HMGT 435 assignment 3 final

.docx

School

University of Maryland *

*We aren’t endorsed by this school

Course

435

Subject

Economics

Date

Jan 9, 2024

Type

docx

Pages

6

Uploaded by DeaconHawk1194

Report
Assignment 3: Economic Analysis of Supply and Market Structure of Healthcare Industry – Generic Drugs Jacqueline J. Santoro University of Maryland Global Campus HMGT 435 Healthcare Economics Professor Janemarie Mulvey 28 November 2023
Memorandum To: Professor Janemarie Mulvey (Boss) From: Jacqueline Santoro Subject: Economic Analysis of Supply and Market Structure of Generic Drugs Description of Product: The products we are focusing on for this memo are generic drugs. Generic drugs are medications utilized by consumers that are equivalent to brand-name drugs regarding dosage, strength, administration route, quality, and intended use. Generic drugs are excluded from the market until a patent expires (Lee, 2019). Essentially, a US patent can give a holder a monopoly of 17 years for a brand-name drug because it is intellectual property. The monopoly created through the US patent brings difficulty to bringing generic drugs into the market. However, introduction of generic drugs into the market can promote competition, reduce healthcare costs, and improve efficiency in the pharmaceutical market. Identification of Market Structure and Key Characteristics: The pharmaceutical industry has a market structure that operates as an oligopoly market. Oligopolist firms only have a few rivals or a few large rivals and must utilize both strategic movements and interdependence. Additionally, the decisions of some competitors will determine the strategies of others in an oligopolistic market (Lee, 2019). Another significant characteristic of an oligopoly market is product differentiation. Pharmaceutical companies work hard to differentiate their product by developing distinctive drugs to gain competitive edge and a large market share. As previously discussed, patents are a significant factor in creating entry barriers. However, regulatory approvals and drug development processes also contribute to entry barrier because they can be extensive in the pharmaceutical industry.
Determination of Price for Generic Drugs: Given this market structure, prices charged for generic drugs are determined by many different factors. Overall, generic drug prices have been declining in the United States since at least 2010, however, many generic drugs have risen in price (Ornstein, 2017). Most pharmaceutical prices are based on negotiations between private insurers and suppliers (Lee, 2019). There are two features of the US market that are uncommon in other countries. Firstly, pharmacy benefit managers are often acting as a middleman between insurers and suppliers. Another feature is that the federal government only plays a small role in negotiating prices. Other factors which may play a role in price determination are concentration of the pharmaceutical industry, product differentiation, research and development costs, patents, introduction of break- through drugs. In conclusion, generic drugs within an oligopoly market is influenced by a combination of market structure, competition, and other factors. Effect of Private and Public Insurance: The existence of private and public insurance influences the revenues received for generic drugs. In the public insurance Medicare sphere, there is a prescription drug plan (PDP) which uses copayments for enrollees that require prescription drugs. The copayments that are imposed on patients have two purposes. A lower copayment for generic drugs causes Medicare enrollees to usually switch to generics from the brand name drug. Secondly, it was found that setting low copayments for generic drugs or even eliminating the copayment altogether had a big effect on encouraging Medicare enrollees to switch to the generic statin (Feldstein, 2019). Lower copayments can have either impact revenues in both a positive and negative way. For example, lower copayments can incentivize patients to seek medications which can result in higher
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
prescription volume thus impacting revenue positively. Comparatively, lower copayments mean that patients contribute less out of pocket money for each prescription which can reduce revenue. In the private insurance realm, they typically maintain formularies which outlines what generic drugs are covered under the insurance. Another note is that private insurance companies negotiate reimbursement rates with pharmaceutical manufacturers which can influence revenue received for generic drugs. Private insurance companies often have policies which encourage the switch from a brand name drug to a generic drug because they are less expensive. Government Regulation: One government regulation which has truly impacted the pharmaceutical industry and generic drugs is the Hatch-Waxman Act which ensured the growth of generic drugs in the US by allowing for an earlier and less costly FDA approval of drugs (Feldstein, 2019). Additionally, the system aimed to accelerate patient access to affordable prescription drugs while also protecting pharmaceutical innovation (Gupta, 2019). The act has effectively fostered competition in the pharmaceutical industry and incentives for innovation. Overall, the act has played a vital role in promoting cost-effective alternatives to brand-name drugs while ensuring the market has controlled prices and does not fall into a monopolistic nature. Market Failure: The Hatch-Waxman Act aimed to address the market failures of imperfect competition and imperfect information. The pharmaceutical industry has imperfect competition because of the brand-name drugs and their patents. Patented drugs can create monopolies which limits competition and allows for manufacturers to set higher prices. The Hatch-Waxman Act addresses this issue because it introduces competition into the market by ensuring an easier process for generic drug entry.
Imperfect information refers to when market participants do not have complete or accurate information about products. Imperfect information comes into play because patients and healthcare providers may lack information about the safety and effectiveness of generic drugs when compared to brand-name counterparts. The Hatch-Waxman Act established a Abbreviated New Drug Application (ANDA) process which allows for companies to submit new generic drugs into the market. The ANDA allows generic drug manufacturers to rely upon the safety and efficacy data developed by the original manufacturer (CRS Report, 2016). Overall, this addition to the Hatch-Waxman Act allowed for consumers and healthcare providers to have more information that is backed by therapeutic evidence of generic drugs. By streamlining the approval process for generic drugs, the Hatch-Waxman Act was able to have a positive impact on the market failures of imperfect competition and imperfect information.
References CRS Report. (2016). The Hatch-Waxman Act: A primer. In CRS Reports . https://www.everycrsreport.com/reports/R44643.html Feldstein, P. (2019).   Health policy issues: An economic perspective. (7th ed.).   Health Administration Press.   Gupta, R., Shah, N. D., & Ross, J. S. (2019). Generic Drugs in the United States: Policies to Address Pricing and Competition.   Clinical pharmacology and therapeutics ,   105 (2), 329– 337. https://doi.org/10.1002/cpt.1314 Lee. R. (2019).   Economics for healthcare managers. (4th ed.).   Health Administration Press.   Ornstein, C., & Thomas, K. (2017). Generic Drug Prices Are Falling, but Are Consumers Benefitting? nytimes.com. https://www.nytimes.com/2017/08/08/health/generic-drugs- price-falling.html
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help