The microeconomics of price policies in the pharmaceutical industry
Date
2007-02-23T13:01:04Z
Authors
Appasamy, Thiru Nayagar
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Abstract
Healthcare, it can be argued, is a commodity that has a social constitution. The reason may
be because healthcare is seen to have its foundation in socio-economic principles but has evolved
through scientific study and business application into a profitable business. The delivery of
healthcare in South Africa and in many parts of the world has come under immense scrutiny from
policy-makers, high-volume purchasers, patient-consumers and the healthcare community.
Arguments criticizing the high cost of healthcare delivery range from levelling the blame on one
component (pharmaceuticals, medical fees, inadequate medical scheme cover to name a few
examples) to a condemnation of the entire healthcare delivery system. The healthcare cost
deliberation has also shifted to the centre stage in many public-policy debates and certainly caught
the imagination of the public and journalists alike. It is an emotional debate. A review of related
literature of the past fifty years (such as the Sainsbury Report (1967), the Kefauver Hearings (1963)
and the Snyman Report (1962)), reveals that healthcare and the cost of healthcare delivery are some
of the most frequently debated areas amongst the citizens and policy makers of both the developed
and developing world.
Pharmaceutical prices, more often than not, have been cast as the primary reason that the
delivery cost of healthcare is so high. The methods used by pharmaceutical companies to promote
their products – elaborate conventions, colourful brochures and generous amounts of free samples
(certainly in previous years) to physicians may have contributed to this perception. Furthermore, the
fact that the absolute cost of manufacturing a single capsule or tablet (including drugs that are no
longer under patent) is a small fraction of the actual selling price also tends to raise the public ire.
A greater understanding of pricing structures is necessary to appreciate this sector. The
writer’s own experience in the area of healthcare that involves insurance for medical risks (medical
schemes - the private healthcare funding system) suggests that it is crucial that pharmaceutical
pricing structures be understood against this backdrop. Therefore the main reasons for undertaking
this study are:
i. to appreciate the pricing structures of pharmaceuticals to inform policy debates;
ii. the current empirical evidence1 in the South African market has indicated that
pharmaceuticals are unfairly priced and has prompted the Department of Health to
introduce price regulations2. One goal of the research is to ascertain whether this is
accurate; and
iii. to obtain a broader knowledge base of the issue of pharmaceutical pricing practices in
the South African healthcare market.
It was with this approach that the area of pharmaceutical pricing and the topic was decided upon.
Description
Student Number : 7909638 -
MCom dissertation -
School of Economics and Business Sciences -
Faculty of Commerce, Law and Management
Keywords
Trips, Coase Theorem, Ramsey Pricing, Value Maximising Principle, Pharmacoeconomic, Price Policy, Price Regulation, Drug Efficiency, Transaction Costs