - usually for 20 years, which may
begin well before the drug reaches the market
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Patent protection, safety and labeling
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Formularies, patient co-insurance, some mandated generic substitution
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Formularies: list of drugs covered
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This is an attempt to shift demand to lower-cost products
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Generic Substitution: Unless the physician says otherwise, anytime a prescription is written for
a drug for which there's a generic brand available, the pharmacist is obligated to substitute the
generic
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Private payment (insurance and OOP), some public coverage in Canada (elderly, low-income) though
this is very different from the "no barriers to medically necessary care" clause in the CHA
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Medicaid - extensive coverage (in the sense it doesn't charge co-payments)
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Medicare - Rx coverage began in 2006
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Tiered copayments: function of the cost-effectiveness of the drug rather than your
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Widespread use of formularies, pharmacy benefit managers (PBMs), tiered copayments
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Insurers (public and private) in the US
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Insurance coverage for pharmaceuticals
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Institutional Details
ECON 440 Page 2
Document Summary
Cost effectiveness of drugs - a function of the incremental cost of the new drug relative to the old drug, and the health benefit of the new drug relative to the old drug. Low prices today vs innovation tomorrow: risk, return, profits, and prices. Some spending increase attributable to new blockbuster drugs e. g. hypertension medication: big market, and being on patent its prices are high. Us rx spending growth averaged about 18% from 1997 to 2001. Compares with 5 - 6% growth in healthcare spending, 2 - 3% inflation. The rate of increase in spending on drugs is greater than the increase in spending on healthcare overall. Attempt to decompose this rate of increases spending. Changes in the volume and mix of existing drugs - 7% So, it"s (cid:374)ot just that (cid:449)e"re spe(cid:374)di(cid:374)g (cid:373)ore (cid:271)e(cid:272)ause (cid:449)e"re de(cid:448)elopi(cid:374)g (cid:374)e(cid:449) drugs that are e(cid:454)pe(cid:374)si(cid:448)e . (cid:449)e"re usi(cid:374)g (cid:373)ore (cid:373)edi(cid:272)atio(cid:374)s that are alread(cid:455) o(cid:374) the (cid:373)arket.
