What do drugs cost in the long run?

That is the question that Lakdawalla et al. (2017) attempt to answer in the latest edition of the American Journal of Managed Care (AJMC).  The long-run average cost (LAC) of a pharmaceutical includes not only initial branded drug price, but also subsequent prices increases and decreases, especially those that occur after a treatment’s patent has expired and generics enter the market.  Further, the authors measure the LAC net of any medical cost offsets.

To measure the LAC, the authors rely on data from the 1996-2013 Medicare Expenditure Panel Survey (MEPS).  They find that:

Accounting for patent expiration, the loss of exclusivity price and the launch price overstate the LAC by 39% and 11%, respectively, and the LAC net of medical cost offsets by 75% and 40%, respectively.

Overstating long-run prices could be problematic for patients if it results in reduced treatment coverage and decreased incentives for innovation.  The authors write:

Branded prices, generic prices, and the LAC all play important roles in economic decisions, which are made on the margin. Prices at a point in time matter to payers, who must decide if the benefit of treating 1 more patient outweighs the cost. The LAC and the LAC net, however, should matter to regulators, policy makers, and payers assessing whether a new drug can be marketed or reimbursed. In this context, overstating the eventual cost of a drug may lead to fewer drugs being made available, weaker incentives to innovate, and ultimately, fewer new drugs discovered


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