ECON 440 Lecture Notes - Lecture 22: Opportunity Cost, Bioequivalence, Co-Insurance

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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
Is high and increasing spending on drugs valuable? Why approve new, expensive drugs if we're
already spending $$ on Rx?
Insurance coverage and regulation regarding pricing
Static vs. dynamic tradeoff
Low prices today vs innovation tomorrow: risk, return, profits, and prices
Policy options to affect access, prices, innovation
Outline
e.g. hypertension medication: big market, and being on patent its prices are high
Some spending increase attributable to new "blockbuster" drugs
Is this prices, quantity, more new drugs?
What is driving spending?
Per Capita Pharmaceutical Spending
The rate of increase in spending on drugs is greater than the increase in spending on
healthcare overall
Compares with 5 - 6% growth in healthcare spending, 2 - 3% inflation
How much is prices?
Quantity? Of this quantity, how much is old vs new drugs?
Attempt to decompose this rate of increases spending
US Rx spending growth averaged about 18% from 1997 to 2001
Price increases for existing drugs - 5%
Changes in the volume and mix of existing drugs - 7%
New products - 6%
…we're using more medications that are already on the market
So, it's not just that we're spending more because we're developing new drugs that are expensive…
Utilization
What's Driving the Increase in Drug Spending?
Flu, bacterial infections
Drugs treat formerly serious diseases that we now consider relatively minor
Serious chronic diseases that previously required a lot of medical and surgical intervention can now be
Are Prescription Drugs Valuable?
Lecture 22 - Pharmaceuticals
Wednesday, April 4, 2018
10:06 AM
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Cardiovascular disease, diabetes, depression
Serious chronic diseases that previously required a lot of medical and surgical intervention can now be
managed
Cancer
New drugs are developed that lengthen or save lives (formerly untreatable diseases)
Acid reflux, erectile dysfunction, toenail fungus
New drugs are developed to improve quality of life
"Me-too" drugs: reformulate to extend patent
Small marginal benefit from convenience or reduction in side effects
Orphan drugs - small market or large market but very low prices
Drug makers are incentivized to produce drugs for a large market; drugs that will be consumer
in high-income rather than low-income countries
Incentive to develop profitable drugs, regardless of the disease burden of treated disease
But, pricing structure also provides incentives for drugs with lower value
Drugs and improved diet
Drugs and physician input
Perfect substitutes? Or complements?
Which combination of inputs leads to the biggest improvement in health for the lowest possible
cost?
Which health inputs are most productively efficient?
Health behaviors fall more on the patient
Implications for cost? Outcomes?
Incentives facing the patient to consume a certain combination of these inputs are different
How does the physician externalize this?
Canada: generous and complete insurance for physician and hospital services, less generous for Rx
What capacity does the ways in which different inputs are covered by insurance have to affect the
choices people make?
Unequal insurance of drugs and other inputs
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?
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
When drugs are approved, federal agencies make decisions on how cost effective and valuable
the new Rx is
Responsibility of the Federal government in both the US (FDA) and Canada (Health Canada)
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
Patent protection, safety and labeling
Formularies, patient co-insurance, some mandated generic substitution
Formularies: list of drugs covered
This is an attempt to shift demand to lower-cost products
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
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
Medicaid - extensive coverage (in the sense it doesn't charge co-payments)
Medicare - Rx coverage began in 2006
Tiered copayments: function of the cost-effectiveness of the drug rather than your
Widespread use of formularies, pharmacy benefit managers (PBMs), tiered copayments
Insurers (public and private) in the US
Insurance coverage for pharmaceuticals
Institutional Details
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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.

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