Economic Analysis of Supply and Market Structure of Healthcare Industry

Product or Service Supplied
The product supplied to patients is generic pharmaceuticals. “A generic drug is a pharmaceutical drug which is equivalent to a brand-name product in dosage, route of administration, strength, quality, Kinetics, and its intended use. It may also refer to any drug which is marketed under its chemical name without advertising” (Moin, 2016). The importance to the customer is an issue of affordability: the patient has to incur fewer out of pocket expenses in order to pay for crucial prescriptions in order to fulfill the needs of their chronic diseases or conditions. Generic drugs are essentially the ones that are comparable to their brand-name twins. “They are comparable in terms of the dosage, effectiveness, and intended use. Generics are important because they are essentially a less-expensive alternative to their brand-name counterparts. This, of course, is expected to be important to those who are ultimately picking up the tab, governments, who are the biggest purchasers of health care, insurance companies, and individuals”(VanEck, 2016). It’s thus important for consumers and for leaders within the government to have options when it comes to prescription drugs and these options need to be viable ones. They need to work as good as their full-priced counterparts. Otherwise, it just trifles with consumers.
Market Structure
The market structure of generic pharmaceuticals at once revolves name brand pharmaceuticals and being able to offer inexpensive alternatives to their pricier predecessors. One example of this trend is with the drug Lipitor, intended to be used for the fight against cholesterol. Initially this drug sold for around $3.50 though when the generic versions emerged a year later, the price difference was dramatic: these doses were priced at around .50 cents. “A report by the IMS Institute for Healthcare Informatics for the Generic Pharmaceutical Association estimated that consumer savings from generic drug uptake were nearly $240 billion in 2013” (VanEck, 2016). These savings demonstrate how important generic drugs are to the entire pharmaceutical business and the healthcare industry as a whole. While it would be nice of there was a generic version of every drug on the market, the reality is that when new drugs are approved and given a spot on the marketplace, this is usually with a timeframe of patent protection and overall exclusivity (VanEck, 2016). Hence, it is only when these periods expire that the prevailing market conditions will kick in and assert whether or not a generic variant is created (VanEck, 2016). Generic alternatives of prescription drugs remain the majority of prescriptions filled all over the country, but unexpectedly, the brand name drugs still hold the bulk of the market share in terms of revenue.
Many name brand drugs still possess patents that haven’t expired yet, and big pharma continues to expand more and more drugs to patent (VanEck, 2016). When these expiration periods finally end, they act as sizeable growth drivers for the generic pharma arena. “Visiongain estimates that between 2014 and 2018, $190 billion in branded drug sales could face competition from generic manufacturers as patents expire. In 2016 alone, drugs due to come off patent include AstraZeneca’s (AZN) Crestor, with ~$6 billion in sales in 2015, and Merck’s (MRK) Zetia, with $2.5 billion in sales in 2015” (VanEck, 2016). This demonstrates that the generic pharmaceutical marketplace is expanding and is only going to continue to expand. Consumers don’t want to pay a lot to simply take their medicine. Giving them options and cost-effective alternatives is a winning strategy for market growth. This is particularly true when certain expensive prescription name brand drugs have a price tag that is so high, it means that some patients can’t afford to take them
Price Determination
America spends a tremendous amount of money on healthcare—more than any other first world nation. Prescription drug costs make up just under 20 percent of all expenditures on health care: this amounts to $370 billion dollars per year (Wapner, 2017). These numbers are a reflection not just of the high number of drugs prescribed each year, but also the high cost of making these drugs. Defensive pharmaceutical companies have long justified the high price tags. Research and development is expensive, they say, and R&D is precisely what drives the costs up, but which is a necessary aspect of all prescription drug creation. “If we want cures for devastating diseases, they say, we have to pay for them” (Wapner, 2017). However, many critics argue that such excuses are merely that—excuses for reasons that simply overcharge the consumer. “Research by the Tufts Center for the Study of Drug Development put the cost of developing a new drug at $2.6 billion. But that research was supported by the pharmaceutical industry, and the estimate has been questioned” (Wapner, 2017).
Price determination for prescription drugs remains a massively complicated issue. That’s because within the realm of prescription drugs, there is both pricing and reimbursement. Drugs essentially have a range of different prices: the first one is the list price that originates from the manufacturing company. Many people don’t even pay the list price, but this theoretical price essentially serves as the foundation for later calculations (Wapner, 2017). Reimbursement is the amount the insurer pays for a particular drug: “Typically, depending on the type of drug, the insurer pays either the physician directly, the drug manufacturer or an intermediary, such as a pharmacy benefit manager” (Wapner, 2017). Finally the prescriptions that doctors buy are those given via infusion. These purchases usually occur via an intermediary such as a wholesalers (Wapner, 2017). These firms will purchase the drugs from the manufacturer and the doctor will purchase it from the intermediary entity: the doctors then gives the drug to the patient in office, sends a bill to the insurance company and then receives reimbursement via the insurer (Wapner, 2017).
Influence of Private and Public Insurance
The existence of private and public insurance is just another element that increases the overall complexity of this arena. The financing, distribution, and revenue collection of pharmaceutical drugs in America is very intricate, with many players involved. Public and private insurance is just another entity where the revenue passes through. “In 2015, 42% of prescription drug spending was from private health insurance, 30% from Medicare, 10% from Medicaid, and 14% from private out-of-pocket payments” (Dabora et al., 2017). Public insurance like Medicare Part D, that attempts to leverage the private arena of health insurance spending: Medicare Part D offers a wealth of drugs offered on the plan and rigorous 5-tier benefit structures. One of the elements that makes public insurance useful for getting paid is that entities like Medicare aren’t allowed to negotiate with the manufacturing companies or setting prices for drugs purchased (Dabora et al., 2017). Most private insurance plans offer some sort of prescription drugs since its considered essential. Prices for prescription drugs have risen year to year, with patients paying more. This offers benefits to healthcare managers of generic pharmaceuticals, because payment is made to us regardless. For example, “The average patient payment for a branded prescription drug for patients with commercial insurance increased from $36 in 2011 to $44 in 2015, whereas the average patient payment for a generic prescription drug has remained stable at $8 since 2010” (Dabora et al., 2017). This level of inflation has only been beneficial to the generic drug arena, and it has meant that this sector of the market only continues to grow, with so many professionals receiving payment. Finally, payments made through insurance companies rather than from individuals can be slower, with public insurance companies being the slowest.
Government Regulation: Regulating Price More Aggressively
One of the major ways that government regulation is needed in this industry is that that state needs to wield their power to keep the costs of prescription drugs down. They already regulate price to a certain extent: it just needs to be done more vigorously. The truth of the matter is that not every name brand drug has a generic counterpart. In fact, many don’t. When pharmaceutical companies are crippling people by their own sense of greed, it becomes time for the government to step in. Henry Waxman, a strategist in this regard and leader of Waxman strategies, has been quoted as suggesting their being changes in federal law to ensure that states can run their own formularies for Medicaid drug pricing. “For example, not only do annual increases add to the high prices of new drugs, but brand-name manufacturers pay generic manufacturers to hold off on bringing lower-cost versions to market” (Laff, 2017). Americans are outraged at how high the costs of certain drugs are. Many pharmaceutical companies are blatantly overcharging people, knowing that many won’t even be able to purchase them—even if they are integral to survival. This demonstrates the power of greed, to which certain pharmaceutical companies are completely beholden. This is an example of when the government has an obligation to take control of its power to protect the American consumer. A failure to do so is tantamount to turning one’s back on the American people. The FDA has even recently admitted that it needs to do something regarding prices (Laff, 2017).
References

Dabora, M. C., Turaga, N., & Schulman, K. A. (2017, July 4). Financing and Distribution of Pharmaceuticals in the United States. Retrieved from https://jamanetwork.com/journals/jama/fullarticle/2627994

Laff, M. (2017, August 2). Regulation, Competition Needed to Lower Drug Prices, Says Panel. Retrieved from https://www.aafp.org/news/practice-professional-issues/20170802prescriptioncosts.html

VanEck, V. (2016, March 9). Market Realist. Retrieved from https://marketrealist.com/2016/03/what-are-generic-drugs-and-why-are-they-important

Wapner, J. (2017, March). How prescription drugs get their prices, explained. Retrieved from http://www.newsweek.com/prescription-drug-pricing-569444