Dr. Schondelmeyer said that an efficient market has four components: (1) many buyers and many sellers; (2) the existence of similar or identical substitutes; (3) complete information on product quality and price; and (4) easy market entry and transfer of resources. He believes that the U.S. market for prescription drugs lacks some of these characteristics--in particular, complete information on product quality and price.
Structural features that distinguish the U.S. pharmaceutical market from other markets include the following:
- Directed demand for pharmaceuticals. Physicians prescribe drugs for their patients.
- Differences in the economics of the pharmaceutical industry as a whole vs. individual therapeutic markets. In order to understand competition in the pharmaceutical market, it is important to look at competition in individual therapeutic classes. Nine of 12 therapeutic class markets have greater than 50% concentration, making the pharmaceutical industry a very concentrated industry.
- Insurance coverage and subsidies increasing utilization. Third-party payments account for 75-80% of all prescriptions, and people with good prescription drug coverage have few incentives to curb their prescription drug utilization. If consumers paid out of pocket for all of their prescription drugs, utilization would be much lower.
- Hidden prices, discounts, and rebates. Rebates for brand-name drugs are determined in confidential, private arrangements negotiated between manufacturers and PBMs or other purchasers, and no available data set provides information on the dollar amounts. In the April 1999 DHHS report on prescription drugs, a key limitation of the analysis was the absence of good information about rebates.
Three signals of market failure in the U.S. pharmaceutical market are the following:
- Prices are not known by decisionmakers. Physicians do not know the prices of prescription drugs or think that prices should be a factor in their prescribing decisions; patients do not know the price unless they have to pay out of pocket at pharmacy, and corporate pharmacy and therapeutics committees (which select medications for a formulary) do not know prescription drug prices net of rebates.
- Prices, discounts, and rebates are hidden in the market. Manufacturer's contracts declare that prescription drug prices and rebates are "proprietary and confidential" and cannot be disclosed to pharmacy and therapeutics committees or physicians.
- United States vs. the world ironies. The United States has the highest prescription drug prices and the greatest amount of prescription drug price inflation in the world.
Dr. Schondelmeyer advocated government regulation to increase the transparency of U.S. prescription drug prices. The goals of price transparency, he said, would be to improve economic efficiency in the prescription drug market; help get accurate price information in the market; empower buyers to better negotiate; give access to actual price information to policymakers and researchers; and make pharmaceutical firms more accountable for prices.