Government financing of drug consumption in Norway and the markets for pharmaceuticals

The starting point is the special structure of the market for drugs: The patient is the principal, his or her doctor is the agent that decides on drugs. The doctor may have developed long-lasting relationships to certain producers. Third party financing i s implied by the reimbursements of medical expenses made by the government. The pharmaceutical industry is global, R&D intensive and with relatively few firms participating in the market. The market for pharmaceuticals is therefore a good example of marke ts studied within the field of economics called Industrial Organization, in which limited competition and interactions between firms, markets and consumers agents are essential elements. In recent years an increasing interest among empirical oriented rese archers has been directed towards analysing pharmaceutical markets, Berry et al (1994) and Reiss and Wolak (2005). Our project attempts at making a contribution to this empirical oriented research of pharmaceutical markets. In doing so we also attempt t o develop better tools for the government to control the by now rapid increase in drug expenses covered by the government. A novel feature of this project is the access to unique data. Since January 2004 all prescriptions in Norway are observed at an indi vidual level. The observations include information about the diagnosis of the patient, other characteristics of the patient, characteristics of the doctor, pharmacies and producers. Our empirical models enable us to calculate to what extent generic prod ucts replace branded products, the market power of firms and how it develops over time, the value to the society at large of the entry of new products, the value of products exiting from the Norwegian market and the fiscal impacts on government budget of different regulatory interventions in the market.