A Primer on the Economics of Prescription Pharmaceutical Pricing in Health Insurance Markets
AbstractThe pricing of medical products and services in the U.S. is notoriously complex. In health care, supply prices (those received by the manufacturer) are distinct from demand prices (those paid by the patient) due to health insurance. The insurer, in designing the benefit, decides what prices patients pay out-of-pocket for drugs and other products. In this primer we characterize cost and supply conditions in markets for generic and branded drugs, and apply basic tools of microeconomics to describe how an insurer, acting on behalf of its enrollees, would set demand prices for drugs. Importantly, we show how the market structure on the supply side, characterized alternatively by monopoly (unique brands), Bertrand differentiated product markets (therapeutic competition) and competition (generics), influences the insurer’s choices about demand prices. This perspective sheds light on the choice of coinsurance versus copayments, the structure of tiered formularies, and developments in the retail market.
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Bibliographic InfoArticle provided by De Gruyter in its journal Forum for Health Economics & Policy.
Volume (Year): 14 (2011)
Issue (Month): 2 (November)
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Web page: http://www.degruyter.com
Other versions of this item:
- Ernst R. Berndt & Thomas G. McGuire & Joseph P. Newhouse, 2011. "A Primer on the Economics of Prescription Pharmaceutical Pricing in Health Insurance Markets," NBER Working Papers 16879, National Bureau of Economic Research, Inc.
- D4 - Microeconomics - - Market Structure and Pricing
- I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
- L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology
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