IDEAS home Printed from https://ideas.repec.org/p/tin/wpaper/20210005.html
   My bibliography  Save this paper

Going Through The Roof: On Prices for Drugs Sold Through Insurance

Author

Listed:
  • Jurjen Kamphorst

    (Erasmus University Rotterdam)

  • Vladimir Karamychev

    (Erasmus University Rotterdam)

Abstract

We offer a theory of how the combination of budget constraints and insurance drives up prices. A natural context for our theory is the health care market, where drug prices can be very high. Our model predicts that monopoly prices for orphan drugs are inversely related to the prevalence up until a maximum price. This is supported by empirical evidence in the literature. As a result, prices of drugs sold by a monopoly treating rare serious diseases are doomed to go sky high.

Suggested Citation

  • Jurjen Kamphorst & Vladimir Karamychev, 2021. "Going Through The Roof: On Prices for Drugs Sold Through Insurance," Tinbergen Institute Discussion Papers 21-005/VII, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20210005
    as

    Download full text from publisher

    File URL: https://papers.tinbergen.nl/21005.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Darius Lakdawalla & Wesley Yin, 2015. "Insurers’ Negotiating Leverage and the External Effects of Medicare Part D," The Review of Economics and Statistics, MIT Press, vol. 97(2), pages 314-331, May.
    2. Vasquez, Markus, 2017. "Utility of wealth with many indivisibilities," Journal of Mathematical Economics, Elsevier, vol. 71(C), pages 20-27.
    3. Ken Binmore & Ariel Rubinstein & Asher Wolinsky, 1986. "The Nash Bargaining Solution in Economic Modelling," RAND Journal of Economics, The RAND Corporation, vol. 17(2), pages 176-188, Summer.
    4. G. M.P. Swann, 2009. "The Economics of Innovation," Books, Edward Elgar Publishing, number 13211.
    5. Mark Duggan & Fiona Scott Morton, 2010. "The Effect of Medicare Part D on Pharmaceutical Prices and Utilization," American Economic Review, American Economic Association, vol. 100(1), pages 590-607, March.
    6. de Meza, David, 1983. "Health insurance and the demand for medical care," Journal of Health Economics, Elsevier, vol. 2(1), pages 47-54, March.
    7. Brekke, Kurt R. & Holmas, Tor Helge & Straume, Odd Rune, 2011. "Reference pricing, competition, and pharmaceutical expenditures: Theory and evidence from a natural experiment," Journal of Public Economics, Elsevier, vol. 95(7), pages 624-638.
    8. Salop, Steven C, 1979. "Strategic Entry Deterrence," American Economic Review, American Economic Association, vol. 69(2), pages 335-338, May.
    9. Boone, Jan, 2020. "Pricing above Value: Selling to an Adverse Selection Market," Other publications TiSEM 700b2f3e-d1c8-4422-9b54-f, Tilburg University, School of Economics and Management.
    10. Daron Acemoglu & Joshua Linn, 2004. "Market Size in Innovation: Theory and Evidence from the Pharmaceutical Industry," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(3), pages 1049-1090.
    11. Boone, Jan, 2020. "Pricing above Value: Selling to an Adverse Selection Market," Discussion Paper 2020-023, Tilburg University, Tilburg Law and Economic Center.
    12. Boone, Jan, 2020. "Pricing above Value: Selling to an Adverse Selection Market," Other publications TiSEM eda6a1de-4db6-49a6-87e4-3, Tilburg University, School of Economics and Management.
    13. Fiona Scott Morton, 1997. "The Strategic Response by Pharmaceutical Firms to the Medicaid Most-Favored-Customer Rules," RAND Journal of Economics, The RAND Corporation, vol. 28(2), pages 269-290, Summer.
    14. Dyfrig A Hughes & Jannine Poletti-Hughes, 2016. "Profitability and Market Value of Orphan Drug Companies: A Retrospective, Propensity-Matched Case-Control Study," PLOS ONE, Public Library of Science, vol. 11(10), pages 1-12, October.
    15. Martin Gaynor & Deborah Haas-Wilson & William B. Vogt, 2000. "Are Invisible Hands Good Hands? Moral Hazard, Competition, and the Second-Best in Health Care Markets," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 992-1005, October.
    16. Markus Fels, 2020. "On the value of Medicaid in providing access to long‐term care," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(4), pages 933-948, August.
    17. Nyman, John A., 1999. "The value of health insurance: the access motive," Journal of Health Economics, Elsevier, vol. 18(2), pages 141-152, April.
    18. Fiona M. Scott Morton, 1997. "The Strategic Response by Pharmaceutical Firms to the Medicaid Most-Favored-Customer Rules," Yale School of Management Working Papers ysm58, Yale School of Management.
    19. David Besanko & David Dranove & Craig Garthwaite, 2016. "Insurance and the High Prices of Pharmaceuticals," NBER Working Papers 22353, National Bureau of Economic Research, Inc.
    20. Mark Duggan & Fiona M. Scott Morton, 2006. "The Distortionary Effects of Government Procurement: Evidence from Medicaid Prescription Drug Purchasing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(1), pages 1-30.
    21. Cheng Yuan & Yu Jiang, 2015. "Factors affecting the demand for insurance in China," Applied Economics, Taylor & Francis Journals, vol. 47(45), pages 4855-4867, September.
    22. Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(4), pages 629-649.
    23. Darius N. Lakdawalla, 2018. "Economics of the Pharmaceutical Industry," Journal of Economic Literature, American Economic Association, vol. 56(2), pages 397-449, June.
    24. Lakdawalla, Darius N. & Phelps, Charles E., 2020. "Health technology assessment with risk aversion in health," Journal of Health Economics, Elsevier, vol. 72(C).
    25. Besanko, David & Dranove, David & Garthwaite, Craig, 2020. "Insurance access and demand response: Pricing and welfare implications," Journal of Health Economics, Elsevier, vol. 73(C).
    26. Lakdawalla, Darius & Sood, Neeraj, 2009. "Innovation and the welfare effects of public drug insurance," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 541-548, April.
    27. Boone, Jan, 2020. "Pricing above value: selling to an adverse selection market," CEPR Discussion Papers 15279, C.E.P.R. Discussion Papers.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Boone, Jan, 2024. "Pricing above value: Selling to a market with selection problems," Journal of Health Economics, Elsevier, vol. 94(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. David B. Ridley & Chung-Ying Lee, 2020. "Does Medicare Reimbursement Drive Up Drug Launch Prices?," The Review of Economics and Statistics, MIT Press, vol. 102(5), pages 980-993, December.
    2. Decarolis, Francesco, 2015. "The unintended effects of the Medicare Part D low income subsidy," Health Policy, Elsevier, vol. 119(5), pages 597-603.
    3. Lakdawalla, Darius & Sood, Neeraj, 2013. "Health insurance as a two-part pricing contract," Journal of Public Economics, Elsevier, vol. 102(C), pages 1-12.
    4. 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(1), pages 1-26, March.
    5. Ernst R. Berndt & Joseph P. Newhouse, 2010. "Pricing and Reimbursement in U.S. Pharmaceutical Markets," NBER Working Papers 16297, National Bureau of Economic Research, Inc.
    6. Boone, Jan, 2013. "Does the market choose optimal health insurance coverage?," CEPR Discussion Papers 9420, C.E.P.R. Discussion Papers.
    7. Lakdawalla, Darius & Sood, Neeraj, 2009. "Innovation and the welfare effects of public drug insurance," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 541-548, April.
    8. Markus Rieger‐Fels, 2024. "Why do people buy insurance? A modern answer to an old question," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 27(1), pages 89-114, April.
    9. Boone, J., 2013. "Does the Market Choose Optimal Health Insurance Coverage," Other publications TiSEM f7691fbf-f770-4714-b1b4-1, Tilburg University, School of Economics and Management.
    10. 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(1), pages 1-30, November.
    11. Jihui Chen, 2019. "The Effects of Competition on Prescription Payments in Retail Pharmacy Markets," Southern Economic Journal, John Wiley & Sons, vol. 85(3), pages 865-898, January.
    12. Michael D. Frakes & Melissa F. Wasserman, 2020. "Investing in Ex Ante Regulation: Evidence from Pharmaceutical Patent Examination," NBER Working Papers 27579, National Bureau of Economic Research, Inc.
    13. Hostenkamp, Gisela, 2013. "Do follow-on therapeutic substitutes induce price competition between hospital medicines? Evidence from the Danish hospital sector," Health Policy, Elsevier, vol. 111(1), pages 68-77.
    14. Liran Einav & Amy Finkelstein & Maria Polyakova, 2018. "Private Provision of Social Insurance: Drug-Specific Price Elasticities and Cost Sharing in Medicare Part D," American Economic Journal: Economic Policy, American Economic Association, vol. 10(3), pages 122-153, August.
    15. Brandyn F. Churchill & Laura E. Henkhaus & Emily C. Lawler, 2025. "Effect of vaccine recommendations on consumer and firm behavior," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 44(1), pages 125-150, January.
    16. Patricia M. Danzon & Eric L. Keuffel, 2014. "Regulation of the Pharmaceutical-Biotechnology Industry," NBER Chapters, in: Economic Regulation and Its Reform: What Have We Learned?, pages 407-484, National Bureau of Economic Research, Inc.
    17. Fels, Markus, 2019. "Risk Attitudes with State-Dependent Indivisibilities in Consumption," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203489, Verein für Socialpolitik / German Economic Association.
    18. Kyle Margaret, 2011. "Strategic Responses to Parallel Trade," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(2), pages 1-34, January.
    19. Kortelainen, Mika & Markkanen, Jaakko & Toivanen, Otto & Siikanen, Markku, 2023. "The Effects of Price Regulation on Pharmaceutical Expenditure and Availability," CEPR Discussion Papers 18497, C.E.P.R. Discussion Papers.
    20. Leila Agha & Soomi Kim & Danielle Li, 2020. "Insurance Design and Pharmaceutical Innovation," NBER Working Papers 27563, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tin:wpaper:20210005. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tinbergen Office +31 (0)10-4088900 (email available below). General contact details of provider: https://edirc.repec.org/data/tinbenl.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.