Economics for Managers/economics for managers Assignment

I. Assignment Overview: This assignment is based on an article pub- lished in The Economists’ Voice titled ‘Want More Value from Prescription Drugs? We Need to Let Prices Rise and Fall’, by Dana P. Goldman, Adam Leive and Darius Lakdawalla, in 2013. The article is already attached to this assignment question. Please read the article carefully before attempt- ing this exercise. You will also need to draw on other resources available through the library as well as external resources. Please note that you need to provide clear references for your sources when citing research and data.

II. Learning Objectives: This assignment is designed to encourage you to think about the application of concepts learned in this unit in a real world scenario. This assignment, indeed, is interesting as it explains how the existing economic theories become helpful to undersstand the pricing strategies of cancer drugs. We hope that this assignment will expand the horizon of your thoughts.
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III. Assessment: Your score on this assignment contributes towards 40% of your final score for this unit. Based on the attached Rubric, your assignment will be graded on your use of appropriate economic theory and concepts, clarity of exposition and overall quality of your answers. Although you can work in group, this is not a group assignment and you must submit answers individually.

IV. Submission: This assignment must be submitted electronically on CloudDeakin (CD) Dropbox area by all students by 11:59pm on the due date. No hard copy is required. Print your name and student ID clearly on the first page of your answers. Please check the Academic Honesty and Misconduct section in the Unit Guide. Submitting your answers automati- cally implies that you have read and accepted the Plagiarism and Collusion Declaration, and that the submitted answers are entirely your own work.

V. Questions: Answer all questions. Limit the total word count of your assignment to less than 3,000 words. You are encouraged to provide necessary graphs, figures and tables with data wherever possible, which are not subject to word limit. Please be careful in implementing referencing styles.
1. In your own words, summarise the article. What is the main message of this article? [8 marks]
2. According to Authors, “Drug pricing is also a product of a hidebound reimbursement system that does a poor job in letting prices adjust to new information about value.”- in light of the article and based on your own research, please explain why the authors suggest so. Can you provide a justification for the existence of a reimbursement system in

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life saving drug market? Does the hidebound reimbursement system lead to market failure? [8 marks]
3. Suppose you are a CEO of a pharmaceutical company called ‘XYZ’. After investing millions of dollar, your company comes up with a drug that may cure all types of cancer. As a CEO, what pricing strategies will you adopt to maximise profit? Suppose government is planning to adopt price ceiling or price floor strategy. Do you think such strategy may a?ect your R&D (ie Research and Development) for developing a new drug? Explain. [ 8 marks]
4. We have Pharmaceutical Benefit Scheme (PBS) in Australia. Do you think our pharmaceutical industry is highly beneficial because of PBS? Explain. [8 marks]
5. Do you think that the global drug market is a competitive market? Explain. [8 marks]
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DOI 10.1515/ev-2013-0027 The Economists’ Voice 2013; 10(1): 39–43

Dana P. Goldman*, Adam Leive and Darius Lakdawalla
Want More Value from Prescription Drugs? We Need to Let Prices Rise and Fall

Abstract: The high price of some cancer drugs has recently come under attack by the medical profession. We examine the reasons behind the pricing strategies of cancer drugs. On the one hand, prices should reflect value and research demonstrates that the health benefits from novel cancer drugs have been enormous in terms of addi- tional years of life patients can now enjoy. This provides some justification for the high price tag of these drugs. On the other hand, drug pricing is also a product of a hidebound reimbursement system that does a poor job in letting prices adjust to new information about value. Regulators set thresholds for cost-effectiveness, which establishes not only a price ceiling but also a price floor. Manufacturers often price drugs high at launch in efforts to recoup their initial investment, but a more efficient system would allow prices to both rise and fall over time. Removing distortions in the reimbursement system is crucial to ensuring continued success in saving lives.
Keywords: health; prescription drugs; pricing; value.

*Corresponding author: Dana P. Goldman, Director of the Leonard D. Schaeffer Center for Health Policy and Economics at the University of Southern California, 3335 S. Figueroa Street, Unit A, Los Angeles, CA 90089, USA, e-mail: dana.goldman@usc.edu
Adam Leive: Doctoral Student in Health Economics at the University of Pennsylvania’s Wharton School, Philadelphia, PA, USA
Darius Lakdawalla: Quintiles Chair in Pharmaceutical Development and Regulatory Innovation at the University of Southern California, Los Angeles, CA, USA
A group of distinguished international cancer physicians recently joined together to decry what they called the “astronomical, unsustainable, and perhaps even immoral” prices of cancer drugs.1 In the name of saving patients, they appealed to drug manufacturers to lower their prices.
The group’s remarks made for important political theater in the policy debate over healthcare costs. But they skirted the question of why the drugs’ prices are high to begin with. In large part, drug manufacturers are locked into an approval and reimbursement system that distorts the underlying value of their products and makes high initial prices the best option for recouping their investment. In fact, some regulators set thresholds for cost-effectiveness, which sets not only a price ceiling but also a price floor. Introducing pricing flexibility into these systems,

1 Kantarjian et al. (2013).

40 Dana P. Goldman et al.
which would enable drug prices to both rise and fall in response to new information about a drug’s value, is crucial to ensuring that patients get the drugs they need.
The cancer physicians focused on their specialty, a relatively rare form of cancer called chronic myelogenous leukemia, or CML. Before the development of imatinib – the novel cancer drug, popularly known as Gleevec, used to treat CML – 80 percent of patients diagnosed with the disease died within 10 years. Imatinib lowered that rate to 20 percent – a reduction so dramatic that patients “now live close to normal life spans.”2
The physicians argued that a drug’s price – Gleevec costs $76,000 per year – “must reflect worth.” So what is the “worth” of those extensions in lifespan that CML patients enjoy? Our research shows that imatinib, manufactured by Novartis, created more than $88 billion in social value in terms of patients’ survival gains and drug-company profits over the lifetime of CML patients.3 What is Novartis’ cut? The answer is 10 percent, a fraction typical for a range of other cancer drugs: our research finds patients enjoy between 81 percent and 95 percent of the social value that drugs create, with manufacturers earning a minority of social welfare in terms of profits.4
The oncologists readily acknowledged that drug manufacturers deserve some positive return on their investments in order to encourage them to spend billions more on new drug research. Recouping 10 percent of the total value of cancer-drug innovations doesn’t seem unreasonable, given that these drugs will eventually lose patent protection and that, over their lifetimes, they are far more cost-effective than pricing at their launch would suggest.5
But securing such a return on investment, short of high initial prices, is virtu- ally impossible in our current drug approval and reimbursement system. The key problem is that information on survival benefits and the range of diseases a drug can treat often trickles out slowly over time and after a drug is on the market, but prices – which are often dictated by regulators both here and abroad – do not adjust to reflect changes to the drug’s value.
Traditionally, an experimental drug’s approval was predicated on demon- strating that it improved patients’ survival rates vis-à-vis those under standard care. But waiting for differences in overall survival rates to show up can delay approval up to 10 years or more, blocking patients’ access to potentially helpful therapies and driving up the costs of developing drugs.
2 Kantarjian et al. (2013).
3 Yin et al. (2012).
4 Lakdawalla et al. (2010).
5 Lu et al. (2012).

Want More Value from Prescription Drugs? 41
Recognizing these issues, regulators around the world, including the Food and Drug Administration, have started to consider “surrogate endpoints” when evaluating new drugs.6 One such biological endpoint is tumor size, which is predictive of clinical outcomes like survival. In 2006, the FDA approved Sutent for treatment of both gastrointestinal and kidney cancers based on the drug’s ability to slow tumor growth.7 More conservative European regulators also allow surrogate endpoints, at least in conjunction with other outcome measures, when approving a drug.8
But approval and reimbursement are very different decisions. Progress on the approval front has collided with a hidebound reimbursement system. Even if the FDA approves a drug based on surrogate endpoints, insurers may be reluctant to reimburse for a treatment that hasn’t yet demonstrated a survival benefit. This problem is exacerbated in cases where the drug is very expensive.
Consider the case of the immunotherapy drug Provenge for prostate cancer, which costs $93,000 for a course of treatment. The FDA denied approval in 2007 despite a positive recommendation from its own advisory panel, only to approve the drug 3 years later. It took another year before Medicare would pay for it. The official reason given for Medicare’s holdup was to evaluate the drug’s off-label uses, but doctors, including the American Society of Clinical Oncology, read the lack of immediate coverage as a consequence of the drug’s high price tag.9
So what can be done?
Determining a drug’s value at its launch is difficult. Over time, for example, we sometimes learn that a drug can help treat conditions not considered at the time of its debut, which should theoretically increase its value. In fact, the FDA approved imatinib to treat the most common form of pediatric cancer, acute lym- phoblastic leukemia, in January.10 This expanded use of imatinib may make that drug’s value higher than our $88 billion estimate for CML alone.
But the current reimbursement system is simply not designed to absorb this new information and, as a result, is horribly inefficient in fairly matching a drug’s value to its price. Think of a stock market insensitive to new information: On what basis would you determine the value of a company?
If regulators raised prices with evidence of added value, manufacturers would have less incentive to set high prices at a drug’s launch. And regulators could argue for lower reimbursement until new clinical evidence arose to support

6 Garrido and Mangiapane (2009).
7 Food and Drug Administration (2006).
8 Garrido and Mangiapane (2009).
9 Pharmalot (2010).
10 Wall Street Journal (2013).

42 Dana P. Goldman et al.
higher prices. Drug prices would thus reflect their underlying value, and products would get to market sooner.
But right now, insurers and regulators such as Medicare are trapped on the wrong path, where no one has an incentive to adjust prices. A private insurer won’t offer to pay more than its competitors if a drug becomes more valuable, so prices don’t rise. And Medicare follows private insurers by reimbursing based on average sales prices. In economic parlance, we are stuck at a bad equilibrium. We might look to Medicare, as the largest payer, to break out of the mold since, according to the Government Accountability Office (GAO), cancer drugs comprise over 40 percent of the most expensive medications under Medicare Part B. With Medicare taking the lead, private insurers might be forced to follow.
In many respects, we are winning the war on cancer, with patients living longer thanks largely to innovative treatments. Making cancer drug prices sensi- tive to new information, whether beneficial or disappointing, would help ensure continued success in saving lives.

Previously published online July 26, 2013
References and further reading
Food and Drug Administration. 2006. “FDA Approves New Treatment for Gastrointestinal and Kidney Cancer.” FDA News Release P06-11. http://www.fda.gov/NewsEvents/Newsroom/ PressAnnouncements/2006/ucm108583.htm.
Garrido, Marcial V., and Sandra Mangiapane. 2009. “Surrogate Outcomes in Health Technology Assessment: An International Comparison.” International Journal of Technology Assessment in Health Care 25 (3): 315–322. http://journals.cambridge.org/action/display Abstract?fromPage=online&aid=5961384.
Government Accountability Office. 2012. “Medicare: High-Expenditure Part B Drugs.” GAO-13-46R. http://www.gao.gov/assets/650/649459.pdf.
Kantarjian, Hagop and experts in chronic myeloid leukemia. 2013. “The Price of Drugs for Chronic Myeloid Leukemia (CML); A Reflection of the Unsustainable Prices of Cancer Drugs: From the Perspective of a Large Group of CML Experts.” Blood 121 (22): 4439–4442. http://bloodjournal.hematologylibrary.org/content/early/2013/04/23/blood-2013-03- 490003.full.pdf+html.
Lakdawalla, Darius, Eric Sun, Anupam Jena, Carolina Reyes, Dana Goldman, and Tomas Philipson. 2010. “An Economic Evaluation of the War on Cancer.” Journal of Health Economics 29 (3): 333–346. http://www.sciencedirect.com/science/article/pii/ S0167629610000214.
Lu, Yang, John Penrod, Neeraj Sood, Sarah Woodby, and Tomas Philipson. 2012. “Dynamic Cost-Effectiveness of Oncology Drugs.” American Journal of Managed Care 18: S249–S256. http://www.ajmc.com/publications/supplement/2012/a386_12nov_ oncology/a386_12nov_onclogy_lu_s249.

Want More Value from Prescription Drugs? 43
Pharmalot. 2010. “Oncologists Criticize CMS for Provenge Review.” http://www.pharmalive. com/oncologists-criticizes-cms-provenge-review.
Wall Street Journal. 2013. “FDA Approves New Use for Cancer Drug.” Accessed January 25. http://online.wsj.com/article/SB10001424127887323539804578264073478252766.html.
Yin, Wesley, John Penrod, Ross Maclean, Darius Lakdawalla, and Tomas Philipson. 2012. “Value of Survival Gains in Chronic Myeloid Leukemia.” American Journal of Managed Care 18: S257–S264. http://www.ajmc.com/publications/supplement/2012/A386_12nov_ Oncology/A386_12nov_Onclogy_Yin_S257to64.

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Criteria
Poor / unacceptable
/ Not attempted Requires further development) / needs improvement
Acceptable / Satisfactory / Proficient
Good / Well done Very good / exceeds expectations Excellent / exemplary / exceeding high standard
Question 1 Accessing Criterion Discipline Specific Knowledge and Capabilities; Total Marks: 8
Provides an explanation that is not consistent with the existing economic theories or/and fails to establish the link between the case study and the relevant economic theories.
Furthermore, summary of the of the given article is not coherent and provide incorrect interpretation.

(0 – 2 marks)
Provides an explanation that demonstrates some ability in establishing the link between the case study and the existing economic theories.
Furthermore, summary of the of the given article may be coherent but provide incorrect interpretation

(2.1 – 3.9 marks)
Providing an explanation that demonstrates a good ability in establishing the link between the case study and the existing economic
theories. However, the explanation also demonstrates superficial knowledge of the existing economic
theories. Furthermore, summary of the of the given article is coherent, and provide correct interpretation.

(4 – 4.7 marks) Providing an explanation that demonstrates a competent knowledge in establishing the link between the case study and the existing economic theories. Also demonstrate the ability of accurate understanding of the theories.
Furthermore, summary of the of the given article is coherent, and provide correct interpretation. Providing an explanation that demonstrates a competent knowledge in establishing the link between the case study and the existing economic theories. Also demonstrate the ability of accurate understanding of the theories.
Proficient with the interpretation of one perspective.
Furthermore, summary of the of the given article is coherent, and provide correct interpretation. Demonstrating the depth of knowledge in establishing the link between the case study and the existing economic theories. Also demonstrate the ability of accurate understanding of the theories.
Proficient with the interpretation of different perspectives.
Furthermore, summary of the of the given article is coherent and provide correct interpretation
(4.8 – 5.5 marks) (5.6 – 6.3 marks) (6.4 – 8 marks)
Question 2 Accessing Criterion Critical Poor or missing analysis of theories; Inadequate demonstration of Mostly adequate demonstration of critical General demonstration of Accurate demonstration of Scholarly demonstration of

Thinking (Evaluation Inconsistent critical analysis analysis of theories and critical analysis critical analysis of critical analysis of
of argument or of relevant models, yet some of theories and theories and theories and
Information/theories); argument with no theories and inconsistencies remain in models. models. models.
Total Marks:8 supporting models; Poor the arguments. Discriminates Systematically Systematically and
evidence. Always reasoning and Discriminates between between discriminates methodically
confuses facts and argument with no assertion or personal assertion or between assertion discriminates
personal opinion supporting opinion and information personal opinion or personal between assertion
and/or emotion. evidence. Often substantiated by and information opinion and or personal opinion
Information is taken confuses facts evidence. substantiated by information and information
from source(s) with and personal robust evidence. substantiated by substantiated by
no or little opinion and/or (4 – 4.7 marks) Information is robust evidence. robust evidence.
interpretation. emotion. taken from Information is Information is
source(s) with taken from taken from
(0 – 2 marks) (2.1 – 3.9 marks) appropriate source(s) with a source(s) with a
interpretation. high level of very high level of
Provides relevant interpretation. interpretation.
supporting Provides relevant Provides relevant
diagrams (e.g. diagrams (e.g. diagrams (e.g.
illustrations, illustrations, illustrations,
charts, graphs charts, graphs charts, graphs etc.).
etc.). etc.).
(6.4 – 8 marks)
(4.8 – 5.5 marks) (5.6 – 6.3 marks)
Demonstrates no Demonstrates a Demonstrates Demonstrates a Demonstrates a Demonstrates
ability to limited ability to satisfactory ability to good ability to very good ability exceedingly high
Question 3 Accessing Criterion (Problem Solving); Total Marks:8 independently construct a clear statement about a complex problem or research hypothesis. independently construct a clear and statement about a complex problem or independently and expertly construct a clear statement about a complex problem or research hypothesis with independently and expertly construct a clear statement about a complex problem to independently and expertly construct a clear and insightful statement about a ability to independently and expertly construct a clear and insightful
Proposes no research evidence. Creates an or research complex problem statement about a
solutions or ideas to hypothesis. acceptable new object, hypothesis with or research complex problem

address new and Proposes solution, or idea; evidence of hypothesis with or research
complex problems. inappropriate Proposes one or more reasonably evidence of hypothesis with
Demonstrates no solutions or ideas acceptable creative relevant relevant evidence of all
evidence of initiative to address new solutions to existing contextual contextual factors. relevant
in planning and and complex and/or new situations in factors. Proposes Create a brilliant contextual factors.
identifies no viable problems. professional practice; also reasonable innovative new Create a ground-
approaches for Demonstrates the solution reflects adaptations of object, solution or breaking
solving complex limited evidence proficient judgement of existing objects, idea; Proposes innovative new
problems. of initiative in the pros and cons of the solutions or ideas adaptations of object, solution or
planning and various options. to address new existing objects, idea; Proposes
(0 – 2 marks) identifies few and complex solutions or ideas adaptations of
viable approaches (4 – 4.7 marks) problems to address new and existing objects,
for solving Demonstrates a complex solutions or ideas
complex very high level problems, reflects to address new and
problems. of initiative in on and evaluates complex problems,
planning and the creative reflects on and
(2.1 – 3.9 marks) identifies process and evaluates the
multiple product. Skilfully creative process
approaches for extends an and product.
researching and existing idea. Outstandingly
solving complex Demonstrates a extends an existing
problems. high level of idea Demonstrates
Provide relevant initiative in a very high level
diagrams. planning and of initiative in
identifies multiple, planning and
(4.8 – 5.5 marks) innovative identifies multiple,
approaches. innovative
Provide relevant approaches.
diagrams. Proposes one or
more exemplary
(5.6 – 6.3 marks) creative, novel
solutions to

existing and/or new situations in professional practice. Provide relevant diagrams.

(6.4 – 8 marks)

Question 4 Accessing Criterion Critical Thinking (Existing Knowledge, Research or/and Views); Total Marks:8
Poor or missing analysis of theories. Always presents information from inappropriate sources representing very limited points of view or approaches.

(0 – 2 marks)

Inadequate demonstration of critical analysis of relevant theories and models; Poor reasoning and argument with no supporting evidence. Often presents information from inappropriate sources representing limited points of view or approaches.

(2.1 – 3.9 marks)
Mostly adequate demonstration of critical analysis of theories and models, yet some inconsistencies remain in the arguments. Presents information from relevant sources representing various points of view or approaches, and demonstrating a mastery of theoretical knowledge.

(4 – 4.7 marks) General demonstration of critical analysis of theories and models. Presents complex information from relevant sources representing various points of view or approaches, and demonstrating a mastery of theoretical knowledge.
Provides diagrams explaining one critical aspect of the theories. Accurate demonstration of critical analysis of theories and models.
Synthesises information and knowledge from a range of relevant sources representing various points of view, approaches and demonstrating a high level of mastery of theoretical knowledge.
Provides diagrams explaining different critical aspects of the Scholarly demonstration of critical analysis of theories and models.
Synthesises complex information and knowledge from a broad range of relevant sources representing various points of view, approaches and demonstrating a high level of mastery of theoretical knowledge and expert understanding of recent developments in
(4.8 – 5.5 marks) theories. the discipline and/or area of

(5.6 – 6.3 marks) professional practice. Provides diagrams explaining different critical aspects of the theories.

(6.4 – 8 marks)

Question 5 Accessing Criterion (Global Citizenship); Total Marks:8
Demonstrates no understanding of the complexity of global/ cultural / ethical perspectives or of professional practice.

(0 – 2 marks)
Demonstrates limited understanding of the complexity of global/ cultural / ethical perspectives or of professional practice.

(2.1 – 3.9 marks)
Demonstrates acceptable level of understanding of the complexity of global/ cultural / ethical perspectives or of professional practice.
Provide diagrams and relevant figures to make a consistent argument with good reasoning.

(4 – 4.7 marks) Demonstrates a high level of understanding of the complexity of global/ cultural / ethical perspectives or of professional practice. Provide diagrams and relevant figures to make a consistent argument with good reasoning.
Demonstrates very good sophisticated understanding of the complexity of global/ cultural / ethical perspectives or of professional practice. Provide diagrams and relevant figures to make a consistent argument with good reasoning. Demonstrates extraordinarily sophisticated and deep understanding of the complexity of global/ cultural / ethical perspectives or of professional practice. Provide diagrams and relevant figures to make a consistent argument with good reasoning.
(4.8 – 5.5 marks) (5.6 – 6.3 marks)
(6.4 – 8 marks)
Overall Score 0 or More 11 or more 20 or more 24 or more 28 or more 32 or more

FAIL (N)
FAIL (N)
PASS (P)
CREDIT (C) DISTINCTION (D) HIGH DISTINCTION (HD)

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