Transcript Chapter25

Chapter 25
The
Economics of
Prescription
Drugs
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Outline
• Profiteers Or Benevolent Scientists
• Monopoly Power As It Applies To
Drugs
• Important Questions
25-2
Profiteers or Benevolent Scientists?
• Spending on drugs accounts for 10% of
the more than $2 trillion health care
industry
• The question of advertising
• Ads for particular drugs
• These are not unexpected as new cures and
remedies are invented.
• Feel-good political ads
• These ads are seen as a means to forestall
price controls or regulations.
25-3
Patents
• A patent is a right granted by
government to an inventor to be the
exclusive seller on an invention for a
limited period of time.
• Patents motivate innovation with the
promise of monopoly profit for a
period of time.
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Orphan Drugs
• An Orphan Drug is one that treats
someone with a disease that afflicts
few people.
• The concern is that there is insufficient
potential demand to motivate
innovation.
• For orphan drugs the patent life is
extended by several years.
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The Concern over High Prices
• Are prescription drug prices too high?
• The answer to many depends on the impact of the
disease.
• For “life or death” drugs price has been an ethical
concern.
• The AIDS “cocktail” (a mix of drugs, used to fight the disease)
originally cost $14,000 per patient per year.
• For “quality of life” drugs it has been less of a concern.
• Pepcid and Zantac (heartburn medications), Seldane and then
Claritan (seasonal allergy medications) cost a great deal but have
not raised as much ethical concern.
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The Impact of Monopoly Power
P
MC
P*
MR
Q*
D
Q/t
25-7
Monopoly vs. Perfect Competition
P
MC=Supply
A
•Under PC
B
Pmonop
•CS=PPCAC
•PS=FPPCC
C
•Under Monopoly
PPC
•CS=PmonopAB
E
•PS=FPmonopBE
MR
•DWL=EBC
F
D
Qmonop QPC
Q/t
25-8
Deadweight Loss
• Deadweight Loss (DWL) is the loss
in social welfare associated with
production being too little or too
great.
• In the case of monopoly,
production is too little and prices
are too high.
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Important Questions
• Are prescription drugs expensive necessities or
relatively inexpensive godsends?
• Expensive Necessities?
• Prescription drug prices rose twice as fast as overall prices.
• The prices are often more than ten times their marginal
production costs.
• Inexpensive godsends
• Drug treatments are typically much less than their surgical
alternatives. (Drugs that deal with blocked arteries are less
than a tenth the cost of bypass surgery.)
• New quality of life drugs treat ailments for which there are no
surgical alternatives.
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Why We Should Expect
Costs to be High
• Innovation costs
• Highly trained and highly paid personnel are required to
work on the therapies.
• Expensive equipment is necessary to aid the invention
process.
• Uncertainty about success
• Most new therapies that make it out of the lab do not make
it through clinical testing.
• Time delay and opportunity cost
• Even when therapies are approved the revenue stream
begins more than a decade after the invention costs have
been incurred.
• The opportunity cost in terms of lost interest must be
counted as a cost as well.
25-11
The Cost Debate
• Consumer advocacy groups
contend that ad spending now
exceeds research spending.
• Drug firms contend that this ignores
important “opportunity costs.”
25-12
Induced Demand
• Consumer advocacy groups are
concerned that drug companies are
inventing ailments to treat.
• e.g. Restless legs syndrome & Requip
• The drug treats an ailment that was not
previously known to be an ailment.
25-13
Are Price Controls an Answer?
• Price or profit controls in other countries
make it such that drug prices are much higher
in the U.S. than they are in other countries.
• If the U.S. controlled prices or profits it
would eliminate the sole high profit market
for drugs thereby reducing their motivation
to innovate
• Economists are generally against price or
profit limits for prescription drugs in the U.S.
25-14
Buying from Canada
• It is against the law for anyone to
resell drugs purchased oversees.
• Canadian and Mexican drug prices are
controlled by their governments
• It is much cheaper to buy drugs in
Canada or Mexico that it is in the U.S.
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FDA Approval
• The Process
• Laboratory trials test the
effectiveness of drugs “in the testtube” and on animals.
• Small scale human testing is done to
determine safety.
• Large scale human testing is done to
determine effectiveness. This also
catches some safety issues.
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Too Lax or Too Stringent
• Too Lax
• If drugs are approved that are later determined to
be unsafe (such as the weight loss drug Fen-Phen)
the concern is that screening is too lax.
• Too Stringent
• If drugs that would have saved lives (or otherwise
helped people) are delayed in their approval this is
a loss as well.
• Economists evaluate the marginal cost of
increasing stringency against its marginal
benefits.
25-17
Over-the-Counter
• When a drug has been deemed to be safe and
effective and does not have an adverse
interaction with other drugs it can go overthe-counter (sold without a prescription.)
• It is not always in the consumer’s best
interest for a drug to go over-the-counter
• OTC drugs are not covered by insurance
• The out of pocket expense to consumers with
insurance can often be higher when a drug goes
OTC.
25-18