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Pharmaceutical sector price and productivity measurement : exploring the role of agency, incentives and information Morgan, Steven George

Abstract

This thesis explores how decision-making agency roles played by doctors, pharmacists and government affect the social efficiency of choices in the prescription drug market. The primary objective is to contribute to the quality of expenditure decompositions in this sector and, thereby, to draw attention to the real cost of drug consumption in Canada. Expenditure growth in the pharmaceutical sector may occur because Canadians are purchasing more drugs or more in terms of the health outcomes sought through drug consumption. Prices may also be rising for the drugs that patients consume. Furthermore, with new generations of prescription drugs replacing older and often equally effective ones, expenditure inflation may be due, at least in part, to growing inefficiencies in consumption. Deflating nominal expenditures with traditional economic price indexes is a commonly used approach to decomposing expenditure changes into changes in price, changes in productivity or both. This method may be biased because decision-making agency relationships and non-standard financial incentives give rise to possible inefficiencies in the pharmaceutical sector that would not commonly be found in other sectors. This proposition is explored theoretically and empirically. Potential biases stemming from financial incentives are explored in the context of the measurement problem posed by the entry of generic drugs. Traditional techniques of the economic approach to measurement do not capture the full effect of generic competition because decision-making agents do not always have incentive to consider the full price of drugs consumed. Potential information-related problems in pharmaceutical price and productivity measurement are explored within the context of the hypertension market. Health outcomes based indexes are constructed for this treatment category based on recognized national guidelines for the treatment of hypertension. Economic indexes of price and productivity appear to overstate social productivity in this segment because persistent non-compliance with national guidelines has resulted in higher costs without corresponding health improvements.

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