TY  - JOUR
AU  - Berndt,Ernst R.
AU  - McGuire,Thomas G.
AU  - Newhouse,Joseph P.
TI  - A Primer on the Economics of Prescription Pharmaceutical Pricing in Health Insurance Markets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 16879
PY  - 2011
Y2  - March 2011
UR  - http://www.nber.org/papers/w16879
L1  - http://www.nber.org/papers/w16879.pdf
N1  - Author contact info:
Ernst R. Berndt
MIT Sloan School of Management
100 Main Street, E62-518
Cambridge, MA 02142
Tel: 617/253-2665
Fax: 617-227-0880
E-Mail: eberndt@mit.edu

Thomas McGuire
Department of Health Care Policy
Harvard Medical School
180 Longwood Avenue
Boston, MA 02115
Tel: 617/432-3536
E-Mail: mcguire@hcp.med.harvard.edu

Joseph P. Newhouse
Division of Health Policy  Research and Education
Harvard University
180 Longwood Avenue
Boston, MA  02115-5899
Tel: 617/432-1325
Fax: 617/432-3503
E-Mail: newhouse@hcp.med.harvard.edu
AB  - 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.
ER  -