Economics for Pharmaceutical Management. (MDS-3: Managing Access to Medicines and Health Technologies, Chapter 10)
(2012; 14 pages)

Economics can help managers make difficult resource allocation decisions by providing a framework and a set of concepts and tools for evaluating alternatives in terms of their costs and benefits. Key economic concepts include— Scarcity: the fact that resources are always limited Opportunity cost: the benefits that are given up in choosing one option over the next-best alternative Marginal costs and marginal benefits: the additional costs incurred and additional benefits gained by increasing output Incentives: the factors related to both monetary and nonmonetary rewards or to penalties that influence the behavior of individuals or organizations Considerable debate exists about the appropriate role of government in the health sector. The “social welfare” perspective argues for broad government involvement, whereas the “market economy” perspective holds that government should become involved only when the market system fails. General support exists for the government to provide public goods, which are available for the benefit of everyone. Prominent examples include goods and services with positive externalities, such as immunization, and merit goods, such as health education, which private markets tend not to provide in sufficient quantities. Policy makers must also be concerned with distribution issues—who pays for and who benefits from publicly supported services. Through the use of subsidies, governments can encourage the consumption of health services beyond what individuals would pay for on their own. The private sector is actively involved and often predominant in health care and especially the pharmaceutical sector. Government involvement with the private sector is often justified as a means of correcting “market failure,” which may result from equity considerations, failure of competition, information failure, and externalities. Governments are not always successful in correcting the failure. Efficiency means getting the most output for a given quantity of resources. The tools of pharmaco-economic evaluation can help pharmaceutical managers identify the most efficient options. Different methods include cost-minimization analysis, cost-effectiveness analysis, cost-utility analysis, and cost-benefit analysis. These methods are demanding and labor intensive, and although widely used in pharmaceutical access programs in high-income countries, their applicability is more limited in low- and middle-income countries. Essential medicines lists, standard treatment guidelines, generic substitution, tendering and reference pricing, and tariff and tax minimization can be more effective instruments for improving pharmaceutical purchasing and improving affordability. Pharmaco-economic analysis can be very helpful, but should be used selectively, for instance, in assessing an entire public health program (such as childhood vaccination) or when an important product is expensive and available from only one source.
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