A Primer on the Economics of Prescription Pharmaceutical Pricing in Health Insurance Markets

Berndt Ernst R., McGuire Thomas and Joseph Newhouse
Additional contact information
Berndt Ernst R.: Massachusetts Institute of Technology and National Bureau of Economic Research, eberndt@ mit.edu
McGuire Thomas: Harvard Medical School, mcguire@hcp.med.harvard.edu

Forum for Health Economics & Policy, 2011, vol. 14, issue 1, 30

Abstract: The pricing of medical products and services in the U.S. is notoriously complex. In health care, supply prices (those received by the manufacturer) are distinct from demand prices (those paid by the patient) due to health insurance. The insurer, in designing the benefit, decides what prices patients pay out-of-pocket for drugs and other products. In this primer we characterize cost and supply conditions in markets for generic and branded drugs, and apply basic tools of microeconomics to describe how an insurer, acting on behalf of its enrollees, would set demand prices for drugs. Importantly, we show how the market structure on the supply side, characterized alternatively by monopoly (unique brands), Bertrand differentiated product markets (therapeutic competition) and competition (generics), influences the insurer’s choices about demand prices. This perspective sheds light on the choice of coinsurance versus copayments, the structure of tiered formularies, and developments in the retail market.

Keywords: pharmaceuticals; health insurance; prices; Bertrand competition; brands; generics (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

Downloads: (external link)
https://doi.org/10.2202/1558-9544.1301 (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
Working Paper: A Primer on the Economics of Prescription Pharmaceutical Pricing in Health Insurance Markets (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bpj:fhecpo:v:14:y:2011:i:2:n:10

Ordering information: This journal article can be ordered from
https://www.degruyter.com/journal/key/fhep/html

DOI: 10.2202/1558-9544.1301

Access Statistics for this article

Forum for Health Economics & Policy is currently edited by Dana Goldman

More articles in Forum for Health Economics & Policy from De Gruyter
Bibliographic data for series maintained by Peter Golla ().