Competition issues in the distribution of pharmaceuticals

Aidan HollisDepartment of Economics

University of Calgary

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.

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

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

Limiting reimbursement

• Patented drugs: the usual tools are cost-effectiveness 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?

Solutions for generic pricing • Incomplete insurance

Solutions for generic pricing • Incomplete insurance – bad for patients

Solutions for generic pricing • Incomplete insurance – bad for patients• Competition between pharmacies for preferred status

(US)

Solutions for generic pricing • Incomplete insurance – bad for patients• Competition between pharmacies for preferred status

(US) – bad for patient access

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)

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) --$$

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)

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

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)

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

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)

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

Variation in prices by mechanismSystem Jurisdiction Average Price

Fixed ratio Quebec 100

Tender NZ 43

Tender Saskatchewan 139

Benchmark England 76

Benchmark Australia 252

Tiered pricing Austria 153Source: Fixation des prix des médicaments génériques au Québec, 2013. Quebec prices are normalized. Ten common generic drugs are used to construct the price index.

• 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.

Thanks!

• Contact at ahollis@ucalgary.ca

• Resources: • FR:

http://www.csbe.gouv.qc.ca/fileadmin/www/2013/Medicaments/CSBE_Politiques_prix_generique_juin_2013.pdf

• EN: http://www.csbe.gouv.qc.ca/fileadmin/www/2013/Medicaments/CSBE_Generic_Drug_Pricing_Policy_Quebec.pdf