'Essays in Regulation of Pharmaceutical Markets'

Zurich Open Repository and Archive University of Zurich Main Library Strickhofstrasse 39 CH-8057 Zurich www.zora.uzh.ch Year: 2013 Essays in regulation of pharmaceutical markets Méndez, Susan Johanna Posted at the Zurich Open Repository and Archive, University of Zurich ZORA URL: https://doi.org/10.5167/uzh-141988 Dissertation Originally published at: Méndez, Susan Johanna. Essays in regulation of pharmaceutical markets. 2013, University of Zurich, Faculty of Economics. Essays in Regulation of Pharmaceutical Markets Dissertation submitted to the Faculty of Economics, Business Administration and Information Technology of the University of Zurich to obtain the degree of Doctor of Philosophy in Management and Economics presented by Susan Johanna Méndez Vera from Switzerland (Stallikon, ZH) and Colombia approved in October 2013 at the request of Prof. Dr. Ulrich Kaiser Prof. Dr. Armin Schmutzler The Faculty of Economics, Business Administration and Information Technology of the University of Zurich hereby authorizes the printing of this dissertation, without indicating an opinion of the views expressed in the work. Zurich, 23.10.2013 Chairman of the Doctoral Board: Prof. Dr. Josef Zweimüller Acknowledgements In writing this dissertation I benefited much from the interaction with a number of people who deserve and have my appreciation. First and foremost, I am grateful to my advisor Uli Kaiser for his support and encouragement during the whole time of my dissertation. I greatly appreciate his generosity and his efforts in making this a successful project. I am also specially thankful to Armin Schmutzler for having my back in repeated occasions and for co-advising my thesis. I am most indebted to Dani Halbheer, with whom I have had the pleasure to spend many instructive and amusing coffee breaks. I would like to thank him for his constant support, his helpful advice, and for reading and commenting on many of my drafts. Many thanks go to my coauthors: Thomas Rønde, for hosting me in Copenhagen in severals occasions and to Hannes Ullrich, whom I owe the answers to a good deal of ques- tions. It was a great opportunity to learn from them and a pleasure to work with them. I also want to thank Michelle Sovinsky for all the inspiring discussions and for bringing me closer to the Empirical IO community. Special thanks go to my colleagues Donja Darai, Nicole Ehrsam, Dennis Gärtner, Betti Klose, and Michael Ribbers for all the joy and cake they brought into the office. Finally, I wish to express my gratitude to my family for their unconditional help and to my partner Kevin Staub for his patience, his encouragement, and his constant and caring support. Without his love none of this would have been possible. i ii Contents List of Tables viii 1 Introduction 1 References....................................... 5 2 Parallel Trade of Pharmaceuticals: The Danish Market for Statins 7 2.1 Introduction................................... 8 2.2 LiteratureReview................................ 10 2.3 TheDanishPharmaceuticalIndustry . .... 12 2.3.1 IndustryDescription .......................... 12 2.3.2 RegulatoryFramework . 13 2.4 TheData .................................... 15 2.5 EmpiricalFramework.............................. 17 2.5.1 DemandEstimation .......................... 17 2.5.2 SupplyEstimation ........................... 22 2.5.3 CounterfactualCalculation. .. 23 2.5.4 ConsumerSurplusandWelfare . 24 2.6 Results...................................... 24 2.6.1 Demand ................................. 24 2.6.2 Supply.................................. 26 2.6.3 TheImpactofParallelTrade . 26 iii 2.7 Conclusions ................................... 29 References....................................... 31 TablesandAppendix................................. 47 3 Regulation of Pharmaceutical Prices: Evidence from a Reference Price Reform in Denmark 49 3.1 Introduction................................... 51 3.2 The Danish market for pharmaceutical products . ....... 53 3.3 Data....................................... 56 3.4 Empiricalstrategy ............................... 59 3.4.1 DemandModel ............................. 59 3.4.2 Reduced-formPriceEquation . 63 3.5 Estimationresults ............................... 65 3.5.1 DemandParameters .......................... 66 3.5.2 Prices .................................. 67 3.5.3 Reform Effects on Prices, Demand, and Consumer Surplus ..... 69 3.6 Conclusions ................................... 72 References....................................... 76 TablesandAppendix................................. 85 4 How Do Drug Prices Respond to a Change from External to Internal Reference Pricing? Evidence from a Danish Regulatory Reform 93 4.1 Introduction................................... 94 4.2 InstitutionalBackground . ... 97 4.3 Data....................................... 99 4.4 EmpiricalApproach............................... 102 4.5 Results...................................... 103 4.6 Conclusion.................................... 105 iv References....................................... 107 TablesandAppendix................................. 113 v vi List of Tables 2.1 Danish Market for Statins ......................... 35 2.2 Average Prices ................................ 36 2.3 Average Sales, Average Revenues, and Average Expenditures .. 37 2.4 Demand Estimation ............................. 38 2.5 Average Own- and Cross-Price Elasticities of Demand ....... 39 2.6 Average Marginal Cost and Average Markups ............ 40 2.7 Average Change in Prices ......................... 41 2.8 Average Change in Shares ......................... 42 2.9 Average Change in Markups ....................... 43 2.10 Changes in Profits and Expenditures .................. 44 2.11 Average Welfare Effects .......................... 45 2.12 Average Yearly Expenditures ...................... 46 3.1 Prices and sales for statins ......................... 81 3.2 Logit and random coefficient logit demand ............... 82 3.3 Price Regressions .............................. 83 3.4 Reform effects on market shares, expenditures, and consumer welfare ....................................... 84 4.1 Market Overview .............................. 109 4.2 Summary statistics ............................. 110 vii 4.3 Estimation Results – Anti-Cholesterol ................. 111 4.4 Estimation Results – Antiulcerants ................... 111 4.5 Estimation Results – Antibiotics ..................... 112 viii Chapter 1 Introduction Pharmaceuticals play a key role in working towards achieving the “human right of everyone to the enjoyment of the highest attainable standard of physical and mental health.1” As required by the United Nations, governmental health care agencies attempt to provide inno- vative, safe, effective, and affordable pharmaceuticals given their financial resources. Cost containment policies to influence consumers’ purchase decisions, physicians’ prescription behavior, and firms’ pricing strategies have been widely used to control public budgets in health care systems, but preventing rises in expenditures has proven to be a difficult task. Reasons are e.g. an aging population, the introduction of new and expensive medicines and treatments, a strongly represented and influential pharmaceutical industry, and consumers’ low price sensitivity due to insurance coverage. This dissertation empirically examines two highly debated topics in the pharmaceutical industry. The first chapter analyzes the argument that parallel trade promotes price competition and generates substantial savings to consumers as well as to the government, which is the provider of public health insurance. The second and the third chapters ex- plore the effects of reference pricing, a regulatory policy widely used in Europe to control expenditures for pharmaceuticals. 1As stated in the preamble of the 1946 Constitution of the World Health Organization and Article 25. of the 1948 Universal Declaration of Human Rights. 1 Chapter 1 investigates parallel trade, a practice where products are legally marketed in one country but distributed in another country without authorization of the property rights holder. Parallel trade deals with topics in the related fields of international trade, intellectual property, and competition policy. Opponents of parallel trade argue that parallel imports weaken intellectual property protection, thereby reducing innovation incentives (Li and Maskus 2006, Szymanski and Valletti 2006, and Valletti 2006). On the other hand, politicians and regulatory agencies alike typically propose parallel trade to promote (price) competition (Ganslandt and Maskus 2004), which generates savings to consumers and insurers. In an attempt to reduce high prices for pharmaceutical products, the European Union has allowed parallel imports within its area. The aim of this chapter is to investigate and empirically quantify the impact of parallel trade in markets for pharmaceuticals. The first part of Chapter 1 develops a structural model of demand and supply (Berry 1994) using Danish data on prices, sales and characteristics of medicines used in the treat- ment of hypercholesterolemia (presence of high levels of cholesterol in the blood). These products are top selling medicines worldwide in terms of volume and revenue. Furthermore, the Danish pharmaceutical market provides a clean empirical setting to study these effects due to its unique market structure and the availability of very rich data. The second part of the chapter uses the estimates of the model parameters from the first

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