Competition in the Pharmaceutical Marketplace: It’s Not About Prices

Last week I wrote about pharmacoeconomics and drug prices. Pharmacoeconomics, which attempts to quantify the value of drug benefits in economic terms, certainly can be an important tool in our national discussion about health care costs generally and pharmaceutical prices in particular. However, while pharmacoeconomics can sometimes serve to make the high price of a drug seem more reasonable by showing that it produces an overall savings in health care costs, it doesn’t explain why competition in the pharmaceutical marketplace does not result in substantially lower prices. After all, if two or more drugs for the same indication provide the same pharmacoeconomic benefit, it would be logical to expect that buyers would choose the least expensive, the other pharmaceutical companies would respond by lowering their prices, and this process would continue until a price equilibrium was reached below which the producers of the drug would be unable to earn a profit or reasonable return on their investment. But that does not happen. Prices do not drop substantially on a name brand drug until a generic of that drug is introduced. Even then, the prices of its competitor drugs are not significantly reduced, although their market share may drop as adoption of the generic increases. How can this be?

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