Essays on Pharmaceutical Pricing and Physician Incentives

The rapid increase in healthcare expenditure is a challenge faced by many countries. Among all factors driving high healthcare costs, the pharmaceutical industry represents a significant and growing share of healthcare spending. The rising cost of pharmaceutical products has become a pressing policy challenge, with governments under pressure to adopt direct or indirect controls on drug prices to ensure access to affordable medicines. In this context, the first chapter of my thesis compares an auction-based drug pricing mechanism used in China with Bertrand competition and reference pricing. Unlike standard auctions where the ``prizes'' are fixed, in China, auctions are used to determine the sole supplier of the drugs. The winner then faces a downward-sloping demand (prize) in the downstream market. This feature leads to auctions with variable prizes. I develop an empirical framework to estimate the demand for medicine and the manufacturing costs using novel data collected from a province's pharmaceutical procurements. Then, using counterfactual simulations, I find that the auction mechanism leads to lower prices than a laissez-faire Bertrand competition, albeit with a negligible effect on drug expenditures and welfare. However, a reference pricing policy can significantly reduce drug expenditures but also consumer welfare compared to the auction mechanism, leading to lower total welfare.

To address the challenge of rising healthcare costs, it is important to consider not only drug pricing mechanisms but also the behavior of physicians. As pointed out by Arrow (1963), a fundamental characteristic of the healthcare market is the agency relationship between physicians and patients, where physicians may face different incentives than patients. Therefore, in my second chapter, in joint work with Lichen Wang, I study the interaction between physicians and patients and how changes in the financial incentives of physicians influence treatment choices. Understanding the role of incentives is crucial to identify ways to control healthcare costs. By utilizing a unique exogenous policy change, in which the Chinese government mandated that all public hospitals sell medicines at wholesale prices, and a comprehensive individual-level insurance dataset, I find empirical evidence of physicians' excessive treatment. Furthermore, I document that physicians tend to steer patients away from medicines towards non-medicine based procedures as the latter increases physicians' payoff following the policy change.