Niels Blomgren-Hansen
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Niels Blomgren-Hansen: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark
Abstract: On the possibility of reducing public expenditures on medicine through
deregulation. The market for medicine is special in three essential respects: (a) The
role of the buyer is divided by three agents: the (informed) doctor, who prescribes
the medicine, the public health insurance, which pays most of the bill, and the
(uninformed) consumer, who benefits from the medication and pays part of the bill.
This division creates obvious incentive problems. (b) The distributors (pharmacies
and wholesalers) have no market power as they are obliged to procure the medicine
prescribed by the doctors - no more no less. (c) Competition among suppliers is
limited; most medicine is provided by either a single producer of patented drugs or
by a few competitors. Economic efficiency calls for some combination of regulation
and competition, the exact combination depending upon the market structure of the
various sub-markets. - First, we discuss the possibilities of designing an appropriate
combination of administrative regulation and incentives suitable for enhancing cost-efficiency
of prescription. Second, we analyse the economies of deregulating the
pharmacy sector which, by now, is subject to both controls on both (total) gross
profits and establishment. The conclusion is that deregulation is unlikely to increase
economic efficiency. Third, we take a look at the whole sale sector which, by now, is
subject to binding re-sale prices determined by the producers. Economic efficiency
dictates that binding resale prices are upheld. Finally, we discuss the possibilities of
strengthening the demand side as a way of reducing expenditures and recommend
that the organization of the demand side should reflect the market structure of the
supply side: In case of monopoly, the bargaining should be entrusted to a single,
powerful public body. In case of imperfect competition, tendering appears appropriate.
Keywords: Public expenditure; Medicine through deregulation
JEL-codes: I11
34 pages, July 18, 1999
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