Price Regulation of Pharmaceuticals: A Policy Experiment

What does the demand for pharmaceuticals look like? How effectively does a price cut control pharmaceutical expenditure? To shed light on these questions, I estimate the demand for antihypertensive drugs in Korea (2003-2007) using NLM. The estimation results are following. 1) Physicians are not sensitive to price differences and the price elasticity of the original drugs is further reduced after the entry of generic drugs. 2) The market share of the molecule losing patent protection decreases after patent expiration. 3) The generic drug’s age has an negative effect on the market share of molecule whereas the original drug’s age has an positive effect. 4) Molecules in the same therapeutic subgroup are close substitutes, implying that nesting by the therapeutic subgroup matters. Using these estimation results, I assess South Korea’s pharmaceutical price and reimbursement reform, which was implemented in 2007 (called “Drug expenditure rationalizing plan”). I estimate 3.98% decrease of the drug expenditure due to the price cut policy.