Insurance and new technology: from hospital to drugstore.

This paper traces the relationship between insurance coverage and the technology-induced shift of the locus of medical care and medical spending from the inpatient to the outpatient setting. This shift was accompanied by an increase in the extent of private insurance coverage for outpatient treatments; technological change both caused the increase in coverage (for more costly treatments) and was affected by it (as lower user prices increased the demand for new types of care). Changes in insurance administration technology also facilitated the transformation. Some aspects of the change may have been inefficient, because of the presence of tax subsidy and legal requirements to cover costly new technologies of low effectiveness, but the transformation appears thus far to have worked better for private insurance than for Medicare.

From hospital to drugstore: insurance and the shift to outpatient care.

As policymakers consider whether and how to add prescription drug coverage to Medicare, they need to understand the relationship between insurance coverage and the adoption of new medical technologies, including drugs. Even the direction of these relationships is not always so clear. In this Issue Brief, Drs. Danzon and Pauly examine the shift from inpatient to outpatient care in the last 20 years,and ask two broad questions: to what extent was this shift encouraged by changes in insurance, and to what extent was insurance coverage influenced by this shift?

Cross-national price differences for pharmaceuticals: how large, and why?

Bilateral drug price and quantity indexes, based on comprehensive data for seven countries (US, Canada, France, Germany, Italy, Japan and the UK), refute the conventional wisdom that US drug prices are much higher than elsewhere, for Laspeyres (US-weighted) indexes. Previous drug-price comparisons are biased by unrepresentative samples and unweighted indexes. Quasi-hedonic regression shows that cross-national price differences reflect differences in product characteristics and in their implicit prices, which reflect the regulatory regime. Strict price regulation systematically lowers prices for older molecules and globally diffused molecules. Generic competition lowers prices in less-regulated regimes, which also have more price-elastic demand.

The genomic revolution: is the real risk under-investment rather than bankrupt health care systems?

There is an element of 'scientific determinism' in much of the discussion of the genomic revolution. Recognition of the potential for improving health is more than matched by worries about both the ability of health care systems to cope and the potential for genetic testing to lead to discrimination. There are five main uses for genomics in the development of human diagnostics and therapeutics: pharmacogenomics, gene therapy, pharmacogenetics, genetic testing of symptomatic or at risk people, and population genotyping. Although there are potential health gains, several concerns exist: health gain may increase funding pressures on health care systems; providing cost-effectiveness thresholds may mean drugs for some patient groups may not be developed; random population genetic testing will meet economic and ethical obstacles; and private sector patenting risks a loss of data and access to data, which will inhibit the development of potentially cost-effective tests and therapies.

Medical negligence and the NHS: an economic analysis.

Medical negligence was estimated to cost the NHS in England 235m pounds sterling in 1996/1997, growing at rate of up to 25% per annum. Yet analysis of NHS accounts suggest that a change in accounting policy has led to growth rates and recurrent expenditure on medical negligence being over estimated. The main concern, however, is total societal cost, not the accounting cost to the NHS. The objective of policy should be to ensure that cost-effective investment in injury prevention takes place. Measures that simply shift cost to other social budgets or onto patients are not helpful. NHS arrangements changed in the 1990s with Trusts taking responsibility for claims against hospital doctors and a new NHS Litigation Authority providing insurance for Trusts. It is unclear, however, whether Trusts have had either the incentives or the ability to implement effect risk management policies. Estimates based on two US studies and one UK study suggest that negligence in the NHS in England may cause around 90000 adverse events per year involving 13500 deaths, but only resulting in around 7000 claims and 2000 payments. A priority must be the establishment of a comprehensive national database of claims information. Other policy measures are proposed to reinforce the incentives on Trusts and doctors to implement cost-effective risk management policies.

The economics of parallel trade.

The potential for parallel trade in the European Union (EU) has grown with the accession of low price countries and the harmonisation of registration requirements. Parallel trade implies a conflict between the principle of autonomy of member states to set their own pharmaceutical prices, the principle of free trade and the industrial policy goal of promoting innovative research and development (R&D). Parallel trade in pharmaceuticals does not yield the normal efficiency gains from trade because countries achieve low pharmaceutical prices by aggressive regulation, not through superior efficiency. In fact, parallel trade reduces economic welfare by undermining price differentials between markets. Pharmaceutical R&D is a global joint cost of serving all consumers worldwide; it accounts for roughly 30% of total costs. Optimal (welfare maximising) pricing to cover joint costs (Ramsey pricing) requires setting different prices in different markets, based on inverse demand elasticities. By contrast, parallel trade and regulation based on international price comparisons tend to force price convergence across markets. In response, manufacturers attempt to set a uniform 'euro' price. The primary losers from 'euro' pricing will be consumers in low income countries who will face higher prices or loss of access to new drugs. In the long run, even higher income countries are likely to be worse off with uniform prices, because fewer drugs will be developed. One policy option to preserve price differentials is to exempt on-patent products from parallel trade. An alternative is confidential contracting between individual manufacturers and governments to provide country-specific ex post discounts from the single 'euro' wholesale price, similar to rebates used by managed care in the US. This would preserve differentials in transactions prices even if parallel trade forces convergence of wholesale prices.

International price comparisons for pharmaceuticals. Measurement and policy issues.

Cross-national price comparisons for pharmaceuticals are commonly used for two purposes. Comparisons based on a sample of products are used to draw conclusions about differences in average price levels. Cross-national comparisons applied to individual products are also used by governments to set domestic prices. This paper examines the major methodological issues raised by international price comparisons, focusing on measurement of differences in average price levels and the validity of policy conclusions drawn from such price comparison studies. It argues that valid measures of average price levels can only be obtained from comparisons based on a comprehensive or representative sample of products, appropriately weighted, following standard index number methods. Comparisons of individual product prices should take into account the manufacturer's entire product portfolio over time rather than focus narrowly on a single product at a point in time. Because of the great variation across countries in both the range of drug compounds available and the dosage forms, strengths and pack sizes for each compound, obtaining a broadly comprehensive or representative sample is problematical. If products are required to match on all dimensions, including molecule, manufacturer, strength and pack, as is common in most international price comparisons, then only a very small and unrepresentative sample of the drugs available in each country can be included in the analysis. A trade-off between the desire to compare only identical products and the need to compare a truly representative sample of a country's pharmaceutical market is therefore necessary. A valid comparison of average drug prices should include generics and over-the-counter products that are good substitutes for branded prescription drugs, with all forms, strengths and packs. To achieve this broad representation, however, the requirements of same manufacturer, same brand, dosage form, strength and pack size must be dropped. When such an approach is taken to the comparison of international drug prices, quite different results from those obtained from less comprehensive comparisons may be obtained. Indeed, a major conclusion of this analysis is that international drug price comparisons are extremely sensitive to choices made about certain key methodological issues, such as sample selection, unit of measurement for price and volume, the relative weight given to consumption patterns in the countries being compared, and the use of exchange rates or purchasing power parities for currency conversion. In particular, the results of this analysis indicate that recent reports suggesting that manufacturer prices in the US are 32% higher than in Canada and 60% higher than in the UK are in fact overstatements which arise from limitations of the sample and methods used to calculate these price differentials.

Consolidation and restructuring: the next step in managed care.

Rising expenditures on health care in the U.S. have been facilitated by the fundamental problems of asymmetric information and insurance-induced moral hazard. If managed care is to succeed, it must take both into account through strategies such as information-based consumer education and provider risk-sharing. Because larger networks offer significant advantages in implementing such strategies, hospital mergers, physician-hospital alliances, and economies of scale are major trends in the evolution of managed care.

Liability and liability insurance for medical malpractice.

Physicians typically carry virtually complete malpractice insurance coverage. This contradicts standard theoretical predictions that under a negligence rule of liability there should be no demand for insurance, and insurance policies under moral hazard will contain co-payment provisions. It is argued that judicial 'errors' in defining negligence generate a demand for liability and legal defense insurance. Physician co-payment undermines the insurer's incentives for legal defense and thus induces a trade-off between loss reduction by injury prevention and by legal defense. Fee-for-service reimbursement further distorts the physician's choice between injury prevention and insurance. Implications for the deterrent function of the tort system are discussed.