Forbes has a couple of interesting pieces on drug pricing.

A Primer on Drug Pricing discusses the inherent inefficiencies of an industry driven by huge R&D costs but low marginal costs. The basic point is that the price that maximizes profit leaves a huge dead weight loss.

Reference Pricing For Drugs briefly examines one of the most significant pricing debates in the US economy– how to quantify and monetize differential value in drugs. Payers in the health care system, including HMO’s, and governments have started bucketing drugs that treat a particular disease into a “reference group”. The payers then reimburse based on the cost of the lowest-price drug. This makes perfect sense if the drugs have the same effect. However, what if one drug has lower risk of dangerous (and costly) side effects? Or, to cite the example in the article, what if one drug lowers cholesterol more than another drug in the same reference group?

Reference pricing will affect not only drug pricing and treatment plans, but the development choices of drug companies. If the differential value is there and demonstrable, drug companies will have more incentive to create follow-on drugs. If not, there will be tremendous pressure to get to market first.

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