The pharmaceutical industry in the U.S can be categorized into two depending on the drugs that are being manufactured; patented drug industry and the generic drug industry. This paper will focus on the patented drug industry in the U.S, the factors affecting the supply of patented drugs in the market and what role the market structure plays in the manufacture and sale of these drugs.
Patented drugs are brand names for various medicines that pharmaceutical companies manufacture and are known for their efficacy. They are, however, usually costlier than generic drugs. The market structure for patented drugs varies from that of generic drugs and can be said to be oligopolistic in nature. Patent drugs are getting more expensive to manufacture and can easily take a company more than 1 billion dollars to manufacture a drug, perform required clinical tests, get the drug approved by the Food and Drug Administration and market it to a point where it gets a wide reception in the market ( Saylor Academy, 2012). Such prohibitive costs mean only a few companies that have access to a huge financial base can venture into the business of making drugs. This condition already forms the foundation for an oligopoly.
Delegate your assignment to our experts and they will do the rest.
The few companies that can venture into drug manufacture and sale, such as Pfizer, Novartis and Merck, then dominate the market and are free to dictate the market prices with little fear of competition from a player outside their circle. The fact that the government gives patents to these companies for their drugs and extends these patents means that they are protected from external competition for a while giving them the edge over their competitors making the market structure for patented drugs a good example of an oligopolistic industry.
Price determination in the Patent Drug Industry
Having been classified as an oligopolistic industry, patented drugs industry finds itself in a unique price determination scenario. Drug manufacturers face the normal manufacturing costs of pretesting, development of trial drugs, actual production and the advertising and marketing costs of the drug plus other overheads such as salaries and taxes. However, in addition to all these, these companies pay a lot of money to have their products approved and patented by the relevant authorities; a cost which greatly affects the final cost of the drug (Holy, 2017). This is because the manufacturers will work to recoup their investment by transferring that burden to the consumer thus raising the price of patented drugs.
The pricing of drugs in the patented drugs industry is also affected by the fact that patents give the manufacturer exclusivity for a given period of time thus locking out competitors meaning the holder of the patent is able to adjust the prices of the drug to what they deem fair (Holy, 2017). This is not the case in a perfectly competitive industry where a company has to be mindful of being undercut by competitors if they charge premium prices for their products. Patented drugs have no much competition most of the time thus the uptake of the drug in the market is relatively price inelastic during the period of the exclusive patent. The manufacturers determine their own price with little to no external influence.
Influence of public and private insurance companies on revenue
When it comes to the patented drug industry, insurance companies play a huge role in the revenues received by drug manufacturers. This is due to the fact that public and private insurance companies vouch for different types of drugs, Public insurance focuses on providing basic healthcare for the highest number of people; it is healthcare for all at the least possible cost. This means that public insurance companies will be highly biased in favor of generic drugs which are much cheaper than patent drugs. Companies dealing in patent drugs therefore experience a fall in revenue when more people are moved into public insurance covers ( Saylor Academy, 2012). The opposite however occurs when private insurance covers come into play. This is because private insurance is usually a matter of choice where the people covered are looking for something better and more than the basic they can get with the public cover. As a result, they are willing to pay for it and physicians commonly prescribe to them these patented drugs since their insurance covers can afford them ( Saylor Academy, 2012).
Effects of government regulation on the industry
Government regulation plays a major role in the economy and the pharmaceuticals industry is no stranger to this. Government influence in the prescription drug industry has been going on for some time now and dates as far back as 1925 when the federal government under President Calvin Coolidge allowed the patenting of drugs. These patented drugs were then sold at a premium raising the cost of healthcare. These drugs began being prescribed by physicians and soon after, there arose allegations that doctors were being bribed to prescribe the patented drugs. Companies dealing in these patented drugs formed a monopoly over the market that was even more strengthened in 1984 when the Reagan administration under the Drug Price Competition and Patent Term Restoration Act began permitting the extension of patents issued to these companies for more than twenty years. Government regulation continues to play a huge role in the patent drug industry buoyed by the expansion of Medicare and Medicaid by the Obama administration although it remains to be seen whether the Trump administration will continue with this trend.
Government regulation in addressing market failures
Government regulation through provision of exclusivity patents and the extension of these patents is aimed at addressing the market’s failure to have enough companies willing to venture into drug manufacture that is vital to ensure that newer and more efficient drugs are always being produced. The government instead of manufacturing drugs itself provides an incentive for other companies to venture into the same through these patents. Although the patents have a positive effect of encouraging drug manufacture, they also stifle competition due to the long period in which the patents are usually active ( Saylor Academy, 2012). It is therefore upon the government to ensure there is a balance between addressing a market failure and creating another crisis.
Reference
Holy M. (2017). "How Government Regulation Made Healthcare So Expensive," Mises Wire, Retrieved from https://mises.org/blog/how-government-regulations-made-healthcare-so-expensive
Saylor Academy (2012). Economics Theory through Applications. Saylor Academy. Retrieved from https://saylordotorg.github.io/text_economics-theory-through-applications/
