John A. Vernon

The Impact of Subsidized Health Insurance for the Poor: Evaluating the Colombian Experience Using Propensity Score Matching

This paper evaluates the impact of Colombia’s subsidized health insurance program (SUBS) on medical care utilization. Colombia’s SUBS program is a demand-side subsidy intended for low-income families, where the screening of beneficiaries takes place in decentralized locations across the country. Due to the self-selection problems associated with non-experimental data, we implement Propensity Score Matching (PSM) methods to measure the impact of this subsidy on medical care utilization. By combining unique household survey data with community and regional data, we are able to compute propensity scores in a way that is consistent with both the local government’s decision to offer the subsidy, and with the individual’s decision to accept the subsidy. Although the application of PSM using these rich datasets helps to achieve a balance between the treatment and control groups along observable dimensions, we also present instrumental variable estimates to control for the potential endogeneity of program participation. Using both methods, we find that Colombia’s subsidized insurance program greatly increased medical care utilization among the country’s poor and uninsured. This evidence supports the case for other Latin American countries implementing similar subsidy programs for health insurance for the poor.

Drug Prices and Research and Development Investment Behavior in the Pharmaceutical Industry

This paper argues theoretically and shows empirically that pharmaceutical R&D spending increases with real drug prices, after holding constant other determinants of research and development (R&D). Specifically, an estimated elasticity suggests that a 10 percent increase in the growth of real drug prices is associated with nearly a 6 percent increase in the growth of R&D intensity. Simulations that are based on our multiple‐regression model indicate that the capitalized value of pharmaceutical R&D spending would have been about 30 percent lower if the federal government had limited the rate of growth in drug price increases to the rate of growth in the general consumer price index during the period 1980–2001. Moreover, the results suggest that a drug price control regime would have resulted in 330–65 fewer new drugs, representing over one‐third of all actual new drug launches brought to the global market during that time period.

Pharmaceutical Risk-Sharing Agreements

Increased spending on pharmaceuticals continues to foster debate over healthcare policy. The increasing costs of bringing products to the market, as well as increased utilization of pharmaceuticals contribute to increased pharmaceutical expenditure; however, appropriate pharmaceutical use can, in certain cases, reduce overall healthcare costs. Nevertheless, the perception of high drug prices still puts pressure on pharmaceutical companies to build confidence in the proposition that their products are worth the additional expense. One potential approach to building this confidence, and maintaining investment incentives, is for the pharmaceutical company to share the risk of a situation in which there is uncertainty about whether the product is effective for the consumer and payer. Such risk-sharing arrangements for pharmaceuticals, like warranties, can be used to signal high quality when product quality is not fully observable. While there may be difficulties in devising such schemes for every product, such risk-sharing plans may become a staple feature of the market in the future.

Analysis of Manufacturing Costs in Pharmaceutical Companies

In the pharmaceutical industry, costs attributed to manufacturing are a major part of a company’s total expenses. In this paper, trends in various expense and income categories of pharmaceutical companies have been analyzed with particular emphasis on manufacturing costs to gain an insight into their relationships and how they may differ among types of pharmaceutical companies such as brand name, generics, and biotechs. The study includes data published in the annual reports of leading pharmaceutical companies from 1994 to 2005. Twenty-two pharmaceutical companies were selected based on the annual revenues. The set was further divided into three groups: brand names, generics, and biotechs. The analysis shows that, between 1994 and 2005, manufacturing costs (as a percentage of total sales) are different for the three groups of companies listed above. Additionally, each group of companies differs in how savings are leveraged strategically. The data on brand-name pharmaceutical companies also indicate that there is a strong correlation between the reduction of the cost of goods sold (COGS) and the increase in R&D expenditure. This suggests the validity of Vernon’s theory that for brand-name companies, a reduction in COGS will likely have a positive impact on investments in R&D, presumably resulting in much needed innovations and future health benefits for the society.

Economic and Developmental Considerations for Pharmacogenomic Technology

In this paper we use a cost-effectiveness framework to model the strategic decision-making considerations by pharmaceutical manufacturers as they relate to drug development and the new technology of PG (the science of using genetic markers to predict drug response).In a simple, static, one-period model we consider three drug development strategies: a drug is exclusively developed and marketed to patients with a particular genetic marker; no distinguishing among patients based on the expression of a genetic marker is made (traditional approach); and a strategy whereby a drug is marketed to patients both with and without the genetic marker but there is price discrimination between the two subpopulations.We developed three main principles: revenues under a strategy targeting only the responder subpopulation will never generate more revenue than that which could have been obtained under a traditional approach; total revenues under a targeted PG strategy will be less than that under a traditional approach but higher than a naïve view would believe them to be; and a traditional approach will earn the same total revenues as a price discrimination strategy, assuming no intermarket arbitrage.While these principles relate to the singular (and quite narrow) consideration of drug revenues, they may nevertheless partially explain why PG is not being used as widely as was predicted several years ago when the technology first became available, especially in terms of pharmaceutical manufacturer-developed tests.

Assessing Consumer Gains from a Drug Price Control Policy in the United States

We use national data from 1960 to 2000 to estimate the demand for pharmaceuticals in the United States. We then simulate consumer surplus gains from a hypothetical drug price control policy that would have limited drug price increases to the rate of inflation from 1981 to 2000. Using a range of values for the real interest rate, coinsurance rate, and own-price elasticity of demand, we find that the consumer surplus gains from this policy equal

The economics of pharmaceutical price regulation and importation: refocusing the debate.

472 billion by the end of 2000. According to a recent study, that same policy would have led to 198 fewer new drugs being brought to the U.S. market. Therefore, the average social opportunity cost per drug developed during this period was approximately

Pharmaceutical manufacturing efficiency, drug prices, and public health : Examining the causal links

2.4 billion. Research on the value of pharmaceuticals suggests that the social benefits of a new drug are far greater than this estimate. Hence, drug price controls could do more harm than good.

Ownership form and consumer welfare: evidence from the nursing home industry.

(ProQuest-CSA LLC: ... denotes formulae omitted.) I. INTRODUCTION There is a great deal of misinformation surrounding the economics of pharmaceutical importation and price regulation. Among economists, the principles governing the relationships between prices, innovation, and pharmaceutical research and development (R&D) investment are incontrovertible.1 Unfortunately, faulty, non-economic analyses abound on these fundamental relationships,2 reinforcing economic illiteracy and leading to unfounded U.S. public policy. Effective public policy debate requires that all parties to the debate be informed and aware of the potential costs and benefits associated with new policies, or changes in existing policies. This has not yet occurred for pharmaceutical importation and price regulation policy. Therefore, the purpose of this paper is to provide a positive (in contrast to a normative) economic analysis of pharmaceutical importation and price regulation. This paper will not answer the question of whether or not regulated drug prices in the U.S. (achieved either through direct price controls or indirectly through importation) will, on net, improve social welfare. Nor will it draw conclusions about the social welfare effects of non-U.S. price regulation. Quantitative analyses of this nature are beyond the scope of the paper. Instead, the objectives of the paper are to dispel the flawed logic advocated by some non-economists, and to place the issues firmly within a rational, incontrovertible, economic framework. The reader is then free to make her own judgment with knowledge of the economic facts and realities surrounding public policy towards price regulation and importation. This paper will proceed as follows. section II will use standard economic tools and models to place the issues of price regulation and importation into context. Specifically, the links between prices, profits and R&D investment will be demonstrated. Economic logic will frame the issues and draw several irrefutable, qualitative conclusions. Prior to this, however, this paper provides a brief overview of the various forms of price regulation used around the world. Finally, to demonstrate the economic illiteracy surrounding these very important public policy issues, this paper will briefly discuss several examples of high-profile flawed economic logic. Overcoming bad economic reasoning is a critical first step to making sound public policy decisions in the U.S. Section III will report and discuss several empirical estimates on the relationship between drug prices, profits and R&D investment. This section will also undertake multiple policy simulations designed to partially answer important questions surrounding the tradeoffs between drug prices, profits, and innovation. Having a quantitative approximation of these links may help inform future policy debates. Several caveats regarding both the empirical analyses and simulations will be emphasized. While quantitative and statistical measures are important considerations when debating policy issues, it is equally important that they be viewed with caution and only within the context of the sample studied and assumptions employed. This section will conclude by considering the forced-sale provision contained in a recent importation bill (the Dorgan bill)3 and illustrate why it will be ineffective in achieving its objective. Section IV will conclude the paper. II. PHARMACEUTICAL PRICE REGULATION, PROFITS, AND R&D INVESTMENT A. A BRIEF OVERVIEW OF PHARMACEUTICAL PRICE REGULATION The United States is the only major industrialized country in the world that does not currently regulate prescription drug prices.4 In the United States, prescription drug prices are determined, for the most part, in a free market system. In direct contrast with this, practically every other country, either directly or indirectly, imposes one form of price controls on pharmaceuticals. …

Examining the link between price regulation and pharmaceutical R&D investment

There are important fundamental links among the efficiency of pharmaceutical manufacturing, drug prices, and public health in the United States. This article seeks to probe these links because recent research (by academics and even the US Food and Drug Administration) suggests there are significant opportunities to improve the manufacturing processes for pharmaceuticals. Two models are developed that consider the impact of reduced manufacturing costs on pharmaceutical prices and firm profits. The two models effectively bound the range of potential future benefits from greater manufacturing efficiency and estimate that, for example, a 30% reduction in manufacturing costs will generate between