Pricing and Reimbursement in U.S. Pharmaceutical Markets

Ernst R. Berndt, Joseph P. Newhouse

NBER Working Paper No. 16297
Issued in August 2010
NBER Program(s):Health Care, Industrial Organization, Productivity, Innovation, and Entrepreneurship

In this survey chapter on pricing and reimbursement in U.S. pharmaceutical markets, we first provide background information on important federal legislation, institutional details regarding distribution channel logistics, definitions of alternative price measures, related historical developments, and reasons why price discrimination is highly prevalent among branded pharmaceuticals. We then present a theoretical framework for the pricing of branded pharmaceuticals, without and then in the presence of prescription drug insurance, noting factors affecting the relative impacts of drug insurance on prices and on utilization. With this as background, we summarize major long-term trends in copayments and coinsurance rates for retail and mail order purchases, average percentage discounts off Average Whole Price paid by third party payers to pharmacy benefit managers as well as average dispensing fees, and generic penetration rates. We conclude with a summary of the evidence regarding the impact of the 2006 implementation of the Medicare Part D benefits on pharmaceutical prices and utilization, and comment on very recent developments concerning the entry of large retailers such as Wal-Mart into domains traditionally dominated by large retail chains and the "commoditization" of generic drugs.

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Document Object Identifier (DOI): 10.3386/w16297

Published: Ber ndt, Ernst R. and Joseph P. Newhouse, “Pricing and Reimbursement in U.S. Pharmaceutical Markets”, Chapter 8 in Patricia M. Danzon and Sean N. Nicholson, eds., The Oxford Handbook on the Economics of the Biopharmaceutical Industr y , New York: Oxford University Press, pp. 201 - 265, 2012.

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