Pricing Policies in the Pharmaceutical Sector
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Drug Information Journal, Vol. 36, pp. 453-464, 2002 F’rinted in the USA. All righu reserved.
PRICING POLICIES IN THE PHARMACEUTICAL SECTOR STEFAN0 CAPRI ISIS Research, Milan, Italy
ROSELLALEVAGGI Dipartimento di Scienze Economiche, Universith di Brescia, Brescia, Italy
In this article we analyze the problem of determining the price for new drugs in a market where stringent budget constraints on public expenditure exists and we suggest an innovative methodology to set drug prices. The market is characterized by asymmetry of information and a high proportion of investment in research and development, an element that must be taken into account because it is only through research that it is possible to obtain better drugs. Our proposed method allows one to set the price of new drugs in different market contexts, that is, where less effective alternatives are already sold or in new markets. We also propose a unified methodology to evaluate the social value of drugs in different markets through the definition of a function of the cost per quality adjusted life year that society is willing to pay. Key Words: Drug value; Price setting; Public health care expenditure
INTRODUCTION
On the consumption side, the demand does not reflect the marginal benefit to consumers. The demand for drugs is usually created by a doctor who acts as an agent for his patients. Hence, the demand might also reflect his preferences. Furthermore if the patient has insurance coverage, the price he pays is lower than the market price, and 0 On the production side, drugs have a high proportion of cost in research and development (R&D). Hence, the price is usually much higher than the cost of production.
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WHEN A MARKET CAN work according to the rules set out for perfect competition there is no need for regulation because a first best allocation of resources, where consumers maximize their utility and firms their profits, is reached automatically. Prices on these markets reflect the marginal benefit from consumption and the equilibrium is found at a point where the marginal cost of production is equal to the marginal utility of consumption. This condition also implies zero profit for the f m s and cost minimization. The market for drugs is not a perfect competitive structure for several reasons:
In reviewing the different regulation policies applied to the drug market we can find at least five categories of restrictions: Patent restrictions on commercialization of the new drug, which allows the company to sell new drugs in a regime of monopoly, 0 Restrictions on their price ranging from the Italian case where the price and its increase
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Reprint address: Prof. Rosella Levaggi, Dipartimento di Scienze Economiche, Universita di Brescia, Via S. Faustino 74h, 25122 Brescia. Italy. E-mail: levaggiO eco. unibs.it.
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must be authorized by a government agency to the less restrictive Australian rule to reimburse the consumer with the price of the cheapest alternative, 0 Restrictions on the drugs that can be sold, that is, before a new drug c
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