Deck 11: Pharmaceuticals

Question 1

In the presence of insurance coverage, over the counter purchases of drugs like acetaminophen, ibuprofen and naproxen sodium will have a higher elasticity of demand than physician prescribed drugs.

Answer 1

True

Question 2

Jay's physician prescribes a 15-day supply of a pain relieving medication which costs Jay $15 in co-pay because he has an insurance policy which covers prescription drugs. After 15 days, Jay is still in pain and believes that the medicine alleviates his pain about the same as over the counter ibuprofen. Ibuprofen costs $15 for a 15-day supply, and Jay's price elasticity of demand is about the same for both products. Jay will eventually decide to purchase the ibuprofen over the counter because renewing his prescription involves an additional opportunity cost of the doctor visit.

Answer 2

True

Question 3

Costs structure in the pharmaceutical industry is largely characterized by fixed expenses which are proportional to output levels.

Answer 3

False

Question 4

On average, government-funded expenditures on prescription drugs are about $200 per person per year.

Question 5

While generics account for more than three quarters of all prescription drugs sales by volume, they account for only 10% of all prescription sales revenues.

Question 6

It was not until after World War II, that it became clear that control over drug safety mechanisms should rest with governmental agencies rather than with an industry watchdog group.

Question 7

The average percentage of revenues spent on R&D by pharmaceutical companies in the U.S. has been stable for the past three decades at about 17%.

Question 8

One of the most widely used estimates of the average cost of developing a new drug has been at about $80 million (in 2000 dollars).

Question 9

One of the common tasks for pharmacoeconomists employed by large pharmaceutical companies is performing a cost effectiveness study of a new drug.

Question 10

Economies of scale are a common feature of R&D in the pharmaceutical industry.

Question 11

Phase I of FDA testing involves human testing for efficacy of an Investigational New Drug (IND).

Question 12

Once a firm has isolated and tested a drug on animals, it files a New Drug Application (NDA) with the FDA. Then, three phases of testing take place over a period of several years.

Question 13

On average, R&G expenses consume a larger share of pharmaceutical funds than marketing and administrative costs.

Question 14

The proportion of expenditures paid out of pocket for pharmaceuticals today is greater than the fraction of expenditures paid out of pocket for physician or hospital services.

Question 15

Most studies have shown that the initial stages of the pharmaceutical manufacturing process usually give rise to _________________ , while after the large fixed (sunk) costs are finally paid off, manufacturing of pharmaceutical products exhibits ________________________________.

A) economies of scale; diseconomies of scale.
B) diseconomies of scale; economies of scale.
C) constant returns to scale; diseconomies of scale.
D) economies of scale; constant returns to scale.
E) diseconomies of scale; constant returns to scale.

Question 16

What does the term "detailing" mean in the pharmaceutical industry?

A) An exceptionally thorough cleaning, washing and precise coating process at the final stages of the production of each batch of pills, which will favorably show off all the details of the pill.
B) Detailing involves a representative of the pharmaceutical firm calling on an individual physician to set up a meeting, where the representative will discuss one or two products with the physician.
C) The process of developing a pill design (shape, color, engraving, and other artistic and decorative details).
D) Careful attention to every detail of the drug manufacturing process.
E) The requirement to the drug manufacturers to include the details of the drug side effects in journal and TV advertisements.

Question 17

When a retail pharmacy fills your prescription, they likely have an incentive to

A) be as efficient as possible when providing a service to you, thus keeping your wait time to a minimum.
B) reduce your wait time to a complete zero, by utilizing the electronic prescription filling software.
C) increase your waiting time somewhat beyond the average, to allow you more time to shop around for other items the pharmacies typically sell, as they are usually sold at a higher-than-average markup.
D) waive your prescription copay if you purchase at least $30 worth of groceries while waiting for your prescription to be filled.
E) substitute a generic version even if the prescription explicitly requires the brand name.

Question 18

The earliest federal regulation of the pharmaceutical industry was

A) the Food, Drug and Cosmetics Act.
B) the Harris-Kefauver Act.
C) the Hatch-Waxman Act.
D) the Biologics Control Act.
E) the Prescription Drug User Fee Act.

Question 19

One act passed by the federal government aimed at reducing the monopoly power of patented drugs was

A) the 2003 Medicare Modernization Act.
B) the 1984 Hatch-Waxman Act which established a process whereby generic drugs could be fast tracked for approval if they could prove they were the bioequivalent of an already approved patented drug.
C) the TRIPS agreement which also provided special provision for AIDs drugs to the poor.
D) the Harris-Kefauver Drug Act Amendments which slowed down the rate at which new drugs were approved by the FDA.
E) the 1997 FDA modernization act which gave pharmaceutical companies ability to provide some information about unapproved uses of drugs.

Question 20

The hierarchy of funds to the pharmaceutical market in order of level of expenditures is

A) wholesalers, mail order and retail pharmacies, pharmacy benefit managers, brand name pharmaceutical companies.
B) mail order and retail pharmacies, wholesalers, pharmacy benefit managers, brand name pharmaceutical companies.
C) brand name pharmaceutical companies, wholesalers, pharmacy benefit managers, mail order and retail pharmacies.
D) brand name pharmaceutical companies, mail order and retail pharmacies, wholesalers, pharmacy benefit managers.
E) brand name pharmaceutical companies, mail order and retail pharmacies, pharmacy benefit managers, wholesalers.

Question 21

Which drug is likely to be the most profitable for its producer (in terms of average "per-drug" profit)?

A) The drug that was introduced in the market 1 year ago.
B) The drug that was introduced in the market 2 years ago.
C) The drug that was introduced in the market 3 years ago.
D) The drug that was introduced in the market 10 years ago.
E) The drug that was introduced in the market 15 years ago.

Question 22

What is the average time period for the introduction of a new drug into market?

A) 2 years
B) 5 years
C) 8 years
D) 9 years
E) 12-15 years

Question 23

Discuss the role of risk and return in the pharmaceutical industry.

Question 24

Explain the importance of the 1984 Drug Price Competition and Patient Restoration Act (The Hatch-Waxman Act) to the development of the generic drug market.

Question 25

If the PBM is owned by one of the pharmaceutical companies from whom it buys drugs, why might a conflict arise? Why might the FTC be interested in limiting the amount of vertical integration in the health care industry?

Question 26

Explain why R&D by surgeons in hospitals can be expected to lead to more process innovations than product innovations. Compare the regulation of surgeons' use of new surgical skills with the regulation of new drugs.

Question 27

In the U.S. health expenditures on drugs amount to about 10% of total health expenditures. In Japan, where physicians are legally permitted to sell pharmaceuticals, national expenditures on drugs are almost double the level in the U.S. Discuss how the incentives of physicians differ in both countries. Suggest some reasons why the legal requirements might be so different.

Question 28

Many mail-order pharmacies these days are owned by PBMs. Discuss whether there might be a potential conflict of interest in such ownership; if consumer welfare may be affected, and whether such pharmacies would have an incentive to change their policy regarding the use of generics: i.e. would they possibly have an incentive to fill more or less with generics? Justify your answers.

Question 29

Many mail-order pharmacies these days are owned by PBMs. Addressing the concerns that such ownership might lead to a conflict of interest, the Federal Trade Commission (FTC) launched an investigation into this practice and published its report "Pharmacy Benefits Managers: Ownership of Mail-Order Pharmacies" in 2005. The report found, however, that there were no significant differences between the practices of the two types of mail-order pharmacies, including no significant differences in the use of generics between PBM-owned (35% of all dispensed drugs) vs. non-PBM owned (36% of all dispensed drugs) mail-order pharmacies. Discuss what could be a valid explanation behind this finding.

Question 30

How would you classify the market structure of the pharmaceutical industry: monopoly, oligopoly, monopolistic competition or perfect competition?