Governments that implement external reference pricing (ERP) of pharmaceuticals use prices in other countries as negotiation benchmarks to bring down the cost of prescription drugs. By doing so, they create an incentive for firms to withhold drugs from countries with lower willingness to pay. We analyze the impact of ERP on launch delays using data on drug sales from Europe. To isolate strategic delays caused by ERP from idiosyncratic delays, we develop a dynamic structural model of entry that allows for externalities in price across countries and we estimate it using a novel moment inequality approach that allows for unobserved strategy constraints. We find that without ERP delays in eight low-income European countries would fall by as much as one year per drug. Removing strategic delays by compensating firms through lump-sum transfers would cost around €18 million per drug.
“Where is the Good Stuff? Drug Quality Measures and Economic Research” (with Josh Feng)
Prescription drug quality is an important variable in several strands of the health economics literature, including research on the value of medical R&D, the structure of the pharmaceutical markets, and the impact of innovation policy. In this paper, we provide a starting point for researchers interested in these topics by first summarizing the data, methodology, and literature surrounding the measurement of drug quality, and then highlighting areas of economic research that use quality measures. We conclude with a discussion of possible areas for future research.
Work in Progress
“Is Value-Based Pricing of Pharmaceuticals Optimal?” (with Josh Feng)
This paper analyzes the optimality of value-based pricing (VBP) policies in pharmaceutical markets. We set up an optimal pricing problem involving one potential innovator and a social planner trading off innovation incentives and access to drugs. VBP maximizes the probability that an R&D projects with a positive net expected value will reach the market, but is generally higher than the optimal social price. VBP is closer to optimal when: i) access is not related to pricing; ii) potential projects are expensive relative to value; iii) there is high residual value post loss-of-exclusivity. We then extend the model to account for multiple potential innovators and heterogeneity in innovation.
“The ACA Medicaid Rebate Rule Change: Impact on Pricing and Innovation” (with Josh Feng and Thomas Hwang)
“Price Increases of Protected-Class Drugs in Medicare Part D, Relative to Inflation, 2012-2017” (with Thomas J. Hwang, Stacie B. Dusetzina, Josh Feng, and Aaron S. Kesselheim) Journal of the American Medical Association, 322, no. 3 (2019): 267–269.
“Has the Era of Slow Growth for Prescription Drug Spending Ended?” (with Murray Aitken, Ernst Bernd, David Cutler, and Michael Kleinrock) Health Affairs, 35, no. 9 (2016): 1595-1603