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date: 12 July 2020

Abstract and Keywords

This article begins by describing the many challenges of constructing meaningful price indexes in medical markets. It examines practical issues associated with how prescription drug price indexes are constructed in the United States and how they may be used to decompose the growth in spending into price and quantity components. It shows that drug price indexes are very sensitive to a number of modelling decisions, such as whether to use price per day of treatment, price per prescription, or price per package; whether to define a product narrowly (e.g., with a national drug code [NDC] that represents a product) or broadly (e.g., as a molecule, which includes both the patented drug and any generic entrants); and how often to change the weights assigned to each item in the basket. For example, between 2003 and 2005 the narrow NDC-based price index grew about twice as fast as the broader molecule-based index due to patent expirations and switching to generic alternatives during this period.

Keywords: price index, prescription drugs, medical markets, drug price

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