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Pricing and Reimbursement in U.S. Pharmaceutical Markets

77 Pages Posted: 13 Sep 2010  

Ernst R. Berndt

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Joseph P. Newhouse

Harvard Medical School; Harvard Kennedy School (HKS); Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

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Date Written: September 9, 2010

Abstract

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.

Keywords: health policy, health insurance, pharmaceutical pricing, Medicare

JEL Classification: D4, I11, I18, L11, L65

Suggested Citation

Berndt, Ernst R. and Newhouse, Joseph P., Pricing and Reimbursement in U.S. Pharmaceutical Markets (September 9, 2010). HKS Working Paper No. RWP10-039. Available at SSRN: https://ssrn.com/abstract=1676213 or http://dx.doi.org/10.2139/ssrn.1676213

Ernst R. Berndt (Contact Author)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

Room E52-452
Cambridge, MA 02142
United States
617-253-2665 (Phone)
617-258-6055 (Fax)

Joseph P. Newhouse

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard Medical School; Harvard Kennedy School (HKS) ( email )

Department of Health Care Policy
Boston, MA 02115
United States

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

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