Pharmaceutical Economics and Policy (En)

This is the first book that I have read during this Xmas break. I have no idea if I can read up another book by the end of this year. The book was recommended by Prof. Mike Gibbs, professor of economics at University of Chicago. I took his classes in the MBA course, he was just awesome. Thank you, Mike, for telling me about this outstanding book.

http://www.amazon.com/Pharmaceutical-Economics-Policy-Stuart-Schweitzer/dp/0195300955

For those who are in the field of pharmaceuticals, this book is absolutely a must-read. Although some information are fatalistically outdated     it is five years since this edition was published, and five years is more than enough to change the majority of the rules of the game in this industry     the comprehensiveness of the book and the sound logic stemming from microeconomic theories are just phenomenal. I wanted to take some notes from the book that I thought were important before I forget the content which is actually already happening.

1) The Theory of Pharmaceutical Pricing
What was most interesting to know was that the prices of pharmaceuticals is observed as to be determined by the level of the demand of the product, not the cost of the drug. As a participant in the industry, I was a hard core believer about the explanation of why the price of pharmaceuticals are so high compared with the other commodities, which is because of the large R&D cost. Observations mentioned in this book clearly suggests otherwise. It is the product attributes that determine the price of the drug, or in other words, the market, not the manufacturer that decides the value of the drug. Then, based on the market demand and the marginal cost, the industry figures out the profit maximizing production levels of the product, and there comes the profit. And from this profit, you decide the amount of R&D investment that goes in to the next cycle. It is not the other way around. There was enough evidence to support this idea, and for those who are interested, get the book at Amazon or otherwise. But what this means from an industry perspective is that we don't have to feel the guilt of pricing the drug in an arbitrarily high level taking advantage of the unusually urgent demand of the people suffering from illness with limited options and funding our selfish R&D activities using the surplus. Once again, it is the market fair value that determines the price of the product. And the excess profits suggest that the market is willing to invest in pharmaceutical R&D.

2) Value of Me-too Drugs
Related to the price discussion, before I read this book I was not believing in any value of a me-too drug, which is a late-comer drug that has virtually no innovation or difference compared with the incumbent drug. While there is less incremental benefit on the physician and patient side, there is a significant impact at the payer and the manufacturer level, which is pretty obvious if you think about it; competition drives down the price and therefore reduces the economic burden of healthcare. This was not that much obvious to me because in Japan drug prices are determined by the authorities (National Health Insurance price, or NHI price) and we had no direct control on it. But even in Japan, we can control the ex-factory price to the wholesalers in hope that it will be sold to the retailers in a competitive price point than others. And the NHI price is revised every two years, based on the observed transaction cost from at the retail level.  So me-too drugs obviously have cost savings effect, especially when the incumbent drug remains patented.

3) Limitations of The Market Mechanism of Cost Containment
United States is probably the only country that introduced the market mechanism explicitly to contain costs of healthcare. My understanding was that it is working efficiently given the high penetration rate of the generic drugs after the branded drugs go off patent, and also the relatively small proportion of the drug costs within the national healthcare expenses. However, evidence shows that this is not the case. The formulary approach is the heart of Managed care, to limit the usage of drugs in a same category to the most cost-effective option, and this intuitively suggests that by constraining the authority of the physicians making treatment choices that are expensive than average, it will contain the overall cost of the medical intervention. This naive view was questioned by a series of evidence that the more restrictive the formulary was, the less successful it was in reducing healthcare costs. The explanation was that the pharmaceuticals which are in the same class are not necessarily perfect substitutes of each other and "if a suboptimal drug replaces a drug better matched to a patient's particular needs, the cost of drug may be reduced, but the cost of other services may well rise. Overall treatment costs are highly sensitive to even slight changes in use of hospital and physician services because their cost is so high."