Prescription Drug Demand Based on Mortality
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Prescription Drug Demand Based on Mortality Carter Cothran Thesis Presentation for Master of Arts in Economics July 13, 2005. Introduction Motivation and Hypothesis. What determines drug prices? Are they priced efficiently?

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Prescription Drug Demand Based on MortalityCarter CothranThesis Presentation for Master of Arts in EconomicsJuly 13, 2005

Cothran: Drug Pricing

Introduction motivation and hypothesis
IntroductionMotivation and Hypothesis

  • What determines drug prices? Are they priced efficiently?

  • Will the price of a prescription drug be influenced by the number of deaths or productivity losses it potentially avoids, in addition to other competitive influences?

  • Estimate price as a function of market competition and the harm caused by the disease it treats.

Cothran: Drug Pricing

Previous literature
Previous Literature

  • Danzon and Chao: “Does Regulation Drive out Competition in Pharmaceutical Markets?” JLE, 2000.

  • Study effects of regulation on drug prices across 7 countries.

  • Find that U.S. has greater effects of competition on prices through large generic market and first-mover advantage.

Cothran: Drug Pricing

Previous literature 2
PreviousLiterature - 2

  • Civan and Maloney: Working paper, 2004. Evidence that drug development is motivated by incidence of disease and resulting economic loss.

  • But, only for U.S. and a few other developed countries.

  • Inefficient Pricing?

Cothran: Drug Pricing

Data collection and organization sample of drugs
Data Collection and Organization Sample of Drugs

  • List of top sales and top prescriptions written for 2003 & 2004

  • Rankings from

  • Omitted drugs that were obviously not associated with fatal illnesses.

  • Therapeutic competitors, pioneer brands, & ingredient equivalents (imitators) for these drugs were added to the collection if not already listed.

Cothran: Drug Pricing

Data collection and organization prices
Data Collection and Organization Prices


    • Retail prices: average of 60,000 pharmacies

    • Formulary: price from state insurance plan

    • Information with price:

      • strength

      • package size or quantity

      • type, generic or brand

      • manufacturer of brand

Cothran: Drug Pricing

Data collection and organization 2 treatments dates and death totals
Data Collection and Organization - 2Treatments, Dates, and Death totals

  • Indications & Approval Dates:, FDA label, Nursing Drug Handbook

    • Also used to categorize which drugs are competitors.

  • Mortality Data: CDC (1999 death tables)

    • Link between categories of mortality and indications; sometimes loose and sometimes very specific.

Cothran: Drug Pricing

Empirical analysis variables
Empirical AnalysisVariables

  • Price: average of price per amount of active ingredient in standard prescription.

  • Variance of this price per unit of ingredient is informative.

  • Sometimes forms can be combined; sometimes not. Average price over forms.

Cothran: Drug Pricing

Empirical analysis 2 variables
Empirical Analysis – 2Variables

  • Discount: Retail price minus formulary price divided by formulary price.

  • Age: time since approval date

    • First dates

  • Classes of Drugs: On Patent; Pioneer; Imitator

    • Tables 1, 2, and 3: Summary Statistics

Cothran: Drug Pricing

Determinants of price
Determinants of Price

  • Table 4: Regression using determinants from own-price effects

  • Examine differences among 3 types of drugs, On Patent, Pioneer, and Imitator (omitted category)

  • Not enough information for competitive influences

Cothran: Drug Pricing

Measuring competitive effects variables
Measuring Competitive EffectsVariables

  • Therapeutic Competitor Categories

    • Disease treated

    • Action that drug takes

  • Table 5: Frequency Table of Therapeutic Competitor Categories

    • 121 categories

    • Number of drugs in each

Cothran: Drug Pricing

Effects of competition
Effects of Competition

  • Competitor price measured by:

    • Average price in Therapeutic Competitor Category

    • Average price of Ingred. Equivalents for Pioneer; Therapeutic Competitor Category for On Patent

    • Fixed Effects model to capture avg price in Therapeutic Competitor Categories

Cothran: Drug Pricing

Mortality effects
Mortality Effects

  • Linking Mortality to Therapeutic Competitor Categories

  • Table 7: Summary Statistics

    • General and Specific Category Deaths

    • Death Rate: divide by total 1999 deaths

      • Alternative General Category: equals specific category deaths when general deaths are same as specific deaths.

    • Fixed Effects Values: results from regression (c ) in Table 6

Cothran: Drug Pricing

Relating mortality to price
Relating Mortality to Price

  • Table 8: Regression of Death Totals on Relative Prices for Therapeutic Competitor Categories

    • Regressions a-d use F. E. coefficient values

    • Regressions d-e use F. E. t-statistic values

Cothran: Drug Pricing


  • Results offer support for using mortality as a measure of demand intensity.

  • Additional work:

    • Add more drugs (make sure that sample includes imitators if available)

    • Refine therapeutic categories

    • Refine links between therapeutic categories & mortality

Cothran: Drug Pricing