Pharmaceutical Prices
How sensitive is demand to copayments and advertising? How does competition affect generic prices? Do Americans pay higher prices for pharmaceuticals than people in other rich countries?
How can we encourage lower prices for poor countries?
- David B. Ridley. "Payments, Promotion, and the Purple Pill." (Working paper)
Understanding competition in the drug industry requires understanding how sensitive demand is to prices. The relevant prices for insured consumers are copayments. Estimates of copayment elasticity abound, but not estimates controlling for competition from other branded products, because of the paucity of data. Whereas previous studies examined copayment sensitivity when copayments for branded drugs moved in unison, this study examines copayment sensitivity when copayments diverge. The study uses unique panel data of insurance copayments and utilization for 77 insurance groups, as well as data on advertising. The results indicate that demand is much more sensitive to copayment than previously recognized. Manufacturers selling drugs with higher copayments than branded competitors can lose substantial market share. Manufacturers can offset the loss of demand by greater advertising to physicians, but it is costly.
- Henry G. Grabowski, David B. Ridley, and Kevin A. Schulman. "Entry and Competition in Generic Biologics." Managerial and Decision Economics. 2007. Vol. 28: 439-451. (preprint)
Two hurdles limit approvals of generic biologics. First, the biotechnology industry is young, so few patents have expired for major biologic products.
Second, Congress has not yet approved an abbreviated pathway for generic biologics.
An abbreviated pathway would allow generic biologics, like generic pharmaceuticals, to enter the market with little costly clinical testing.
For generic pharmaceuticals, costly clinical trials are not required, rather generic pharmaceutical manufacturers are only required to provide evidence of bioequivalence. To understand how a policy change will create a market for generic biologics,
we use a simple theoretical model of monopolistic competition (free entry with differentiated products) and simulations with data from generic pharmaceuticals.
We predict that generic biologics will have high fixed costs from clinical testing and from manufacturing,
which implies there will be less entry than would be expected for generic pharmaceuticals.
With fewer generic competitors, generic biologics will be relatively close in price to branded biologics.
People often assume that generics are inherently cheap, but not when there are few competitors.
- David B. Ridley and Kirsten Axelsen. "Impact of Medicaid Preferred Drug Lists on Therapeutic Adherence." Pharmacoeconomics. 2006. Vol. 24, Suppl. 3: 65-78.
Increasingly, private insurers are using differences in patient copayments to drive market share to lower-price drugs, but the same tool is not available for state Medicaid programs.
State Medicaid programs are prohibited from charging copayments above $3 to low income patients.
Instead, state Medicaid programs use preferred drug lists: the less-expensive branded drug is on the list and thus paid for; the more-expensive branded drug is off the list; and payment for drugs that are off the list requires government permission.
The objective of the program is to encourage doctors to prescribe cheaper drugs on the list.
Doctors, however, often prescribe drugs off the list; so when a Medicaid patient goes to the pharmacy with a prescription for a more expensive drug, the pharmacist tells the patient that she needs either a new prescription or government permission for the old prescription.
We find that many Medicaid patients simply give up and do not get any medication. We compare medication across states and over time.
Alabama, for instance, implemented a preferred drug list to encourage use of a cheaper cholesterol medicine and discourage use of a more expensive cholesterol medicine.
We find that 51 percent of patients in Alabama were non-adherent with cholesterol therapy after the policy change compared with 39 percent before.
Non-adherence in North Carolina (which has similar demographics but no policy change) was 36 percent in both periods.
- David B. Ridley. "International Price Comparisons for Novel and Follow-On Drugs." Value in Health. 2007. Vol. 10, No. 6: 510-511.
Prices for novel drugs tend to be about the same in the U.S. as in other rich countries,
prices for less novel drugs tend to be higher in the U.S. than in other rich countries (but this does not account for confidential rebates),
and prices for generic drugs tend to be lower in the U.S. than in other rich countries because the large U.S. market attracts many generic
competitors which compete down generic prices.
- Margaret K. Kyle and David B. Ridley. "Would Greater Transparency and Uniformity of Health Care Prices Benefit Poor Patients?" Health Affairs. 2007. Vol. 26, No. 5: 1384-1391.
We show that the effect of price transparency on profits and welfare depends on the type of price transparency.
In the first type of transparency, the consumer is aware of the price for a treatment before receiving it.
Increasing the first type of transparency is the focus of efforts to bring consumerism to health care in the United States.
In the second type of transparency, the buyer is aware of the price paid by others.
Pharmaceutical manufacturers tend not to adopt this form of transparency.
Manufacturers make prices transparent to the buyer paying the price, but not to other buyers paying different prices.
Increasing the second type of transparency is an objective of the World Health Organization which is posting international pharmaceutical price comparisons.
Increasing the second type of transparency undermines differential pricing and can lead to higher prices for poor people.
Hence, transparency is not uniformly beneficial for consumers.
- David B. Ridley. "Price Differentiation and Transparency in the Global Pharmaceutical Marketplace." Pharmacoeconomics. 2005. Vol. 23, No. 7: 651-658.
The World Health Organization's well-meaning effort to compare
the price of a given molecule across manufacturers and across countries has insufficient adjustments for drug quality variations;
uses price ratios rather than price levels; artificially measures countries’ wealth (for example, using a country’s lowest-paid unskilled government worker);
disregards patents; is too slow in adjusting to changes in prices, inflation, and exchange rates; and requires procurement prices which are difficult to obtain since rebates and discounts are often confidential.
- David B. Ridley and Kevin A. Schulman. "Differential Pricing of Pharmaceuticals in the Internet Age." Journal of Ambulatory Care Management. 2004. Vol. 27, No. 3: 210-214.
The Internet provides healthcare consumers with more information about available prices
and provides pharmaceutical manufacturers with more information about consumers' willingness
to pay. The former effect tends to undermine price differences while the latter tends to support
them. We expect the former effect to dominate and the Internet to undermine differential pricing
of pharmaceuticals.
Health Care Costs
How costly is post-approval drug safety? How costly is hospital inefficiency?
- David B. Ridley, Judith M. Kramer, Hugh H. Tilson, Henry G. Grabowski, and Kevin A. Schulman. "Spending on Postapproval Drug Safety." Health Affairs. 2006. Vol. 25, No. 2: 420-8.
Withdrawals of high-profile pharmaceuticals like Vioxx focused attention on post-approval safety surveillance.
We surveyed drug manufacturers and found that mean spending on postapproval safety per company in 2003 was $56 million
(0.3 percent of sales).
Assuming a constant safety-to-sales ratio, we estimated that total spending on postapproval safety by the top twenty drug
manufacturers was $800 million in 2003. This study is the only systematic estimate of post-approval spending to be published and
helped inform the Institute of Medicine inquiry into drug safety.
- Bimal R. Shah, Shelby D. Reed, Jennifer Francis, David B. Ridley, and Kevin A. Schulman. "The Cost of Inefficiency: A Look at US Hospital Overhead Costs from 1985-1997." Journal of Health Care Finance. 2003. Vol. 30: 1-9.
We examine hospital cost-cutting efforts. We find that
hospital administrators exerted considerably less effort reducing overhead costs than hospital beds.
Had administrators exerted the same pressure on overhead costs
as on beds, the average hospital could have saved $4.6 million annually from 1985 to 1997, or $16.5 billion annually for the US.
Business Location
When firms cluster, they engage in more intense price competition. So why cluster? My research explores some hypotheses.
Followers cluster near leaders to
i) free ride on the demand information of the market leader,
ii) because they can differentiate their products and mitigate price competition, and iii) because zoning forces clustering.
- David B. Ridley. "Herding versus Hotelling: Market Entry with Costly Information." Journal of Economics and Management Strategy. 2008. Vol. 17, No. 3: 607-631.
(preprint)
In the classic analysis of Hotelling (1929), firms cluster to attract consumers that want to minimize travel costs when making a purchase.
An alternative explanation is that an informed firm's entry into a market provides its rival with a noisy signal about market demand.
The uninformed rival will blindly mimic the informed leader when research costs are higher than expected losses from sometimes following the leader into unprofitable markets.
One consequence of this free riding is that an informed firm might forego a market that it knows to be profitable for only one firm.
Since the leader is avoiding markets that are profitable for one firm, the follower will sometimes enter when the leader does not.
Furthermore, an uninformed firm's profits might be higher when research costs are higher,
because it can avoid the research cost knowing that it can blindly follow the informed firm when it enters.
- Gabriel A. Picone, David B. Ridley, and Paul A. Zandbergen. "Distance Decreases with Differentiation: Strategic Agglomeration
by Retailers." International Journal of Industrial Organization. 2009. Vol. 27, No. 3: 463-473.
(preprint)
Theory predicts intense price competition when firms cluster with rivals. Yet, strong evidence of clustering is found in previous empirical research.
Researchers typically measure clustering by comparing observed location patterns to random assignment. The random assignment benchmark does not, however, account for zoning and geography and therefore might overstate the extent of strategic agglomeration.
As evidence, we find that public elementary schools cluster more than random, not because of agglomeration economies, but due to demand density and limited location options.
We argue that a better measurement of strategic agglomeration is to compare across product markets with similar zoning and other location restrictions but different benefits from agglomeration.
We use L-function analysis of five product markets in five cities. We find that retailers with greater ability to differentiate their products are more likely to strategically cluster.
- David B. Ridley. "Hotelling's Law." Draft prepared for the Palgrave Encyclopedia of Strategic Management edited by D. Teece and M. Augier. 2011
- David B. Ridley, Frank A. Sloan, and Yan Song. "Retail Zoning and Competition." (Working paper)
Economists have assumed that zoning decreases competition, but
we provide theory and evidence that zoning can have the opposite
effect. Zoning keeps sellers away from homes which decreases the number of sellers, but also forces those sellers
closer together, possibly increasing competition. Additionally,
the theory explains why, if we do not account for zoning, we
might find that price rises with the number of sellers, and why
distance between sellers increases with the number of sellers.
Using unique data on retail zoning in multiple product markets
we find evidence consistent with the theory.