Margins and Market Shares: Pharmacy Incentives for Generic Substitution.

We study the impact of product margins on pharmacies’ incentive to promote generics instead of brand-names. First, we construct a theoretical model where pharmacies can persuade patients with a brand-name prescription to purchase a generic version instead. We show that pharmacies’substitution incentives are determined by relative margins and relative patient copayments. Second, we exploit a unique product level panel data set, which contains information on sales and prices at both producer and retail level. In the empirical analysis, we find a strong relationship between the margins of brand-names and generics and their market shares. In terms of policy implications, our results suggest that pharmacy incentives are crucial for promoting generic sales.Pharmaceuticals; Pharmacies; Generic Substitution.

Are pharmaceuticals still inexpensive in Norway? : a comparison of prescription drug prices in ten European countries

In this report we compare prices of pharmaceuticals between Norway and nine Western European countries (Austria, Belgium, Denmark, Finland, Germany, Ireland, the Netherlands, Sweden and United Kingdom). The purpose is to examine whether pharmaceuticals are more (or less) expensive in Norway than in comparable countries and thus whether there could be any gains of “importing” foreign price levels. To analyse the cross-country price levels we have obtained data from IMS Health for all prescription bound pharmaceutical sales of the 300 most selling (in sales value) substances on the Norwegian market for Norway and the nine reference countries. The data cover the first six months in 2009 and contain information on prices at both wholesale level (AIP) and pharmacy level (AUP), as well as sales volumes, manufacturer, product name, dosage, presentation form, etc. Based on these data we compute bilateral price indices (products common to Norway and a given reference country) and global price indices (products common to all countries). The price indices are calculated separately for on-patent and off-patent substances, as well as for substances subject to reference price (trinnpris) regulation in Norway. We employ two different approaches. First, we compare prices of similar packages. We pick the most selling package in Norway and compare the price of this one with the same package (same pack size and dosage strength) in the reference countries. Second, we compute average substance prices, where we weight prices of each product with their sales. While the first approach yields a high degree of precision in the price comparisons, the second ensures a much higher degree of representativity. The main result is that Norway has among the lowest prices in Western Europe irrespective of whether we look at the overall index or the index for the patent or the generic market segment. For the substances under reference pricing (“trinnpris”) regulation, Norway has clearly the lowest prices. We also find that Norway has among the lowest pharmacy margins in the sample. Finally, we analyse the development in prices from 2007 to 2009. Most countries have experienced price reductions over the period. The reduction in Norway is, however, fairly strong compared with the reference countries. Low prices and margins can be explained by the strict regulation of prices (and margins) in the on-patent-segment combined with competition stimulating incentives in the generic segment (trinnpris). These factors are also likely to explain why Norway is one of the cheapest countries in Western Europe when it comes to prescription drugs

The price of cost-effectiveness thresholds under therapeutic competition in pharmaceutical markets

Health systems around world are increasingly adopting cost-effectiveness (CE) analysis to inform decisions about access and reimbursement. We study how CE thresholds imposed by a health plan for granting reimbursement affect drug producers’ pricing incentives and patients’ access to new drugs. Analysing a sequential pricing game between an incumbent drug producer and a potential entrant with a new drug, we show that CE thresholds may have adverse effects for payers and patients. A stricter CE threshold may induce the incumbent to switch pricing strategy from entry accommodation to entry deterrence, limiting patients’ access to the new drug. Otherwise, irrespective of whether entry is deterred or accommodated, a stricter CE threshold is never pro-competitive and may in fact facilitate a collusive outcome with higher prices of both drugs. Compared to a laissez-faire policy, the use of CE thresholds when an incumbent monopolist is challenged by therapeutic substitutes can only increase the surplus of a health plan if it leads to entry deterrence. In this case the price reduction by the incumbent necessary to deter entry outweighs the health loss to patients who do not get access to the new drug.publishedVersio

Public versus private health care in a national health service

This paper studies the interplay between public and private health care in a National Health Service. We consider a two-stage game, where at stage one a Health Authority sets the public sector wage and a subsidy to (or tax on) private provision. At stage two the physicians decide how much to work in the public and the private sector. We characterise different equilibria depending on whether physicians coordinate labour supply or not, the physicians’ job preferences, and the cost efficiency of private relative to public provision. We find that private provision tends to crowd out the NHS if physicians are sufficiently indifferent about where to work or the private sector is sufficiently cost efficient. Competition between physicians triggers a shift from public provision towards private provision, and an increase in the total amount of health care provided. The endogenous nature of labour supply may have counter-intuitive effects. For example, a cost reduction in the private sector is followed by a higher wage in the public sector

On the competitive effect of informative advertising

This paper analyses the competitive effects of informative advertising. The seminal work by Grossman and Shapiro (1984) show that informative advertising results in lower prices and that firms may benefit from advertising restrictions. A crucial assumption in their model is that captive (partially informed) consumers are not price responsive. Replicating their model in a Hotelling duopoly version, we show that results are in fact reversed if we allow for captive consumers to respond to prices. We then use general demand functions and derive exact conditions for the competitive effect to prevail. A main result is that the procompetitive effect depends on the nature of competition and the relative price elasticities of the monopoly and the competitive demand segments

On the competitive effect of informative advertising

This paper analyses the competitive effects of informative advertising. The seminal work by Grossman and Shapiro (1984) show that informative advertising results in lower prices and that firms may benefit from advertising restrictions. A crucial assumption in their model is that captive (partially informed) consumers are not price responsive. Replicating their model in a Hotelling duopoly version, we show that results are in fact reversed if we allow for captive consumers to respond to prices. We then use general demand functions and derive exact conditions for the competitive effect to prevail. A main result is that the procompetitive effect depends on the nature of competition and the relative price elasticities of the monopoly and the competitive demand segments

Prices of pharmaceuticals : a comparison of prescription drug prices in Sweden with nine European countries

We study the price level of pharmaceuticals in Sweden relative to the following nine European countries; Austria, Belgium, Denmark, Finland, Germany, Ireland, the Netherlands, Norway, and United Kingdom (UK). Our sample consists of prescription drugs that do not have generic sale in Sweden. Using IMS Health data on prices and sales volumes for the first half of 2010, we compute several price indices to describe the price differences and potential cost savings in the non-generic market segment. Our results show that the Swedish price level is slightly below average relative to the other European countries. UK, Norway and the Netherlands tend to have lower prices than Sweden, whereas Germany, Ireland and Denmark tend to have higher prices. Finland has lower prices than Sweden on wholesale level, but slightly higher prices at retail level. Austria and Belgium have about the same price level as Sweden

Pharmaceutical patents : incentives for R&D or marketing?

We analyse how a patent-holding pharmaceutical firm may strategically use advertising of existing drugs to affect R&D investments in new (differentiated) drugs, and thereby affect the probability distribution of future market structures in the industry. Within a fairly general model framework, we derive exact conditions for advertising and R&D being substitute strategies for the incumbent firm and show that it may overinvest in advertising to reduce the incentive for an entrant to invest in R&D, thereby reducing the probability of a new product on the market. In a more specific setting of informative advertising, we show that such overinvestment incentives are always present, and that more generous patent protection implies that a larger share of the patent rent is spent on marketing, relative to R&D