Pharmacoeconomic Principles Lecture PDF

# Pharmacoeconomic Principles ## Donald Klepser, Ph.D., M.B.A. ## Learning Objectives - Discuss the relationship between microeconomic theory and the market for pharmaceuticals - Describe value-based insurance design (VBID) and how its intended effects ## Econ 101 Review - If prices go up, people...

# Pharmacoeconomic Principles ## Donald Klepser, Ph.D., M.B.A. ## Learning Objectives - Discuss the relationship between microeconomic theory and the market for pharmaceuticals - Describe value-based insurance design (VBID) and how its intended effects ## Econ 101 Review - If prices go up, people will generally consume less - Downward sloping demand curve - If prices go up, firms will generally produce (sell) more. - Upward sloping supply curve - At the equilibrium price, everyone is satisfied ## Perfectly Competitive Market This is a graph of the quantity versus price of some good. Price increases from 0 to 50 on the Y-axis and quantity is on the X-axis from 0 to 50. The graph shows a downward sloping demand curve and an upward sloping supply curve. The equilibrium price, P*, is 25 and the equilibrium quantity, Q*. ## Market Power - Neither the buyer or seller has any - Both are price takers - Seller - Price higher > lose all sales - Price lower > make no sales - Buyer - If they value the product more than the price, they buy. If not, they don't. - This is ok unless demand is constrained by income ## Assumptions of Perfect Competition - Are there a large number of sellers and buyers, of an identical good, all of whom are small relative to the size of the total market? - Anyone is allowed to enter the market as either a buyer or as a seller; and similarly, buyers and sellers may leave the market without additional "shut down" costs? - There is no government intervention? - Buyers pay the full cost of their purchases? - Buyers and sellers have perfect information about the market? - There are no external interventions, nor are there any interactions with other markets? ## Do the assumptions of perfect competition hold in the market for pharmaceuticals? If not, what does it mean for the market prices of drugs? ## Assumptions of perfect competition - Are there a large number of buyers and sellers? - Do they sell an identical good? - Are they buyers and sellers small relative to the size of the market? ## Monopoly Power - Limited number of large manufacturers (one for brand name products) - Medicines sold are not identical - Seller has market power and is a price setter - Prices will rise ## Monopoly Pricing This is a graph showing the quantity of a good, on the X-axis, versus the price of the good on the Y-axis. Three lines are shown on the graph: * The marginal cost line (MC) which trends upwards to the right * The marginal revenue line (MR) which trends downwards to the right * The demand line (D) which trends downwards to the right. The intersection of the MC line and MR line is labeled with "Q" and is the quantity produced. The intersection of the MR line and the Demand line is labeled "Qc" and is the quantity that consumers would buy if left to their own devices. The intersection of the MC line and the Demand line is labeled "Pc" and is the price at which a competitive market would sell the good. The intersection of the MC line and the Demand line is labeled "Pm" and is the price at which a monopolistic market would sell the good. The shaded areas on the graph represent the following: * The area between the demand line (D), the vertical line from Qm, and the horizontal price line is marked as "Consumer Surplus". * The area between the horizontal line Pm, the vertical line from Qm, and the horizontal price line Pc is marked as "Producer Surplus". * The triangle above the horizontal line Pc and below the demand line (D) is labeled "Deadweight loss". ## Assumptions of Perfect Competition - Can anyone enter the market to buy or sell pharmaceuticals? - Are there any "costs" to leaving the market? ## Barriers to Entry - Patents - First mover advantage - Economies of scale and high fixed costs - Again, the seller gains market power and can raise prices ## Assumptions of perfect competition - Is there government intervention in the market for pharmaceuticals? ## Regulatory Environment - Supply side - Patents - FDA approval process - Tax credits for orphan drug development - Demand side - Medicare and Medicaid - Can move equilibrium price closer to or further from perfect competition ## Assumptions of Perfect Competition - Do buyers pay the full cost of their purchases? ## Third Party Insurance - Coinsurance and copayments - Price elasticity of demand - How responsive is demand to price - Moral hazard - Monopsony power - Small number of large buyers ## Assumptions of perfect competition - Do buyers and sellers have perfect information about the market? (i.e. sellers costs, or purchasers value of the product) ## Asymmetric Information - Incomplete and imperfect information - Patients may not understand the full value of the medication - Prescribers may recommend unnecessary treatments - Patient may be non-compliant without the providers knowledge - ## Assumptions of perfect competition - Are there any other interventions in the pharmaceutical market? - Are there interactions with other markets? ## Short-term shocks to supply and demand - Unpredictable disease outbreaks - Demand for Cipro in 2001 - Unexpected supply shortages - Influenza vaccine in 2004 ## Value Based Insurance Benefit Design ## How we got here - Patient who really need (highly value) a service cannot always afford it This is a graph of quantity on the X-axis, from 0 to 100, and price on the Y-axis, from 0 to 60. - The graph shows an upward sloping supply line and a downward sloping demand line that intersect at a quantity of around 25 and a price of around 30. - A third line labeled "Budget Constrained Demand" is also on the graph. It trends downwards to the right and intersects the supply curve at a quantity of around 100 and a price of around 10. ## How we got here - Insurance reduces the price faced by patients - Increases demand (moral hazard) and raises price This is a graph of quantity on the X-axis, from 0 to 50, and price on the Y-axis, from 0 to 50. - The graph shows an upward sloping supply line and a downward sloping demand line that intersect at a quantity of around 25 and a price of around 25. - A shaded area represents the Deadweight loss. - There is a solid vertical line at around a quantity of 25 and a dashed horizontal line at around 25. - A solid vertical line at around quantity of 50 is labeled Q, and a solid horizontal line at around price of 50 is labeled P. ## How we got here - Coinsurance/copayment increases price to patients regardless of value This is a graph of quantity on the X-axis, from 0 to 50, and price on the Y-axis, from 0 to 50. - The graph shows an upward sloping supply line and a downward sloping demand line that intersect at a quantity of around 25 and a price of around 25. - A shaded area represents the Deadweight loss. - There is a solid vertical line at around a quantity of 25 and a dashed horizontal line at around 25. - A solid vertical line at around quantity of 40 is labeled Q, and a solid horizontal line at around price of 40 is labeled P. ## How we got here - Cost sharing kept going up to control costs - Higher cost sharing reduces utilization - Reduced compliance and adherence - Reduce overutilization and appropriate utilization - Short term cost savings leading to higher long term costs - Cost sharing was based on price and not evidence-based value ## Value Based Benefit Design - Reduce or eliminate cost sharing on specific drugs or service - Use to price to encourage utilization of high value products and services - Asthma meds that reduce ER visits - Guided by evidence-based medicine - Consider safety, efficacy, and cost effectiveness ## Value Based Benefit Design - Too early to tell if this plan design improves adherence and outcomes - How do you trade off the costs and benefits to make these decisions? - This is where we will pick up in the Drug Literature Evaluation course ## Summary - The market for pharmaceutical violates many of the assumptions of a perfectly competitive market. - As a result, drug prices are higher than they would be in a perfectly competitive market. - VBBD is an attempt to improve the efficiency of the market for drugs and other healthcare