msc module economics of health care @ city university the market for medicines 13 th december 2002 n.
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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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msc module economics of health care @ city university the market for medicines 13 th december 2002

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

Jon Sussex

agenda
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
types of medicines
Types of Medicines

* OTCs = over the counter (i.e. non-prescription) medicines

measures affecting prescriber price sensitivity
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
supply side main characteristics 1
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’
slide10

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

supply side main characteristics 2
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
net value of the pharmaceutical industry economic rent
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’

market failure
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
monopoly power
Monopoly Power
  • Economies of scale and/or scope – but NB contestability
  • Natural (local) monopoly
  • Input constraints
  • Patents: dynamic efficiency vs static monopoly
options types of regulation
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
1998 competition act
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
banded rate of return regulation
Banded Rate of Return Regulation

%RoR

Outturn RoR > threshold => repay excess

Target RoR

Outturn RoR < threshold => may increase prices

0

£ capital employed

rpi x regulation of a basket of n products
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

{

{

regulation criteria
Regulation Criteria
  • Static efficiency:
    • Productive efficiency
    • Allocative efficiency
  • Dynamic efficiency
  • Benefit to UK plc – economic rent
  • Regulatory (administrative) burden
  • Equity/other social policy objectives
exercise
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
key questions
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?
pharmaceutical price regulation scheme 1999
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
pprs 1999 continued
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%
multilateral ex manufacturer price comparisons at market exchange rates
Multilateral, Ex-manufacturer, Price Comparisonsat Market Exchange Rates

Source: Department of Health (2001) PPRS 5th Report to Parliament

understanding the methodological issues
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?