Abstract

Increases in drug prices and drug spending are of concern to health systems worldwide. This has naturally driven policy interest and discussion around drug pricing and the need to balance affordability with sustaining innovation. Some of these discussions are being shaped by the value-based systems already in use in some industrialized countries. There are also ongoing policy discussions about branded drug prices in the United States. There are several issues that are raised when discussing drug pricing and potential methods to ensure affordability and accessibility without providing disincentives to commercial development of innovative drugs, including the costs and uncertainty of drug development and the relationship of prices to drug value.¹

Economic theory tells us that, in a free market, prices are determined at the intersection of supply (which increases with higher prices) and demand (which decreases with higher prices). Supply at different prices reflects the amount suppliers are willing to supply. Demand at different prices reflects the value of the product to the consumer. In a competitive free market, where there are many suppliers and consumers, limited product development costs, and no barriers to entry, the market price will generally be reached through the intersection of supply and demand at a level equal to the cost of goods, plus a return sufficient for the suppliers to remain profitable. In a free market monopoly, where there is only 1 supplier because of high barriers to entry (eg, patent protection), the supplier will set a price that maximizes their profits based on the knowledge that as the price is raised, the demand for their goods will likely fall.