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Regulating drug prices: where do we go from here?

Author

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  • Nicolas Bloom
  • John Van Reenen

Abstract

This paper examines the arguments for changing the ways that UK drug prices are regulated. In the UK, NHS pharmaceutical expenditures on branded drugs, currently worth about £3 billion a year, have been regulated by the Pharmaceutical Price Regulation Scheme (PPRS) since 1978. We argue that, in publicly funded healthcare systems, pharmaceutical price regulation is necessitated by a tendency towards excessive government expenditure because of over-prescription and the monopoly power of firms with on-patent drugs. We briefly explain the operation of the PPRS, which is based on rate-of-return regulation, and discuss its merits and drawbacks. We then consider five alternative pricing systems: free pricing, therapeutic benefit pricing, international reference pricing, therapeutic reference pricing and RPI - X price regulation. However, we reject all these alternatives in favour of a reformed PPRS. We suggest three potential reforms of the PPRS: an RPI - X cost allowance if feasible or a widening of the rate-of-return bands otherwise; the introduction of a marketing innovation allowance; and greater regulatory transparency.

Suggested Citation

  • Nicolas Bloom & John Van Reenen, 1998. "Regulating drug prices: where do we go from here?," Fiscal Studies, Institute for Fiscal Studies, vol. 19(3), pages 321-342, August.
    • Handle: RePEc:ifs:fistud:v:19:y:1998:i:3:p:321-342
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    File URL: http://www.ifs.org.uk/fs/articles/bloom_aug98.pdf
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    References listed on IDEAS

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    1. Drummond, Michael & Jonsson, Bengt & Rutten, Frans, 1997. "The role of economic evaluation in the pricing and reimbursement of medicines," Health Policy, Elsevier, vol. 40(3), pages 199-215, June.
    2. Martin Cave;Adrian Towse, 1997. "Regulating Prices Paid by the NHS for Medicines Supplied by the UK-Based Pharmaceutical Industry," Briefing 000427, Office of Health Economics.
    3. James D. Adams & Adam B. Jaffe, 1996. "Bounding the Effects of R&D: An Investigation Using Matched Establishment-Firm Data," RAND Journal of Economics, The RAND Corporation, vol. 27(4), pages 700-721, Winter.
    4. Colin Mayer & John Vickers, 1996. "Profit-sharing regulation: an economic appraisal," Fiscal Studies, Institute for Fiscal Studies, vol. 17(1), pages 1-18, February.
    5. Tirole, Jean, 1986. "Procurement and Renegotiation," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 235-259, April.
    6. Patricia Danzon, 1997. "Trade and Price Differentials for Pharmaceuticals: Policy Options," Monograph 000430, Office of Health Economics.
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    Cited by:

    1. Iain M. Cockburn & Jean O. Lanjouw & Mark Schankerman, 2016. "Patents and the Global Diffusion of New Drugs," American Economic Review, American Economic Association, vol. 106(1), pages 136-164, January.
    2. Gorecki, Paul K. & Nolan, Anne & Brick, Aoife & Lyons, Seán, 2012. "Pharmaceuticals Delivery in Ireland. Getting a Bigger Bang for the Buck," Research Series, Economic and Social Research Institute (ESRI), number RS24, June.
    3. Freemantle, Nick, 1999. "Does the UK National Health Service need a fourth hurdle for pharmaceutical reimbursement to encourage the more efficient prescribing of pharmaceuticals?," Health Policy, Elsevier, vol. 46(3), pages 255-265, March.
    4. Jommi, Claudio & Paruzzolo, Silvia, 2007. "Public administration and R&D localisation by pharmaceutical and biotech companies: A theoretical framework and the Italian case-study," Health Policy, Elsevier, vol. 81(1), pages 117-130, April.

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    More about this item

    JEL classification:

    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L6 - Industrial Organization - - Industry Studies: Manufacturing
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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