Presenter:

Nicklas Rudholm

Authors:

Nicklas Rudholm

Chair: Randall Ellis; Discussant: Ting Liu Tue June 6, 2006 13:45-15:15 Room 235

Rationale: The most common motivation for regulating health care markets has been that the difference in information between the producer of health care and the patient is large, giving the producers of health care market power. In its most extreme form, this could lead to so called supplier induced demand, where producers of health care sell unnecessary treatments to uninformed patients. In other, less extreme cases, the information gap between producer and patient still gives the producer the possibility to charge prices above marginal cost. In this paper, the effects of increased consumer information about price differences in medically equivalent treatments (branded and generic drugs) on the market power of health care producers (pharmaceutical firms) will be examined.

Objective: The objective of this paper is to estimate the effect of increased consumer information about price differences between brand name and generic drugs on pharmaceutical prices.

Methodology: In October 2002, the Swedish pharmaceuticals market was reformed. The reforms required that pharmacists substitute the prescribed pharmaceutical product to the cheapest available generic product. The reforms also require that pharmacist inform the patient that there are substitute products available and that the products will be switched. However, they also have to inform the patient of the opportunity to buy the prescribed pharmaceutical product instead of the generic, paying the difference in price between the products themselves. This means that under the new regulations, patients have more information about the price difference between the prescribed (in most cases brand name) product and the cheapest available generic alternative. As such, the introduction of the substitution reform can be seen as a natural experiment where the information available for patients concerning price differences in medically equivalent treatments has been increased. Using a unique dataset covering 1.5 million pharmaceutical prescriptions made out in the county of Västerbotten, Sweden during the period January 2001 until June 2003, regression analysis is used to test how the increase in patient information has affected pharmaceutical prices.

Results: The results show that increased patient information about the price difference between available generic products and brand name drugs do lower the price of brand name pharmaceuticals.

Conclusions: The results from this paper indicate that increased patient information decreases the market power of pharmaceutical firms. This, in turn, means that it might be possible to reduce health care costs by increasing patient information about available treatments and the price differences between those treatments.