Pharmaceutical Industry Pricing Models Essay

3597 Words Jan 5th, 2014 15 Pages
The pharmaceutical industry is praised as one of the leading industrial sectors. The fruits of its extensive research and development are traded worldwide and have improved the length and quality of life of countless individuals. At the same time, however, the industry is criticized for its marketing and pricing practices—and even for its research and development priorities. Industry's consistently high profits and large expenditures on research and development as well as on marketing that foster scrutiny and criticism.
The pharmaceutical industry is unique in the sense that that it is fundamentally based in research and development (R&D) but is also a manufacturing industry. Like other industries within the health sector,
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The patient receives the service, but significant portion of expenditures, does not pay for it directly. Payment is left to government or private insurers, acting as third-party payers. Of course, patients ultimately pay, but only indirectly, and as part of a greater pool of insurance beneficiaries and taxpayers.
Pharmaceutical Prices
Pricing of pharmaceuticals is perhaps the most controversial aspect of the industry. Consumers and their elected legislative representatives are highly attuned to drug prices. It appears that consumers are more sensitive to the prices of pharmaceuticals than they are to those of other health services, which are far more expensive. With the relatively low level of insurance coverage for pharmaceuticals and their appearance as a product rather than a sophisticated service, it is not surprising that consumers are more likely to complain about a $50 bottle of tablets than a $500 radiology procedure, or a $5000 hospital stay.
To understand how drug prices are set, one must return to the structure of the industry. Perhaps its most differentiating characteristic is that it is particularly intensive in fixed costs. Once those fixed costs are expended, the remaining costs of drug marketing, manufacturing, and distribution, while far from insignificant, are relatively small.
The model of price setting in a perfectly competitive market suggests that prices

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