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A Primer on the Economics of Prescription Pharmaceutical Pricing in Health Insurance Markets

Author

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  • Berndt Ernst R.

    (Massachusetts Institute of Technology and National Bureau of Economic Research, eberndt@ mit.edu)

  • McGuire Thomas

    (Harvard Medical School)

  • Newhouse Joseph P.

    (Harvard University)

Abstract

The 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.

Suggested Citation

  • Berndt Ernst R. & McGuire Thomas & Newhouse Joseph P., 2011. "A Primer on the Economics of Prescription Pharmaceutical Pricing in Health Insurance Markets," Forum for Health Economics & Policy, De Gruyter, vol. 14(2), pages 1-30, November.
    • Handle: RePEc:bpj:fhecpo:v:14:y:2011:i:2:n:10
    DOI: 10.2202/1558-9544.1301
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    References listed on IDEAS

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    Cited by:

    1. Herr, A. & Suppliet, M., 2011. "Co-Payment Exemptions and Reference Prices: an Empirical Study of Pharmaceutical Prices in Germany," Health, Econometrics and Data Group (HEDG) Working Papers 11/18, HEDG, c/o Department of Economics, University of York.
    2. Espinosa, Oscar & Rodríguez, Jhonathan & Ávila, Diego & Rodríguez-Lesmes, Paul & Basto, Sergio & Romano, Giancarlo & Mesa, Lorena & Enríquez, Hernán, 2023. "The impact of updating health benefits plans on health technologies usage and expenditures: the case of Colombia," Documentos de Trabajo 20821, Universidad del Rosario.
    3. Michel Mougeot & Florence Naegelen, 2018. "Medical service provider networks," Health Economics, John Wiley & Sons, Ltd., vol. 27(8), pages 1201-1217, August.
    4. Alpert, Abby & Duggan, Mark & Hellerstein, Judith K., 2013. "Perverse reverse price competition: Average wholesale prices and Medicaid pharmaceutical spending," Journal of Public Economics, Elsevier, vol. 108(C), pages 44-62.
    5. Berndt, Ernst R. & Dubois, Pierre, 2012. "Impacts of Patent Expiry and Regulatory Policies on Daily Cost of Pharmaceutical Treatments: OECD Countries, 2004-2010," IDEI Working Papers 702, Institut d'Économie Industrielle (IDEI), Toulouse.
    6. Cremer, Helmuth & Lozachmeur, Jean-Marie, 2022. "Coinsurance vs. co-payments: Reimbursement rules for a monopolistic medical product with competitive health insurers," Journal of Health Economics, Elsevier, vol. 84(C).
    7. Leemore Dafny & Christopher Ody & Matt Schmitt, 2017. "When Discounts Raise Costs: The Effect of Copay Coupons on Generic Utilization," American Economic Journal: Economic Policy, American Economic Association, vol. 9(2), pages 91-123, May.
    8. Suppliet, Moritz & Herr, Annika, 2016. "Cost-Sharing and Drug Pricing Strategies : Introducing Tiered Co-Payments in Reference Price Markets," Other publications TiSEM 4d692f0e-8577-4392-b413-2, Tilburg University, School of Economics and Management.
    9. Ernst R. Berndt & Rena M. Conti & Stephen J. Murphy, 2017. "The Landscape of US Generic Prescription Drug Markets, 2004-2016," NBER Working Papers 23640, National Bureau of Economic Research, Inc.
    10. Ernst R. Berndt & Mark R. Trusheim, 2017. "The Information Pharms Race and Competitive Dynamics of Precision Medicine: Insights from Game Theory," NBER Working Papers 24020, National Bureau of Economic Research, Inc.
    11. Ernst R. Berndt & Pierre Dubois, 2016. "Impacts of Patent Expiry on Daily Cost of Pharmaceutical Treatments in Eight OECD Countries, 2004--2010," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 23(2), pages 125-147, July.
    12. Colleen Carey, 2017. "Technological Change and Risk Adjustment: Benefit Design Incentives in Medicare Part D," American Economic Journal: Economic Policy, American Economic Association, vol. 9(1), pages 38-73, February.
    13. Dunn, Abe, 2016. "Health insurance and the demand for medical care: Instrumental variable estimates using health insurer claims data," Journal of Health Economics, Elsevier, vol. 48(C), pages 74-88.
    14. Alice M. Ellyson & Anirban Basu, 2021. "Do pharmaceutical prices rise anticipating branded competition?," Health Economics, John Wiley & Sons, Ltd., vol. 30(5), pages 1070-1081, May.
    15. Gregory J. King & Xiuli Chao & Izak Duenyas, 2019. "Who Benefits When Prescription Drug Manufacturers Offer Copay Coupons?," Management Science, INFORMS, vol. 65(8), pages 3758-3775, August.
    16. Ernst R. Berndt & Mark R. Trusheim, 2018. "The Information Pharms Race and Competitive Dynamics of Precision Medicine: Insights from Game Theory," NBER Chapters, in: Economic Dimensions of Personalized and Precision Medicine, pages 87-114, National Bureau of Economic Research, Inc.
    17. Glazer Jacob & Huskamp Haiden A. & McGuire Thomas G., 2012. "A Prescription for Drug Formulary Evaluation: An Application of Price Indexes," Forum for Health Economics & Policy, De Gruyter, vol. 15(2), pages 1-26, March.
    18. Alice M. Ellyson & Anirban Basu, 2018. "The New Prescription Drug Paradox: Pipeline Pressure and Rising Prices," NBER Working Papers 24387, National Bureau of Economic Research, Inc.
    19. Roediger, Alexander & Wilsdon, Tim & Haderi, Artes & Pendleton, Kathy & Azais, Boris, 2019. "Competition between on-patent medicines in Europe," Health Policy, Elsevier, vol. 123(7), pages 652-660.

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    More about this item

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • 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; Plastics

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