Three essays on health economics

The present doctoral thesis is based on three different essays on health economics. Even though the topics differ across the three chapters, they share two main features: i) they are all based on micro analyses and ii) they all aim to explain some specific aspects of the pharmaceutical market. In particular, the first two chapters shed light on the nexus between regulation and drug Innovation, while the third presents an econometric analysis of the demand of production factors in the Italian pharmaceutical industry. It is worth noticing that the first and the third chapter both present an empirical analysis based on novel and ad hoc datasets. The first chapter Pharmaceutical industry, drug quality and regulation. Evidence from US and Italy, co-authored by Vincenzo Atella and Jay Bhattacharya, studies the interactions existing between pharmaceutical companies and regulators and how these interactions affect the quality (i.e. ex post efficacy) of the drug delivered to the market. This contribution is the first attempt, to our knowledge, to provide an empirical assessment of the nexus between regulation and the pairs price, efficacy realized in drug market. In particular, the goal is to analyze the effects on drug price and drug quality of the two most common regulatory regimes in the pharmaceutical market: Minimum Efficacy Standards (MES) and Price Controls (PC). Following Besanko, Donnenfeld, and White [5], we develop a very simple model of adverse selection where a pharmaceutical company can charge different prices to a heterogeneous group of buyers for its (innovative) drug, and we evaluate the properties of the equilibria under the two regimes. We model consumer heterogeneity stemming from differences in the willingness-to-pay for drug quality, measured through ex-post efficacy. The theoretical analysis provides two main results. First, the average drug quality delivered is higher under the MES regime than in the PC regime or a in combination of the two regimes. Second, PC regulation reduces the difference in terms of high-low quality drug prices. The empirical analysis has been conducted on a common sample of drugs available both in Italy and in US. Drug quality has been measured using data from Tufts - New England Medical Center - Cost Effectiveness Analysis Registry that allows to compare cost-effectiveness of a broad range of interventions (among which drugs are the most studied) using standardized cost-utility ratios. Despite its simplicity, the theoretical model produces testable predictions that are corroborated by the empirical analysis. The chapter Information and regulation in drug market explores the trade-off faced by the pharmaceutical firms whether to innovate or not and the related problem of designing a regulatory framework that provides incentives for firms to produce breakthrough drug rather than incremental modifications to the existing pharmaceutical product lines (the so-called me-too drugs). We consider the interaction between the innovative firm and the regulator when the innovative process is assumed to be stochastic. The relationship between the regulated price and the efficacy of the entrant drug is established through a bargaining approach. The model suggests that regulators should apply a value-based approach to pricing in order to relate the price to the incremental therapeutic benefit delivered to patients. In light of this purpose, the regulator should use her bargaining power to penalize the production of me-too drugs and incentivate firm’s innovative effort acknowledging higher prices to more effective drug. Finally, the third chapter How variable is labor input in the Italian manufacturing: the case of the pharmaceutical industry analyzes the labor demand in the Italian manufacturing, using firmlevel data on pharmaceutical industry. The Italian pharmaceutical industry is characterized by the existence of long-term labor contracts, and this fact suggests to consider labor as quasi-fixed input. In order to characterize firms’ behavior we base our analysis on the restricted Generalized Leontief cost function. The choice of this flexible functional form is due to its ability to capture the input substitution patterns in presence of more than one quasi-fixed input. Therefore demand and substitution elasticities are estimated with respect to two different theoretical models: the first, QFI(1), with capital as quasi-fixed input and the second, QFI(2), with two quasi-fixed inputs, capital and labor. The choice among the two alternative specifications is based on an elasticity comparison criterion, since the two models are not nested. Our results confirm the a priori on the labor market rigidity and point out the high heterogeneity between the firms, even controlling for size and nationality.