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Forum for Health Economics & Policy

Editor-in-Chief: Goldman, Dana

CiteScore 2017: 0.53

SCImago Journal Rank (SJR) 2017: 0.425
Source Normalized Impact per Paper (SNIP) 2017: 0.297

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A Primer on the Economics of Prescription Pharmaceutical Pricing in Health Insurance Markets

Ernst R. Berndt
  • 1Massachusetts Institute of Technology and National Bureau of Economic Research, eberndt@ mit.edu
  • Other articles by this author:
  • De Gruyter OnlineGoogle Scholar
/ Thomas McGuire / Joseph P. Newhouse
Published Online: 2011-11-07 | DOI: https://doi.org/10.2202/1558-9544.1301

The pricing of medical products and services in the U.S. is notoriously complex. In health care, supply prices (those received by the manufacturer) are distinct from demand prices (those paid by the patient) due to health insurance. The insurer, in designing the benefit, decides what prices patients pay out-of-pocket for drugs and other products. In this primer we characterize cost and supply conditions in markets for generic and branded drugs, and apply basic tools of microeconomics to describe how an insurer, acting on behalf of its enrollees, would set demand prices for drugs. Importantly, we show how the market structure on the supply side, characterized alternatively by monopoly (unique brands), Bertrand differentiated product markets (therapeutic competition) and competition (generics), influences the insurer’s choices about demand prices. This perspective sheds light on the choice of coinsurance versus copayments, the structure of tiered formularies, and developments in the retail market.

Keywords: pharmaceuticals; health insurance; prices; Bertrand competition; brands; generics

About the article

Published Online: 2011-11-07

Citation Information: Forum for Health Economics & Policy, Volume 14, Issue 2, ISSN (Online) 1558-9544, DOI: https://doi.org/10.2202/1558-9544.1301.

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