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Jon Sussex

MSc Module ‘Economics of Health Care’ @ City University The Market for Medicines 13 th December 2002. Jon Sussex. Agenda. Characteristics of the market for medicines Demand side Supply side Regulating the market Market failure What and how to regulate: options

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Jon Sussex

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  1. MSc Module ‘Economics of Health Care’@ City UniversityThe Market for Medicines13th December 2002 Jon Sussex

  2. Agenda • Characteristics of the market for medicines • Demand side • Supply side • Regulating the market • Market failure • What and how to regulate: options • Exercise - Regulating the UK pharmaceutical industry • The Pharmaceutical Price Regulation Scheme and international comparison of medicine prices

  3. Pharmaceutical Sales as % of GDP

  4. Types of Medicines * OTCs = over the counter (i.e. non-prescription) medicines

  5. Generics’ Market Shares, 2001 (Retail Market) Source: IMS

  6. Demand Side Characteristics

  7. Measures Affecting Prescriber Price Sensitivity • Primary Care Trust budgets • Practice budgets and prescribing incentive schemes • Provision of information (PACT, NICE guidance, pharmaceutical advisers, etc.) • Generic prescribing targets

  8. Supply Side – Main Characteristics (1) • Patents are an incentive for dynamic efficiency – by promising temporary monopoly if successful • Patents last 20 years; first 9-11 of which are spent getting the medicine to market, i.e. research & development (R&D) • Commercial success in R&D-based companies depends on finding ‘blockbusters’

  9. Marketing approval product launch Investigational new drug application Regulations 1990 1993 1999 2001 Time (years) Discovery research Regulatory review Phase I Phase II Synthesis Biological testing & pharmacological screening Basic research Phases of drug development 50-100 voluns 200-400 patients Long-term animal testing Clinical phases Chemical development Pharmaceutical development 2-3 1 1 5,000 8-15 4-8 Discovery and Development of a New Medicine Phase III Final patent application Marketing application Development research Post-mktng devel Phase IV 3000 + patients Toxicology and pharmacokinetic studies Attrition rates Cost $800M 0 Source: CMR International

  10. Supply Side – Main Characteristics (2) • R&D costs are sunk (global) joint costs • R&D costs ≈ 17% of pharmaceutical sales p.a. But ≈ 31% of costs on net present value basis • => (even long-run) marginal cost << average cost • => Price discrimination (based on Ramsey rule?) if non-linear pricing is impractical •  Parallel trade

  11. Net Value of the Pharmaceutical Industry– Economic Rent Estimates for 2000: £ million p.a. Producer rents (exports & overseas) 500-1,500 Labour rents 80-160 R&D spillovers to other sectors 120-360 Total rent 700-2,000 Terms of trade effect ? Source: Pharmaceutical Industry Competitiveness Task Force (2001) ‘Value of the Pharmaceutical Industry to the UK Economy’

  12. Market Failure • Public goods and the free-rider problem (e.g. research) • Externalities • E.g. your vaccination reduces my risk of catching an infection • E.g. the caring externality: I’m happy if you’re cared for • Incomplete or asymmetric information • Moral hazard (= ‘hidden action’) • Selection problem (= ‘hidden information’) • Principal/agent problems

  13. Monopoly Power • Economies of scale and/or scope – but NB contestability • Natural (local) monopoly • Input constraints • Patents: dynamic efficiency vs static monopoly

  14. Options: Types of Regulation • ‘No regulation’ = Competition Act only • Profit, i.e. rate of return, control: • Unbanded • Banded • Price control: • Baskets of products, as with ‘RPI-X’ control of utilities’ prices • Individual products, e.g. via reference prices, or ‘cost-plus’, or related to therapeutic benefit

  15. 1998 Competition Act • Came into force March 2000 • Based on EU Treaty - Articles 81 & 82 • Prohibitions: • Chapter 1 – Agreements preventing, restricting or distorting competition • Chapter 2 – Abuse of a dominant market position • Fines up to 10% of turnover; 3rd parties may sue for damages

  16. Banded Rate of Return Regulation %RoR ▲ ▲ Outturn RoR > threshold => repay excess ▲ ▲ Target RoR ▲ Outturn RoR < threshold => may increase prices ▲ 0 £ capital employed

  17. RPI-X Regulation of a Basket of ‘n’ Products w1p11 + w2p12 + w3p13 + …….. + wnp1n --------------------------------------------------- -1 x 100 ≤ ΔRPI - X w1p01 + w2p02 + w3p03 + …….. + wnp0n Where: wi = weight for product ‘i’ (e.g. quantity sold in period 0) pti = price of product ‘i’ in period t = 0,1 ΔRPI = % change in retail price index between period 0 and period 1 X = efficiency factor { {

  18. Regulation Criteria • Static efficiency: • Productive efficiency • Allocative efficiency • Dynamic efficiency • Benefit to UK plc – economic rent • Regulatory (administrative) burden • Equity/other social policy objectives

  19. Exercise • What, if anything, to regulate? • On- and/or off-patent? • Branded and/or unbranded? • Prescribed and/or over-the-counter? • Sales to NHS only, or all UK sales? • If so, how? • Rate of return control, unbanded • Rate of return control, banded • Price control – basket, RPI-X • Price control – individual products, reference prices • From 3 perspectives: • General public: patients & taxpayers • Government • Industry

  20. Key Questions • How price-sensitive are the people making the consumption choices? • How much competition is there between one medicine and another, or between medicines and alternative treatments? • Do producers have incentives to keep costs down? • Will production and consumption choices become increasingly distorted over time? • Do producers have incentives to invest in the UK, especially in R&D? • Would the regulatory system be costly for the regulator to administer and the companies to comply with?

  21. Pharmaceutical Price Regulation Scheme 1999 • Have been variants of PPRS since 1960s • Department of Health acts as regulator for whole UK • Objectives of 1999 PPRS: • Secure the provision of safe and effective medicines for the NHS at reasonable prices • Promote a strong and profitable R&D-based pharmaceutical industry • Encourage efficient and competitive development and supply of medicines • Voluntary – but (unspecified) statutory alternative scheme for firms that opt out

  22. PPRS 1999 (continued) • Covers all branded medicine sales – on-patent & branded generics – to NHS by companies selling > £1m p.a. to NHS (≈80% of total sales to NHS) • Return on capital ≥ 29.4% => repay excess to DoH • Return on capital ≤ 8.5% => may apply for price increase(s) to take RoC to 13.6% • R&D costs allowed up to 20% of sales • Promotion costs allowed up to 7% of sales • Free pricing at launch but no increases then allowed unless company’ RoC falls to ≤ 8.5%

  23. Multilateral, Ex-manufacturer, Price Comparisonsat Market Exchange Rates Source: Department of Health (2001) PPRS 5th Report to Parliament

  24. Understanding the methodological issues • Manufacturers’ prices or final selling price to the payer? • Brands or generics or molecules? • Sample size and selection (value versus volume, degree of market coverage) • Bilateral versus multilateral • Match single pack, match product form or price per unit (tablet, DDD, IMS SUs, Kg)? • Volume weights: unweighted, own country (Paasche) or foreign weights (Laspeyres)? • Choice of exchange rate • What exactly is the question you are trying to answer?

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