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Cost-Effectiveness Analysis of Branded Drugs With Market Demand and Insurance
Mark V Pauly1, William S Comanor2, H E Frech3
1The Wharton School of the University of Pennsylvania, Philadelphia, PA, USA.
Summary
Pharmaceutical cost-effectiveness analysis changes when prices and effectiveness are endogenous. Market drug prices and insurance influence cost-effectiveness ratios, revealing different outcomes than traditional exogenous models.
Area of Science:
- Health economics
- Pharmaceutical pricing
- Cost-effectiveness analysis
Background:
- Traditional cost-effectiveness analysis assumes drug prices and effectiveness are fixed.
- This assumption impacts judgments on the value of specific medications.
Purpose of the Study:
- To explore the theoretical implications of endogenous pharmaceutical prices and patient responses.
- To model pharmaceutical price setting with and without health insurance.
- To analyze the impact on cost-effectiveness ratios.
Main Methods:
- Utilized basic economic models of patient demand and pharmaceutical firm pricing.
- Predicted market equilibria in drug and insurance markets.
- Calculated cost-effectiveness ratios within these market settings.
Main Results:
- Market cost-effectiveness ratios differ significantly from those using exogenous prices.
- Ratios may show similarity across products due to profit-maximizing pricing by firms with market power.
- Market cost-effectiveness ratios consistently show benefits exceeding costs.
Conclusions:
- Insurance generally leads to less favorable cost-effectiveness ratios.
- Bargaining between insurers and drug firms improves cost-effectiveness ratios.
- Endogenous pricing and patient response models offer a more realistic view of drug value.
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