Biomedical Engineering Reference
In-Depth Information
react to them. Assessing the impact from such spillovers can be instructive to
drug companies in evaluating the strategy (cf. the analysis of scandals in Roehm
and Tybout
2006
).
Another possible externality is linked to the dyadic decision making (see Ding
and Eliashberg
2008
) feature of pharmaceuticals.
11
Drug use by other patients
conveys information about a given drug's efficacy and safety to either the physician
or/and the patient, and can lead to herd behavior. In such a setting, a particular
drug—which is not necessarily the most efficacious or safest for that matter while
meeting FDA approval guidelines—can reach a dominant position in the market, at
least in the short-run, despite the availability of substitutes (see e.g., Berndt et al.
2003
). In other words, aggregate usage affects brand evaluation and can impact,
e.g., the drug's rate of penetration in the market.
Next consider an unintended consequence from US government regulation that
Scherer (
2000
) describes in some detail: By the early 1990s, HMOs and PBMs
became significant players in the industry, and started establishing lists of drugs
(aka formularies) that are suitable to treat a given illness. Once physicians began to
comply with the formulary guidelines (i.e., physicians were now “forced” to con-
sider the patient's insurance and the associated formulary prior to selecting the
appropriate drug to prescribe), the HMOs and PBMs had a bargaining chip to nego-
tiate with the drug manufacturers. In other words, drug companies that sold substi-
tutable products (that were still under patent protection) were played off against
each other by the HMOs and PBMs to obtain significant price discounts—varying
from 20 % to more than 50 %—to include those drugs in the formularies.
At about the same time as the above events were unfolding, the US government
passed laws that required drug manufacturers to give the governmental agencies
(that were reimbursing prescription drug purchases of patients covered by Medicaid)
price discounts equal to the higher of either 15.1 % or the best deal offered to any
nongovernmental buyer of any prescription medication. So, the manufacturers
faced with the deep-discount demands of the HMOs and/or PBMs realized that such
discounts will have to be extended to the government organizations as well; since
Medicaid purchases constituted a significant portion of the manufacturer's revenue,
these discounts would end up being too costly. Consequently, Scherer (
2000
) and
the studies cited therein note that there have been substantial reductions in the
discounts offered by the manufacturers. More recent studies of this phenomenon can
be useful in establishing the spillover effect of government regulation (see Verniers
et al.
2011
for a valuable effort in that direction).
The presence of spillover from a given marketing action has the potential to
affect the response from other marketing actions; for instance, suppose that DTCA
and effort from the pharmaceutical sales force (aka detailing) has a synergistic
effect. Recalling the analysis from Sect.
23.3
, we note that the market response from
11
The dyadic decision making aspect can moderate the effects of all of the spillovers being
discussed here.
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