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Pricing of drugs with heterogeneous health insurance coverage

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  • Ferrara, Ida
  • Missios, Paul

Abstract

In this paper, we examine the role of insurance coverage in explaining the generic competition paradox in a two-stage game involving a single producer of brand-name drugs and n quantity-competing producers of generic drugs. Independently of brand loyalty, which some studies rely upon to explain the paradox, we show that heterogeneity in insurance coverage may result in higher prices of brand-name drugs following generic entry. With market segmentation based on insurance coverage present in both the pre- and post-entry stages, the paradox can arise when the two types of drugs are highly substitutable and the market is quite profitable but does not have to arise when the two types of drugs are highly differentiated. However, with market segmentation occurring only after generic entry, the paradox can arise when the two types of drugs are weakly substitutable, provided, however, that the industry is not very profitable. In both cases, that is, when market segmentation is present in the pre-entry stage and when it is not, the paradox becomes more likely to arise as the market expands and/or insurance companies decrease deductibles applied on the purchase of generic drugs.

Suggested Citation

  • Ferrara, Ida & Missios, Paul, 2012. "Pricing of drugs with heterogeneous health insurance coverage," Journal of Health Economics, Elsevier, vol. 31(2), pages 440-456.
  • Handle: RePEc:eee:jhecon:v:31:y:2012:i:2:p:440-456
    DOI: 10.1016/j.jhealeco.2012.02.004
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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. Nabin Munirul Haque & Mohan Vijay & Nicholas Aaron & Sgro Pasquale M., 2012. "Therapeutic Equivalence and the Generic Competition Paradox," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-26, November.

    More about this item

    Keywords

    Brand-name pricing; Generic entry; Generic competition paradox; Health insurance;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • I12 - Health, Education, and Welfare - - Health - - - Health Behavior

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