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Health Policy
j ourna l ho me pag e: www.elsev ier .com/ locate /hea l thpol
o follow-on therapeutic substitutes induce priceompetition between hospital medicines? Evidence from theanish hospital sector
isela Hostenkamp ∗
OHERE Centre of Health Economic Research, University of Southern Denmark, Department of Business and Economics, J.B. WinsløwsVejB, DK-5000 Odense C, Denmark
a r t i c l e i n f o
rticle history:eceived 24 July 2012eceived in revised form 7 March 2013ccepted 11 March 2013
Objective: The pricing of follow-on drugs, that offer only limited health benefits over exist-ing therapeutic alternatives, is a recurring health policy debate. This study investigateswhether follow-on therapeutic substitutes create price competition between branded hos-pital medicines.Methods: New follow-on drugs and their incumbent therapeutic competitors were identi-fied from Danish sales and product registration data on hospital pharmaceuticals usingmedically relevant criteria. We examined whether follow-on drugs adopt lower pricesthan their incumbent competitors, and whether incumbent competitors react to entry offollow-ons through price adjustments using a random intercept panel model.Results: We found no evidence that follow-on drugs adopt lower prices than their incum-bent competitors. Furthermore, potentially due to low sample size, we found no evidencethat prices for incumbent pioneer products were significantly reduced as a reaction tocompetition from follow-on drugs.
Conclusion: Competition between patented therapeutic substitutes did not seem to increaseprice competition and containment of pharmaceutical expenditures in the Danish hospitalmarket. Strengthening hospitals’ incentives to consider the price of alternative treatmentoptions paired with a more active formulary management may increase price competitionbetween therapeutic substitutes in the Danish hospital sector in the future.
. Introduction
The pricing of new pharmaceuticals is a recurring healtholicy debate, especially for drugs that largely replicate theealth effect of pioneer pharmaceutical innovations andffer only limited health benefits over existing therapeu-ic alternatives. While exact copies of patented medicines
re banned from entering the market during the patentife, patented medicines may face competition from follow-n drugs, also called me-too drugs, which are therapeutic
alternatives with a different chemical composition butcomparable health effects [1]. Critics argue that these drugsdivert resources away from break-through pharmaceuti-cal innovation, while providing only little added value interms of health benefits. At the same time they inflatemarketing costs, which eventually have to be recoveredthrough the price and thereby increase pharmaceuticalexpenditures [2–4]. On the other hand proponents arguethat follow-on therapeutic substitutes provide importanthealth benefits, at least for some patients, or may provide
protection against drug resistances [5]. In addition, theymay limit market exclusivity, increase price competitionbetween therapeutic substitutes and thereby limit phar-maceutical expenditures [6,7].
Apart from a voluntary price agreement between theministry of health and the research-based pharmaceuticalindustry, which was signed in June 2009, there was essen-tially no price regulation for hospital medicines during our
1 The public health insurance scheme provides public coverage for
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Despite this controversy, there is little empiri-cal evidence whether competition between therapeuticsubstitutes decreases or increases pharmaceutical pricesand expenditures. The aim of the current study is thereforeto empirically investigate whether new follow-on drugsinduce price competition between patented therapeuticalternatives in the hospital sector. So far the existing lit-erature focused mostly on the primary pharmaceuticalmarket in the U.S. A few demand-side studies investigatedwhether consumers respond to changes in relative drugprices. These studies found mostly small, not universallysignificant price elasticities across therapeutic substitutes,suggesting that patients only to a limited extent considerthe price of therapeutic alternatives in their consumptiondecision [8–12]. Similarly supply-side studies investigatedwhether the entry or presence of therapeutic alternativesaffects prices of pharmaceuticals during the patent life. Forthe U.S., these studies found that there is a negative rela-tionship between the number of therapeutic substitutesand the price of new medicines [13,14], and that follow-on drugs tend to adopt lower introductory prices to winmarket share, however, this relationship has not beenfound in European countries or Canada [1,15,16]. More-over, there is no conclusive evidence whether the entry orpresence of follow-on therapeutic alternatives has an influ-ence on the prices of incumbent therapeutic alternatives[1,14,15,17,18].
The literature has ascribed the low level of price com-petition between therapeutic alternatives to two mainreasons. First, a lack of information about potential sub-stitution possibilities [19], and second, a lack of incentivesto consider the price of therapeutic alternatives due toextensive drug price insurance [20]. In addition, supply-side drug price regulation has been identified as a factorlimiting price competition between therapeutic substitutesin Europe [15]. Thus, it is important to relate any competi-tive pressure to the specific institutional environment [21].In the market for hospital medicines many of the institu-tional characteristics differ considerably from the primarypharmaceutical sector. The greater geographical concen-tration of hospitals compared to general practices mayfacilitate the dissemination of knowledge about new sub-stitution possibilities among hospital doctors comparedto primary care physicians. Therefore new therapeuticalternatives may diffuse faster causing more incentives toengage in price competition for incumbent pharmaceuticalfirms. In addition, prospective payment schemes for hos-pital services may provide strong incentives for hospitaldoctors to consider the price of therapeutic alternatives inthe treatment decision [22].
The Danish market for hospital medicines provides aunique opportunity to study price competition betweentherapeutic alternatives since information on actual con-tract prices is available. Moreover, there is no priceregulation, such that the observed price effects can be inter-preted as a result of competition rather than regulation.The introduction of new follow-on medicines may increase
hospitals’ possibilities to negotiate with manufacturers ofpatented medicines over prices and inclusion on the hospi-tal formulary, and may greatly reduce the market power ofincumbent competitors [23]. The current study therefore
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investigates whether there is evidence of price com-petition between follow-on and incumbent therapeuticalternatives. We examine this by testing whether follow-onproducts adopt lower prices than their incumbent thera-peutic competitors and use a random intercept model toestimate the price effect from the entry of follow-on drugson prices for incumbent therapeutic substitutes. In manyEuropean countries the market for hospital pharmaceut-icals is the fastest growing item of healthcare expenditures,and a large part is spent on patented medicines, makingit an issue of high policy relevance. While this study usesDanish data, the institutional characteristics in the hospi-tal sector are similar across European countries, so that theresults of this study may also be of interest for health policymakers in other countries.
2. The Danish institutional set-up
In order to launch a new pharmaceutical product inDenmark the manufacturer has to apply for a market-ing authorisation with the Danish or European MedicinesAgency, which is granted based on an assessment of theproduct’s efficacy i.e. its intended effects vs. its side effects.Unlike the Food and Drug Administration in the US, theDanish and the European Medicines agency does not assessthe innovative or therapeutic value of new products. A mar-keting authorisation is therefore just a certification that amedicine is potentially effective for the treatment of a spe-cific disease or medical condition. It does not imply thatthe medicine is more effective or safer than existing thera-peutic alternatives nor that it should be covered by publiccoverage schemes or that the medicine cannot be pricedhigher than potential therapeutic alternatives.
In Denmark pharmaceutical price setting is principallyfree, although in the primary pharmaceutical sector pricesand market access for new medicines are essentially regu-lated through public reimbursement regulation.1 However,since there are few private specialists in the Scandinaviancountries, most specialist medicines are almost exclusivelyused in the hospital sector. Therefore there is little over-lap between the primary pharmaceutical market and thehospital sector, and prices for hospital medicines are notindirectly regulated through reimbursement regulation inthe primary sector. Indeed, many recently launched spe-cialist medicines never applied for public reimbursementin the primary sector. As a consequence there is no insti-tution that assesses whether the health benefits of a newpharmaceutical warrant its costs before market access isgranted in the hospital sector.
essential medicines based on a discretionary assessment of the medicine’shealth effect compared to its costs taking overall budget impact con-siderations into account. The threat of a negative decision by thereimbursement council, implying high patient (co-)payments, may havelimited pharmaceutical prices in the primary pharmaceutical sector.
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bservation time from 2005 to 2009.2 Instead, the hospitalector relies on pharmaceutical formulary lists and publicendering to control pharmaceutical expenditures. Each ofhe Danish regions has one or more therapeutic and drugommittees (TDC), which issues a hospital formulary list-ng the medicines recommended for public hospitals in theespective region [24]. While these committees are sup-osed to take evidence on cost-effectiveness of alternativereatment options into account, experience from past yearsas shown that hospital formularies commonly differedcross regions and were not used as a strategic tool toegotiate prices with pharmaceutical suppliers.
As a rule, hospital medicines are financed throughase-based prospective funding (DRGs) by regional healthuthorities and there are no patient co-payments. As Franknd Salkever point out, prospective payment schemesrovide strong incentives for hospitals to consider the pricef alternative input factors in their health production func-ion, as the hospital is facing the marginal cost of therescribed medicines [22]. Hospital doctors, being directlymployed by the hospitals, could therefore be more price-ensitive with respect to the medicines they prescribe thanrimary care physicians, who generally have no incentiveso consider the price of the medicines they prescribe [20].ince hospital doctors may be sufficiently informed andospitals only have a financial incentive to use a morexpensive treatment option if it offsets other hospital costs,hird party financing and agency problems may have lessistortionary effects on the price mechanism in the hospitalector than in the primary pharmaceutical sector.
However, new and expensive medicines are excludedrom the DRG system but are covered through a sepa-ate pharmaceutical budget, which nowadays makes uphe majority of pharmaceutical expenditures in the hospi-al sector. Excluding innovative high-price medicines fromhe DRGs is also common in other European countriesuch as France or Germany. Since DRG rates are typi-ally based on average treatment cost in previous years,here is the concern that case-based funding schemes areot sufficiently flexible to cope with innovative expen-ive medicines [25,26]. While prospectively managedharmaceutical budgets principally retain the incentivesf hospitals to consider the price of alternative treat-ent options in their health production function,3 their
mplementation is often problematic. As the regions areenerally unable to refuse to provide healthcare services
f the budget limit is reached, fixed budgets are politi-ally difficult to enforce and therefore often exceeded inractice.4 Exempting expensive pharmaceuticals from the
2 The voluntary price agreement committed the members of theesearch-based pharmaceutical industry association to freeze prizes untilhe end of the year and to cut prices by 5% from January 2010 in order tovert more strict regulation of prices for hospital medicines.3 The integration of pharmaceuticals into the case-based funding
cheme corresponds to the application of a relative cost-effectivenesshreshold, whereas their coverage through prospective global phar-
aceutical budgets corresponds to the application of an absoluteost-effectiveness ratio, provided that quality of treatment is fixed andRG rate to variable cost margins are the same across DRGs.4 Indeed, if pharmaceuticals were fully covered retrospectively, a case-
ased funding scheme of hospital services paired with an exemption of
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case-based financing scheme, therefore, softens the budgetconstraint and decreases hospitals’ incentives to considerthe price of therapeutic alternatives.
Since information on comparative effectivenessbetween direct therapeutic competitors is generally notavailable at the time of product launch there was often noconsensus as to which medicines represent therapeuticalternatives. The central procurement agency hence hadonly few possibilities to leverage its purchasing powerin price negotiations or centralised tenders for patentedmedicines. The ability to shift pharmaceutical demandfrom one therapeutic alternative to another, which isconsidered to be the main source of countervailing marketpower of large health care organisations, may thereforebe limited and the centralisation of purchasing through anational agency may have had little impact on prices forpatented medicines. Pharmaceutical demand of hospitalsmay therefore not be as price-sensitive as is commonlybelieved providing little incentives for suppliers ofpatented medicines to engage in price competition.
To investigate this issue we analyse the pricing pat-tern of newly introduced follow-on products and theirimpact on pharmaceutical prices of therapeutic substitutes.Although there are no explicit price negotiations, the entryof new follow-on products should increase therapeuticchoice and provide better possibilities for hospitals to sub-stitute away from one therapeutic alternative to another.Thus, if hospitals have a credible budget constraint andbase their purchasing decisions on the price of therapeu-tic alternatives, the suppliers of these alternatives mayengage in price competition and the entry of new follow-onmedicines may reduce pharmaceutical expenditures.
3. Materials and methods
3.1. Material
In this study we made use of a unique dataset providedby AMGROS, the central Danish public procurement agencyfor hospital medicines, which administers and registers lit-erally all sales in the Danish hospital sector.5 The datasetrecords actual annual pharmaceutical sales in the Danishhospital sector by individual pharmaceutical package andyear, from 2004 to 2009. Form these data we calculated theprice for each product by dividing the total actual turnoverby the number of Defined Daily dosages (DDDs) sold perpackage, so that the prices reflect the actual contract priceper DDD and are comparable across substances. In addition,the dataset contains information about the pharmaceuticalsubstance, form and concentration and the manufacturer of
each package. From this dataset 17 entries of new follow-onmedicines entering into eight medically defined therapeu-tic classes were identified through the following strategy:
expensive pharmaceuticals incentivizes to substitute as many hospitalservices as possible for exempted pharmaceuticals.
5 Pharmaceutical sales through AMGROS are supported through anelectronic health information system thus the data are extremely accu-rate. A validation through an accredited accounting firm showed that morethan 98% of all sales are registered in AMGROS’ system.
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Table 1Descriptive statistics of included variables.
First, all medicines that had their first sales between2005 and 2009 were identified, using the ATC classifica-tion system. The ATC system assigns a unique seven digitalphanumerical code for each substance according to itsmain anatomical and therapeutic field of use. Chemicallysimilar substances are grouped into subclasses, which havethe first five digits in common. Many researchers have usedthe first four or five digits of the ATC code to identify ther-apeutic substitutes [1,18]. However, in the hospital sectoreven chemically similar products often treat very differ-ent medical conditions so that doctors generally do notconsider these medicines to be substitutes.
Instead, we used the product summary information pro-vided by the Danish and European Medicines Agencies toidentify the medical indications of new entrants and todefine their relevant therapeutic market.6 Since the focusof this study is on hospital medicines for which there islittle overlap between the primary pharmaceutical sectorand the hospital sector, we concentrated on entries in theanatomical groups J (anti-infectives for systemic use) andL (antineoplastic and immunomodualting agents). Morethan 60% of pharmaceutical expenditures in the hospitalsector fall into these two groups and they are in generalhospital-only-medicines.
With help from experienced pharmacologists we thenidentified all therapeutic substitutes using the samedatabases and excluded all entries, which were mere re-combinations of existing substances. Table 1 providesan overview of the 17 entries and their therapeuticsubstitutes, which can be grouped into eight therapeuticclasses. The resulting dataset contains about 90 individualpackages, which form the unit of observation for our sta-tistical analysis. These medicines represent about 32% ofthe total turnover generated in the Danish hospital sectorin 2009. The following sub-section describes the marketenvironment of the eight therapeutic classes.
3.1.1. Multiple sclerosisAt the beginning of our observation period there were
three substances from four manufacturers available forthe treatment of multiple sclerosis. One of the incum-bent therapeutic substances is available in two brandedversions from two manufacturers, specialising on differ-
ent strengths. One new therapeutic competitor (Tysabri)entered in 2006, but only has an indication as second-linetreatment for patients with high disease activity after other
6 See www.produktresume.dk and http://ec.europa.eu/health/documents/community-register/html.
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treatment options have failed. Since 2009 one of the oldersubstances is available as a generic version. The total mar-ket size for this therapeutic class more than doubled duringthe observation period to about 52 mio D in 2009.
3.1.2. Rheumatoid arthritisThe introduction of new biological agents partly
replaced chemical disease modulating arthritis drugs(DMARDs), which were the standard therapy for the treat-ment of rheumatoid arthritis until then. The biologicalmedicines represent a breakthrough in therapy for manypatients with moderate to severe disease activity, but arealso very expensive. In 2005 four biological agents (Remi-cade, Enbrel, Humira and Kineret) were available for thetreatment of rheumatoid arthritis, which were all stillpatented for the entire observation period. Recommen-dations about which of these agents should be used asfirst-line treatment differed across regions. Another fourfollow-on products entered in 2007 and 2009 respec-tively. In Denmark all of these medicines are dispensedby rheumatologists in a hospital setting. Some of the bio-logical agents are administered in combination with theDMARD methotrexate. In order to compare prices we addedmethotrexate to the price where applicable. The turnoverfor this therapeutic class increased by factor five during ourobservation period to about 107 mio D in 2009 making itthe largest treatment category.
3.1.3. Hepatitis BFor the treatment of Hepatitis B there were four sub-
stances (Zeffix, Hepsera, Intron A and Pegasys) from fourmanufacturers available in 2005. None of the medicinesfaced competition from generic competitors between 2005and 2009. Two substances are used as first-line treatment,whereas the remaining substances only have an indicationas second-line treatment. The new therapeutic competi-tor (Baraclude) that entered in 2006 is used as second-linetreatment. The total market for this therapeutic class morethan doubled during the observation time to 4.5 mio D in2009.
3.1.4. Invasive fungal infectionsFungal infections range from superficial to systemic,
potentially life-threatening infections. In 2009 there weretwo antifungal agents for systemic use in the Danish hospi-tal market (Vfend and Noxafil), which are supplied by twomanufacturers. One of them entered during our observa-tion period. Older antifungal agents such as Amphotericinor Fluconazol, which are already available as generic ver-sions, were shown to be considerably less effective andare associated with higher mortality for invasive fungalinfections and are, therefore, not regarded as potentialsubstitutes.
3.1.5. Invasive candidiasisInvasive candidiasis is a special kind of yeast infec-
tion, which mainly affects severely immune-compromised
patients after organ transplantation, cancer or AIDS treat-ment. One substance was available for treatment of theseconditions in 2005 (Cancidas) and two more entered duringour observation period (Ecalta and Mycamine). Substances
hat are used for invasive fungal infections may also be usedor invasive candidiasis, but are less effective. Togetherhese two therapeutic classes grew by factor 3.8 to ca.5 mio D .
.1.6. HIVFor the treatment of HIV there were more than 20
ntiretroviral substances and combinations of substances,hich were marketed by 7 different pharmaceutical
ompanies. This could imply that there is ample competi-ion between products. However, these numbers concealhe true competitive environment in this market; sinceIV patients develop drug resistances over time andptimal treatment involves a combination of medicinesrom three different categories. Medicines mainly dif-er along the dimension of side-effects and average timentil drug resistance sets in, which also depends on theatient’s compliance with therapy. The introduction of newntiretroviral therapies has greatly reduced the onset ofrug-resistances, but has also to a large extent crowded-ut some of the older antiretroviral therapies, which areherefore only used today if no other treatment optionsxist. While still incurable, advances in HIV treatment suc-essfully postponed the onset of AIDS and turned HIV into
chronic condition with the effect that prevalence of HIVnd therefore total demand for HIV drugs increased duringhe last five years.
Since each patient gets at least one substance fromach category, medicines in different categories are ratheromplements than substitutes, so that the supply-side isuch more concentrated than it might first seem. The
rst category comprises 14 substances, of which 5 have anndication for treatment-naïve patients, whereas the resthould only be used in treatment-experienced patients. Theecond category includes five substances, of which onlywo are used as first-line treatment. The third categoryncludes only two substances and a couple of drugs com-ining substances from category two and three, which were
ntroduced between 2005 and 2009. All drugs in categorywo and three are supplied by two consortia of pharmaceu-ical companies ViiV (Glaxo) and Gilead/BMS, so that the
arket environment is really duopoly. None of the drugsaced competition from generic manufacturers during ourbservation time.7
There were five new entrants to the first category;wo of them received an indication for treatment-naïveatients (Prezista and Isentress), whereas the other threehould only be used in treatment-experienced HIV patientsAptivus, Celsentri and Intelence). Since the later wereess efficacious in terms of more side effects, they areot considered therapeutic substitutes for treatment-naïveatients. Category one was subsequently divided into twoherapeutic classes for the purpose of our analyses. The
arket for HIV antiretroviral therapy doubled during the
ast five years and in 2009 drugs in category one, two andhree equalled 42 mio D in total.
7 For one of the drugs in category 2 Epivir a generic copy received aarketing authorisation in 12/2009 but did not have positive sales, yet
nd was therefore not included.
Fig. 1. Development of pharmaceutical expenditures across the 8 thera-peutic categories.
3.1.7. Ph+ CMLIn 2005 there was one substance (Glivec) available
for the treatment of patients with Philadelphia chromo-some + chronic myelogenous leukaemia (Ph+ CML), a can-cer caused by a gene translocation that creates the enzymetyrosine kinase. The treatment inhibits tyrosine kinase andthereby greatly limits the growth of the tumour clone anddecreases the risk of blast crisis. However, patients developresistance to this treatment over time. Two new substances(Sprycel and Tasigna) were introduced between 2005 and2009 for the treatment of Ph+ CML patients, which maybe effective for relapsed patients that do not respond tothe first-line treatment any more. The two follow-ons wereonly recommended to be used as second-line treatments.The second entrant was launched by the same companyas the incumbent drug. Price competition between thesetwo medicines is therefore unlikely to evolve. The totalturnover of this drug category doubled between 2005 and2009 to approximately 14.5 mio D . Fig. 1 shows the devel-opment of expenditures in the 8 therapeutic categories. Asubstantial part of worldwide pharmaceutical innovation iscurrently devoted to protein kinase inhibitors, consequen-tially new treatment options are likely to become availablein the future.
3.2. Methods
The empirical analysis has two parts. First, we ana-lysed whether follow-on drugs adopt lower launch pricescompared to their incumbent therapeutic substitutes usingt-tests. To compare the launch prices of new follow-on products to incumbent therapeutic alternatives, wedivided the relative launch price of the new entrant by thevolume weighted average price of their direct therapeuticsubstitutes at the time of entry. Direct therapeutic com-petitors are all drugs that are medically non-inferior. Next,we analysed whether the entry of new medicines affectedthe pricing of incumbent therapeutic alternatives usingregression analysis. For this purpose we have restrictedthe analysis to the sample of incumbent drugs, and forman identifier denoted Tentry equal to 1 if the productfaced an additional therapeutic competitor in period t
compared to period t − 1. To capture long term effects oftherapeutic competition, we additionally defined a dummyvariable denoted Pentry equal to 1 if the product experi-enced competition from a new follow-on product at time t
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or any previous year during our observation period. To takedifferent degrees of therapeutic competition across treat-ment lines into account we additionally defined a dummyvariable denoted Direct for direct therapeutic competitorswithin the same- or higher-treatment line status, which weinteracted with our measure for therapeutic competition.
The strategy to identify competitive effects from theentry of follow-on therapeutic substitutes is thus based ona comparison of pharmaceutical prices of incumbent ther-apeutic alternatives before and after the follow-on enteredthe market. Restricting the sample to the incumbent drugsavoids potential problems with a changing compositionof sampled medicines over time, but has the drawback ofreducing the number of observations.
In order to identify manufacturer’s strategic reactionsto a change in market structure and to use all the availabledata, we perform our analysis at the individual packagelevel. Aggregating price information at the substance orproduct level could be problematic if prices of differentversions of the same product are nonlinear in the amountof active ingredient they contain and the relative weightof different versions changes between years. An observedprice change between successive periods may then not bethe result of a strategic decision of the manufacturer, buta change in the composition of demand for different formsor concentrations.
However, when performing statistical analyses at thepackage level potential correlations of prices of differentversions of the same product, and of different products bythe same manufacturer in the same therapeutic class haveto be taken into account [17]. Products within the sametherapeutic class treat the same medical condition andoften use similar production techniques and input factorsso their costs may be correlated. Manufacturers may haveseveral branded products within the same therapeutic classso that prices of products from the same manufacturer maybe correlated [11]. Finally, prices for different versions ofthe same branded product may be correlated because man-ufacturers often want to encourage the ordering of largepackage sizes through implicit quantity discounts. Thusobservations of individual package prices are nested withindifferent brands, manufacturers and therapeutic classes.
To take this hierarchical structure of the data intoaccount we follow Stargardt’s [17] approach and estimatea random intercept model, in which the pharmaceuticalprice for package i of brand j by manufacturer s in thera-peutic class c at time t is allowed to vary randomly betweenbranded products ujsc, manufacturers vsc and therapeuticclasses wc.
Yijsct = x′ijsct ̌ + ujsc + vsc + wc + eijsct
Since prices varied greatly across pharmaceutical pack-ages, we took the natural logarithm of the volume weightedaverage price for a specific pharmaceutical package in aparticular year ln(P) as our main outcome variable. In addi-tion to our measure of therapeutic competition defined
above, we controlled for the presence of generic compe-tition at the therapeutic class level, by defining a dummyvariable denoted DVG equal to one, if there was a genericcompetitor among the therapeutic competitors in year t,
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but excluded the products facing direct generic compe-tition themselves. In this way we were able to identify,whether there were any effects of generic entry on other,still patented therapeutic alternatives. Potential endogene-ity of market structure at the therapeutic class level is lessof an issue for empirical analyses than at the molecularlevel since the process to develop a new drug and to applyfor marketing approval are lengthy and uncertain. Thus, anincrease in the number of therapeutic competitors in a par-ticular year is unlikely to be affected by prevailing prices,which lessens the need for instrumentation [27]. Yet wecan take differences in price levels between drug classesinto account through the multilevel structure of our model.
Finally, we included an identifier for biological productsdenoted Bio to account for increased capital requirementsfor the production of biological products and a non-lineartime trend. In an alternative specification we included aset of year dummies to control for macroeconomic shocksand the possibility to account for any potential price effectsfrom a voluntary price agreement that was signed in June2009. Table 1 provides the descriptive statistics of theincluded variables.
4. Results
4.1. Descriptive analysis of launch prices
Column 5 in Table 2 shows the relative launch prices forthe new therapeutic substitutes.
Tysabri entered the multiple sclerosis market with aprice premium of 66% compared to the prevailing aver-age price of existing therapeutic alternatives. The firstfollow-on therapeutic substitute that entered the rheuma-toid arthritis market during our observation time (Orencia)was priced slightly above the average price of existingtherapeutic alternatives, but the launch prices of the latefollow-ons (RoActemra, Cimzia, and Simponi) that enteredin 2009 were priced below the average price. Baracludeentered the Hepatitis B market in 2006 with a launch pricethat was exactly the same as one of the other second-line treatments but slightly higher than the average pricepaid for therapeutic alternatives in this class. The follow-onthat entered the invasive fungal infections market (Noxafil)entered with a 28% higher price compared to the incum-bent therapeutic alternative. Two therapeutic alternativesentered the market for invasive candidiasis during ourobservation period, the first (Ecalta) entered with a ca 6%lower price than the incumbent drug, whereas the secondfollow-on (Mycamine) entered with a price premium of 6%,despite this, the incumbent remained first-line treatmentchoice. The two new therapeutic alternatives that enteredthe market for Ph+ CML treatments were launched with aprice premium of 87% and 62% respectively. Therefore, theywere only recommended to be used as second-line treat-ments, although they were shown to be at least equallyeffective as the incumbent treatment at the recommendeddosage.
In summary the analysis of launch prices shows thatthere is no clear trend in launch prices over time or withthe number of therapeutic competitors. A mean compari-son test with equal variance cannot reject the hypothesis
74 G. Hostenkamp / Health Policy 111 (2013) 68– 77
Table 2Overview of therapeutic classes, new entrants and incumbent therapeutic substitutes.
Hepatitis B Inc J05AF05 Zeffix 3 No No 5Inc J05AF08 Hepsera 2 No NoInc L03AB05 IntronA 3 Yes NoInc L03AB11 Pagasys 2 Yes NoEnt J05AF10 Baraclude 3 06/2006 1.07 No No
Fungal Inc J02AC03 Vfend 6 No No 2Infections Ent J02AC04 Noxafil 1 10/2005 1.29 No No
Candidiasis Inc J02AX04 Cancidas 4 No No 3Ent J02AX06 Ecalta 1 09/2007 0.94 No NoEnt J02AX05 Mycamine 2 04/2008 1.06 No No
HIV1 Inc J05AG03 Stocrin 7 No No 4Treatment Inc J05AG01 Viramune 2 No NoNaïve Inc J05AE08 Reyataz 10 No No
Ent J05AE10 Prezista 5 02/2007 0.90 No NoEnt J05AX08 Isentress 2 12/2007 1.23 No No
Treatment Inc J05AE01 Invirase 2 No No 7Experienced Inc J05AE02 Crixivan 2 No No
Inc J05AE06 Kaletra 4 No NoInc J05AE07 Telzir 1 No NoInc J05AX07 Fuzeon 1 No NoEnt J05AE09 Aptivus 1 10/2005 1.21 No NoEnt J05AX09 Celsentri 2 09/2007 1.42 No NoEnt J05AG04 Intelence 1 08/2008 0.88 No No
HIV2 Inc J05AF05 Epivir 3 No No 2Inc J05AF09 Emtriva 1 No NoInc J05AR01 Combivir(comb) 1 No No
HIV3 Inc J05AF06 Ziagen 2 No No 2Inc J05AF07 Viread 3 No NoInc J05AR04 Trizivir(comb) 1 No NoInc J05AR02 Kivexa(comb) 2 No NoEnt J05AR03 Truvada(comb) 3 02/2005 No NoEnt J05AR06 Atripla(comb) 1 12/2007 No No
Ph+ Inc L01XE01 Glivec 5 Yes No 27
2
tepteaatsl
Ent L01XE06 Sprycel
Ent L01XE08 Tasigna
hat there is no difference between launch prices of newntrants and existing therapeutic alternatives at a fiveer cent level of significance. However, we could notake potential differences in relative effectiveness of newntrants compared to existing therapeutic alternatives intoccount as such information was unfortunately unavail-
ble. Some prioritisation with respect to placing newherapeutic alternatives as first- or second-line treatmentseems to be made. New medicines may be assigned second-ine status either because of high price or more side effects.
11/2006 1.87 Yes No11/2007 1.62 Yes No
4.2. Regression analysis
Table 3 shows the estimated effects of therapeutic com-petition on prices of incumbent patented pharmaceuticalproducts. Model 1 and 3 estimate the immediate effectof an increase in the number of therapeutic alternatives,
whereas Model 2 and 4 estimate the effect of therapeuticcompetition in the long run. Since the dependent vari-able is log transformed the reported coefficients can beinterpreted in terms of semi-elasticities i.e. a percentage
G. Hostenkamp / Health Policy 111 (2013) 68– 77 75
Table 3Price effect of therapeutic competition using random intercepts regression.
Model 1 Model 2 Model 2 Model 3ln(P) ln(P) ln(P) ln(P)(std. err.) (std. err.) (std. err.) (std. err.)
change in prices due to a unit change in the independentvariable. While pointing into the expected direction as toreduce prices, the price effect from an increase in thera-peutic competition is very small and not significant, in anyof the models. Although the effect from an increase in ther-apeutic competition becomes stronger in the long-run, theeffect on prices remains insignificant. Moreover, therapeu-tic competition did not seem to be asymmetric with respectto same-line competitors as compared to other productswithin the same therapeutic class. In addition, the presenceof a generic competitor at the drug class level did not signif-icantly affect prices of therapeutic substitutes that containdifferent, still patented substances. Biological medicineshave the tendency to be more expensive than chemicalproducts even among this sample of patented products,although the difference is not statistically significant in allmodels.
The only factor that consistently significantly affected
prices for incumbent therapeutic alternatives in all mod-els was time. Prices for patented pharmaceutical packagesin these high turnover therapeutic classes increased onaverage by between 0.8 and 1.2% each year. However, this
represents only a moderate price increase considering thatgeneral price inflation of consumer goods was at least dou-ble during those years. Furthermore, Model 3 and 4 furtherreveal that the effect of time was not linear. Especially in2007 prices increased over proportionally, whereas pricesstagnated in 2008, the year the financial crisis commenced.The price agreement of June 2009 did not seem to showany effect on pharmaceutical prices in these high turnovertherapeutic classes in the year it was signed. This might bedue to price increases before the agreement was signed, orbecause the price agreement targets official prices, hencemay have had little effect on actual contract prices. How-ever, since the main part of the agreement, a 5% price cutof official prices, will first become effective in 2010, it maybe too early to evaluate its effect with our data.
In terms of modelling pharmaceutical prices for indi-vidual packages, taking correlation between products intoaccount is important. Conversely, additional correlation
between branded products from the same manufacturerdoes not seem to be important. This might be due tothe low number of companies that have several brandedproducts within the same therapeutic class. Finally prices
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lso seemed to vary significantly across therapeuticlasses.
. Discussion and policy implications
The study investigated pricing patterns for pharmaceut-cals when new follow-on drugs became available on theanish market for hospital medicines. We found no differ-nce between the launch prices of new follow-on productsompared to incumbent therapeutic alternatives. More-ver, we found no evidence that the entry of follow-onrugs lead to significant price reductions of incumbentherapeutic alternatives or that therapeutic competitioneduced pharmaceutical expenditures. In this respect ouresults are in line with previous studies from the primaryharmaceutical sector that did not find evidence for priceompetition between producers of branded therapeuticlternatives [15,17,18].
While our study overcomes a number of methodologi-al issues of previous analyses on therapeutic competitionhat could have biased estimates towards insignificance,ur data has the disadvantage that information aboutherapeutic advance of new products was not available.his substantially limited the number of medicines thatould be included in this study and may have implica-ions for the interpretability of our results. Particularlyhe descriptive analysis of launch prices of new follow-n drugs must be interpreted with caution. However, byoncentrating on follow-on substitutes that entered exist-ng, clinically defined therapeutic classes, we believe thathe products considered here provide only limited addi-ional health benefits to patients. Moreover, by focusingn incumbent therapeutic substitutes in the regressionnalysis this information should not be essential, as theirffectiveness is unaffected by the entry of more or lessffective follow-on products. Nevertheless, a larger numberf products would have been desirable to increase the sta-istical precision of the regression estimates. Consideringhe substantial resource requirement to identify true thera-eutic substitutes there is a trade-off between accuracy anduantity of information in any empirical analysis focussingn therapeutic competition. Thus, the low number of obser-ations could have contributed to the conclusion that themall tendency to reduce prices of incumbent therapeuticlternative products was not sufficient to reject the hypoth-sis of no price reductions.
Nevertheless, when accepting these limitations, ouresults suggest that suppliers may have insufficient incen-ives to compete in prices. One potential reason for this
ay be that hospitals did not have sufficient incentives toonsider the price of therapeutic alternatives in their treat-ent decision. Changing the reimbursement policy so that
ew medicines are by default included in the case-basednancing scheme unless evidence on superior effectivenessompared to existing products is provided could providealuable information about substitution possibilities at the
ime of product launch. In addition it could increase hos-itals’ cost awareness and provide incentives for hospitalso prescribe more cost efficiently and to use formulary liststrategically to negotiate prices with manufacturers.
y 111 (2013) 68– 77
Another possibility to increase the incentives for pricecompetition could be to change the procurement ofpatented medicines from specifying the exact product tospecifying the desired outcome. This would increase thenumber of potential competitors to compete for a singlecontract, but entail substantial requirements on measur-ing and monitoring of patients’ health outcomes to preventdishonesty by hospitals to safe costs through underreport-ing of health outcomes. This would probably represent themost radical change in institutions compared to the statusquo in which literally all patented hospital medicines arefinanced on top of DRG tariffs.
What degree of therapeutic competition provides thesocially optimal level of incentives for pharmaceuticalresearch and development is a more fundamental ques-tion that is beyond the scope of this study. However, it iswell known that drug price insurance may induce distort-ions in the price mechanism that provide inefficiently highincentives for the development of new pharmaceuticalinnovation if neither doctors nor patients share in the pricefor their medication. Thus, some degree of price competi-tion between therapeutic alternatives is likely to be welfareimproving [28], providing a welfare economic rationale forprice negotiations between representatives of the demandside and pharmaceutical manufacturers ensuring that dugprice insurance translates into increased utilisation ratherthan increased manufacturer profits. Recent evidence fromthe U.S. market suggests that it is mainly the possibil-ity of large health care institutions to negotiate priceswith manufacturers of patented medicines when ther-apeutic alternatives are available that has greatly keptexpenditures for Medicare part D, a large U.S. govern-ment supported pharmaceutical benefit program, belowthe expected budget [21].
In the long run exemptions from prospective fund-ing should, therefore, be restricted to very innovativemedicines and only be used as a transition tool to admin-ister the inclusion of these medicines into the prospectivepayment scheme to avoid adverse incentive effects fromthe combination of prospective and retrospective financingelements. This would require a review of all pharmaceut-icals that are currently on the list of additionally financedmedicines and all new medicines as to whether theyare characterised by a general therapeutic class effect.Evidence on comparative cost-effectiveness that also con-siders potential efficiency gains outside the hospital sectorshould ultimately be used to assign medicines to DRGs orto define new DRG-tariffs if they provide significant addedhealth benefits to patients. Such a system would internaliseincentives to consider the price of alternative treatmentoptions into hospitals’ production function and thereforeprovide more incentives for pharmaceutical companiesto compete in price, while providing more incentives forbreak-through pharmaceutical innovation. Naturally theeffectiveness of integrating pharmaceuticals into the case-based financing scheme as a cost containment tool dependson the broadness of the treatment categories defined.
Yet, another possibility to increase price sensitivityinside the hospital sector could be to make medicines thatcost considerably more, but only represent a conveniencebenefit to patients, available at a patient co-payment.
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Although such a policy would be consistent with reim-bursement practices in the primary pharmaceutical sector,it could result in more affluent patients having better accessto care, which would not be congruent with the principalaim of the Danish healthcare system to provide universalaccess to healthcare for all citizens.
In the short run the most promising approach isprobably to strengthen the possibilities of the centralprocurement agency to either negotiate over prices withmanufacturers of patented medicines or to organise ten-ders at the level of therapeutic equivalence. For these to beimplementable inside hospitals, though, a consensus aboutwhich therapeutic alternatives can be used interchange-ably, at least at regional level, would be a precondition. Thisin return would require evidence about the relative cost-effectiveness of different treatment options, which are notgenerally available when new medicines are introduced.Therefore it is difficult to assess which therapeuticalternatives actually are substitutes. The establishment of anew national committee in 2010 that should work towardsan alignment of utilisation of expensive hospital medicinesmay be a first step towards using the purchasing power ofcentralised procurement more strategically.
6. Conclusion
This is the first attempt to study price competitionbetween patented therapeutic alternatives in the hospi-tal sector. Our results suggest that there is no evidencethat therapeutic competition has limited pharmaceuti-cal prices and expenditures. This implies that hospitalsmay be less price-sensitive than commonly believed byhealth policy makers, which could stem from the com-mon practice to exclude new expensive hospital medicinesfrom prospective hospital financing schemes. A more activerole of formulary management in the Danish hospitalsector coupled with a requirement to provide cost-effectiveness evidence when new therapeutic alternativesare introduced into the market may help to contain phar-maceutical expenditure growth in the future.
Role of the funding sources
This study was financially supported by AMGROSthe Danish Procurement Agency for hospital medicines.AMGROS provided the data. However, AMGROS or itsemployees had no influence on the study set-up, analysis,presentation or publication of results.
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