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Pricing and Reimbursement in U.S. Pharmaceutical Markets

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  • Ernst R. Berndt
  • Joseph P. Newhouse

Abstract

In this survey chapter on pricing and reimbursement in U.S. pharmaceutical markets, we first provide background information on important federal legislation, institutional details regarding distribution channel logistics, definitions of alternative price measures, related historical developments, and reasons why price discrimination is highly prevalent among branded pharmaceuticals. We then present a theoretical framework for the pricing of branded pharmaceuticals, without and then in the presence of prescription drug insurance, noting factors affecting the relative impacts of drug insurance on prices and on utilization. With this as background, we summarize major long-term trends in copayments and coinsurance rates for retail and mail order purchases, average percentage discounts off Average Whole Price paid by third party payers to pharmacy benefit managers as well as average dispensing fees, and generic penetration rates. We conclude with a summary of the evidence regarding the impact of the 2006 implementation of the Medicare Part D benefits on pharmaceutical prices and utilization, and comment on very recent developments concerning the entry of large retailers such as Wal-Mart into domains traditionally dominated by large retail chains and the "commoditization" of generic drugs.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16297.

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Date of creation: Aug 2010
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Publication status: published as Ber ndt, Ernst R. and Joseph P. Newhouse, “Pricing and Reimbursement in U.S. Pharmaceutical Markets”, Chapter 8 in Patricia M. Danzon and Sean N. Nicholson, eds., The Oxford Handbook on the Economics of the Biopharmaceutical Industr y , New York: Oxford University Press, pp. 201 - 265, 2012.
Handle: RePEc:nbr:nberwo:16297

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  1. Margaret K. Kyle, 2007. "Strategic Responses to Parallel Trade," NBER Working Papers 12968, National Bureau of Economic Research, Inc.
  2. Patricia Danzon, 1997. "Price Discrimination for Pharmaceuticals: Welfare Effects in the US and the EU," International Journal of the Economics of Business, Taylor & Francis Journals, Taylor & Francis Journals, vol. 4(3), pages 301-322.
  3. Mark Duggan & Fiona Scott Morton, 2008. "The Effect of Medicare Part D on Pharmaceutical Prices and Utilization," NBER Working Papers 13917, National Bureau of Economic Research, Inc.
  4. Jonathan Gruber & Botond Köszegi, 2001. "Is Addiction "Rational"? Theory And Evidence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 116(4), pages 1261-1303, November.
  5. Richard G. Frank & David S. Salkever, 1995. "Generic Entry and the Pricing of Pharmaceuticals," NBER Working Papers 5306, National Bureau of Economic Research, Inc.
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  7. Richard G. Frank & David S. Salkever, 1997. "Generic Entry and the Pricing of Pharmaceuticals," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 6(1), pages 75-90, 03.
  8. Alan M. Garber & Charles I. Jones & Paul M. Romer, 2006. "Insurance and Incentives for Medical Innovation," NBER Working Papers 12080, National Bureau of Economic Research, Inc.
  9. Ernst R. Berndt, 2007. "A primer on the economics of re-importation of prescription drugs," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(4-5), pages 415-435.
  10. Keeler, Emmett B & Newhouse, Joseph P & Phelps, C E, 1977. "Deductibles and the Demand for Medical Care Services: The Theory of a Consumer Facing a Variable Price Schedule under Uncertainty," Econometrica, Econometric Society, Econometric Society, vol. 45(3), pages 641-55, April.
  11. Peltzman, Sam, 1973. "An Evaluation of Consumer Protection Legislation: The 1962 Drug Amendments," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(5), pages 1049-91, Sept.-Oct.
  12. Ernst R. Berndt, 2002. "Pharmaceuticals in U.S. Health Care: Determinants of Quantity and Price," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 16(4), pages 45-66, Fall.
  13. DiMasi, Joseph A. & Hansen, Ronald W. & Grabowski, Henry G., 2003. "The price of innovation: new estimates of drug development costs," Journal of Health Economics, Elsevier, Elsevier, vol. 22(2), pages 151-185, March.
  14. Dana Goldman & Tomas Philipson, 2007. "Integrated Insurance Design in the Presence of Multiple Medical Technologies," NBER Working Papers 12870, National Bureau of Economic Research, Inc.
  15. Currie, Janet & Madrian, Brigitte C., 1999. "Health, health insurance and the labor market," Handbook of Labor Economics, Elsevier, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 50, pages 3309-3416 Elsevier.
  16. Danzon, Patricia M. & Chao, Li-Wei, 2000. "Cross-national price differences for pharmaceuticals: how large, and why?," Journal of Health Economics, Elsevier, Elsevier, vol. 19(2), pages 159-195, March.
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  21. Patricia M. Danzon & Mark V. Pauly, 2002. "Health Insurance and the Growth in Pharmaceutical Expenditures," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 45(S2), pages 587-613.
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  25. repec:reg:wpaper:258 is not listed on IDEAS
  26. Frank, Richard G., 2003. "New estimates of drug development costs," Journal of Health Economics, Elsevier, Elsevier, vol. 22(2), pages 325-330, March.
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Cited by:
  1. Lee G. Branstetter & Chirantan Chatterjee & Matthew Higgins, 2011. "Regulation and Welfare: Evidence from Paragraph IV Generic Entry in the Pharmaceutical Industry," NBER Working Papers 17188, National Bureau of Economic Research, Inc.

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