Price & Cost of Medicine

Medicine’s Price
 Factors influence of medicine pricing

Internal Factor: External Factor:

Marketing Target/goal Pricing Marketing Condition &
Marketing mix strategy Desicion Demand, Competition,
Cost
Economic condition,
Organization Considerant
Other’s stakeholder
 Price’s Area & Component
Supply Area Ceiling
C
Price

B
Patient
Pharmacy Price

A
Price
DISTRIBUTION Patient Area
COST
Manufa-
cture’s
MARKETING COST,
Price MANAGEMENT COST,
PROFIT
Manufa- RAW MATERIAL,
cture’s PACKAGING
Direct ELECTIRICTY
Cost PERSONNEL
 CEILING PRICE
Price’s Structure
• RETAILER’S COST

• PROFIT

• MARKETING, INCLUDE DISTRIBUTION

CONSUMER’S
PRICE
• MANAGEMENT COST
RETAILER’S
NETT PRICE • PRODUCTION COST
• CONTAINER / PACKAGING
MANUFAC- • EXIPIENTS
TURE’S PRICE
• ACTIVE INGGREDIENT
 CEILING PRICE
Price’s Structure
• RETAILER’S COST

• PROFIT

• MARKETING, INCLUDE DISTRIBUTION

CONSUMER’S
PRICE
• MANAGEMENT COST
RETAILER’S
NETT PRICE • PRODUCTION COST
• CONTAINER / PACKAGING
MANUFAC- • EXIPIENTS
TURE’S PRICE
• ACTIVE INGGREDIENT
 Justification for High Drug Costs
1. New drugs innovative and valuable to society

2. Drug R&D costs are high

3. Producing drugs is risky

4. Drug companies donate millions dollars of free drugs

5. Good value; impossible to put a value on good health

 Homework 20 -04 2013
• Theory of “Cost of Therapy” with
examples
• E.g. : cost of diabetes therapy
– Direct of medical cost
– Indirect of medical cost
– Direct of non medical cost
– Indirect of non medical cost !
 Drug Companies Claim:
Spend more on R&D than on Promotion
 Drug Industry Concerns
about risk and profitability
• Generic competition
• Reduced patent protection time
• Rising costs to produce
• High #s of failed compounds
• Possible re-importation from abroad
• Rising regulatory costs
 Benefits to Generic Market Entry
• Increases consumer choice
• First marketed generics typically priced 20 to
30 percent below branded comparators
• On average, branded drugs cost 3 times more
than generics
• Generics accounted for approximately 42
percent of all prescriptions dispensed in 2000
• The more generics in market, the lower prices
drop
 Discussion Questions
What to Do About High Drug Costs
• What can you as a pharmacist do to help your
patients?
• What can our institution do to better control
costs?
• What policies could help moderate drug
costs?
• What role can the formulary play in these
efforts?
 Types of accounting costs
a. Accounting cost :costs are the monetary value of expenditures for supplies, services, labor, products, equipment
and other items purchased for use by a business or other accounting entity. It is the amount denoted on invoices
as the price and recorded in bookkeeping records as an expense or asset cost basis
b. Opportunity cost : the value of the best alternative that was not chosen in order to pursue the current
endeavor—i.e., what could have been accomplished with the resources expended in the undertaking. It
represents opportunities forgone
c. Historical cost : historical costs is the original monetary value of an economic item. Historical cost is based on the
stable measuring unit assumption. In some circumstances, assets and liabilities may be shown at their historical
cost, as if there had been no change in value since the date of acquisition
d. Marginal cost, is the change in the total cost that arises when the quantity produced changes by one unit,
includes any additional costs required to produce the next unit
e. Sunk cost : sunk costs are retrospective (past) costs that have already been incurred and cannot be recovered.
For example, if a firm sinks $1 million on an enterprise software installation, that cost is "sunk" because it was a
one-time expense and cannot be recovered once spent
f. Transaction cost : is a cost incurred in making an economic exchange (restated: the cost of participating in a
market
g. Manufacturing Costs : are those costs that are directly involved in manufacturing of products. Examples of
manufacturing costs include raw materials costs and charges related workers. Manufacturing cost is divided into
three broad categories
h. Non-manufacturing Costs : are those costs that are not directly incurred to manufacture a product. Examples of
such costs are salary of sales personnel and advertising expenses
 Manufacturing Costs &
Non Manufacturing Costs
• Direct materials cost.
• Direct labor cost.
• Manufacturing overhead cost.

• Salary of sales personnel

• Advertising expenses
• Selling and distribution Costs.
• Administrative Costs
 Costs of Therapy
• direct medical costs like office visits,
hospitalizations, any treatment
costs(Medications,tests, procedures, etc.)

• direct non-medical costs like transportation

to get treatment; hiring a baby sitter so a
parent can visit the doctor, etc.)

• indirect costs like missed work due to illness;

Unpaid assistance, decreased productivity,
etc.)
• intangible costs like pain and suffering
 ECHO Model

E conomic
C linical O utcomes
H umanistic
 Identify the perspective of cost

• that is, who will be utilizing the

information to make what
decisions.
• This will guide you in choosing
the relevant costs and benefits.
 Perspectives
1. Patient
2. Health Practitioner
3. Hospitals or Hospital systems
4. Third-Party payers
5. Societal
 Patient Perspective
Examples of costs that directly
affect the patient include:
• Out-of-Pocket costs
• lost income
• transportation
Relevant Consequences are:
• Therapeutic effectiveness
• Adverse events
• Quality of Life (QOL)
 Patient Perspective
• Direct
Co-pays,

education,

insurance premium,
transportation,

prescriptions,

 sitters

• Indirect
missed work,
sitters
 Health Practitioner
Costs to physicians may include:
• Hospitalization
• Pharmacy
• Personnel
• Supplies
Consequences of interest are:
• Therapeutic effectiveness
• Adverse events
 Hospitals
Costs include:
• Hospital stay costs
• Treatment of adverse events &
complications
Consequences of interest:
• Therapeutic effectiveness
• Adverse events
 Provider Perspective
• Direct
Equipment / leases
Fees

Education

Marketing

Dedicated personnel

• Indirect (overhead /
accounting costs)
Maintenance

Utilities

Mortgage / rent

Business licenses

Office supplies

laundry, waste disposal, etc.

 Third-Party Payer
Costs of care incurred for covered
services which may include:
Hospitalization
Nursing home care
Laboratory costs
Medications
Medical devises
Physician / pharmacist fees
 Societal
• All possible costs including
lost productivity
• All possible consequences
including QoL, & life years.
 Societal Perspective
• Direct
 healthcare costs,
 e.g. premiums,
 Medicare & Medicaid,
 Taxes,
 Medication R&D,
 Healthcare workforce,

• Indirect
 lost productivity,
 lost wages