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Competition and Pharmaceuticals - Aidan Hollis - 2014 OECD Global Forum on Competition
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Competition and Pharmaceuticals - Aidan Hollis - 2014 OECD Global Forum on Competition

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This presentation by Aidan Hollis was made at the 2014 Global Forum on Competition (27-28 February) during the session on competition issues in the distribution of pharmaceuticals. Find out more at …

This presentation by Aidan Hollis was made at the 2014 Global Forum on Competition (27-28 February) during the session on competition issues in the distribution of pharmaceuticals. Find out more at http://www.oecd.org/competition/globalforum

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  • 1. Competition issues in the distribution of pharmaceuticals Aidan Hollis Department of Economics University of Calgary
  • 2. Overview • Pharmacies exercise extraordinary market power when consumers are insured. This leads to high retail mark-ups and excessive numbers of pharmacies competing over quality. • Insurers in response try to control mark-ups using a variety of strategies. • Competition policy should be sensitive to the nature of these interactions.
  • 3. Pharmacy market power • In markets with insured consumers, pharmacies exercise substantial market power because consumers are insensitive to price. • With free entry and no price sensitivity, competition for the consumer will result in – – – – Excessive numbers of pharmacies High service levels Small volumes per pharmacy High unit costs
  • 4. Responses to pharmacy market power • The outcome – many small pharmacies with high costs and high service levels – may be competitive, but not efficient. • Insurers, in response, use various tools to limit prices reimbursed. – They limit reimbursement of dispensing fees and mark-ups charged by pharmacies – They attempt to limit the reimbursable component of the price of the drug
  • 5. Limiting reimbursement • Patented drugs: the usual tools are costeffectiveness analysis and price-referencing • Since generic drugs are homogeneous goods, prices should reflect the cost of production. • But pharmacies don’t have to pass on low wholesale prices because they have market power. – The insurer doesn’t observe true wholesale prices and so doesn’t benefit from manufacturer competition • So how to control pricing?
  • 6. Solutions for generic pricing • Incomplete insurance
  • 7. Solutions for generic pricing • Incomplete insurance – bad for patients
  • 8. Solutions for generic pricing • Incomplete insurance – bad for patients • Competition between pharmacies for preferred status (US)
  • 9. Solutions for generic pricing • Incomplete insurance – bad for patients • Competition between pharmacies for preferred status (US) – bad for patient access
  • 10. Solutions for generic pricing • Incomplete insurance – bad for patients • Competition between pharmacies for preferred status (US) – bad for patient access • Fixed ratio of the brand price (QC, Canada)
  • 11. Solutions for generic pricing • Incomplete insurance – bad for patients • Competition between pharmacies for preferred status (US) – bad for patient access • Fixed ratio of the brand price (QC, Canada) --$$
  • 12. Solutions for generic pricing • Incomplete insurance – bad for patients • Competition between pharmacies for preferred status (US) – bad for patient access • Fixed ratio of the brand price (QC, Canada) --$$ • Tender to supply the entire market (NZ, Saskatchewan Canada)
  • 13. Solutions for generic pricing • Incomplete insurance – bad for patients • Competition between pharmacies for preferred status (US) – bad for patient access • Fixed ratio of the brand price (QC, Canada) --$$ • Tender to supply the entire market (NZ, Saskatchewan Canada) – varying outcomes, risk of shortages
  • 14. Solutions for generic pricing • Incomplete insurance – bad for patients • Competition between pharmacies for preferred status (US) – bad for patient access • Fixed ratio of the brand price (QC, Canada) --$$ • Tender to supply the entire market (NZ, Saskatchewan Canada) – varying outcomes, risk of shortages • Yardstick competition (UK, Australia)
  • 15. Solutions for generic pricing • Incomplete insurance – bad for patients • Competition between pharmacies for preferred status (US) – bad for patient access • Fixed ratio of the brand price (QC, Canada) --$$ • Tender to supply the entire market (NZ, Saskatchewan Canada) – varying outcomes, risk of shortages • Yardstick competition (UK, Australia) – varying outcomes, very intrusive
  • 16. Solutions for generic pricing • Incomplete insurance – bad for patients • Competition between pharmacies for preferred status (US) – bad for patient access • Fixed ratio of the brand price (QC, Canada) --$$ • Tender to supply the entire market (NZ, Saskatchewan Canada) – varying outcomes, risk of shortages • Yardstick competition (UK, Australia) – varying outcomes, very intrusive • Declining price schedule (price tiers based on the number of generics) (Austria, Portugal)
  • 17. Solutions for generic pricing • Incomplete insurance – bad for patients • Competition between pharmacies for preferred status (US) – bad for patient access • Fixed ratio of the brand price (QC, Canada) --$$ • Tender to supply the entire market (NZ, Saskatchewan Canada) – varying outcomes, risk of shortages • Yardstick competition (UK, Australia) – varying outcomes, very intrusive • Declining price schedule (price tiers based on the number of generics) (Austria, Portugal) – little evidence
  • 18. Variation in prices by mechanism System Jurisdiction Average Price Fixed ratio Quebec 100 Tender NZ 43 Tender Saskatchewan 139 Benchmark England 76 Benchmark Australia 252 Tiered pricing Austria 153 Source: Fixation des prix des médicaments génériques au Québec, 2013. Quebec prices are normalized. Ten common generic drugs are used to construct the price index.
  • 19. • There are benefits and costs of these different strategies for controlling reimbursement prices. • From an antitrust perspective, each strategy has different effects on the nature of competition. • Competition authorities have a legitimate interest in the mechanisms used by insurers, and also possess special competence to help guide the mechanisms that are chosen.
  • 20. Thanks! • Contact at ahollis@ucalgary.ca • Resources: • FR: http://www.csbe.gouv.qc.ca/fileadmin/www/2013/Medicaments/CSBE_Politi ques_prix_generique_juin_2013.pdf • EN: http://www.csbe.gouv.qc.ca/fileadmin/www/2013/Medicaments/CSBE_Gene ric_Drug_Pricing_Policy_Quebec.pdf