Rational Actors at Work

This article in the WSJ reports that big Pharma is redirecting its sales effort. It contains at least two good examples of the principle-agent relationship.

SUMMARY: Big health systems are putting distance between their doctors and drug salespeople, making it harder for pharmaceutical companies to get quick acceptance of medicines and putting pressure on profits.

CLASSROOM APPLICATION: The article has two principal-agent relationships for instructors to present, both related to pharmaceutical choices. In the first case, physicians have authority to make prescription decisions. In this scenario, "Drug companies used to send armies of sales reps to woo individual doctors after introducing new drugs like these.... Doctors were often more interested in a drug's clinical-trial results than cost." In the second, hospitals decide systemwide formularies that constrain doctor prescription choices. With incentives implemented under the Affordable Care Act hospital systems are incorporating prescription costs and costs of care related to prescriptions when evaluating drugs.

QUESTIONS: 
1. (Advanced) Why are physicians when making prescription decisions susceptible to tickets to sporting events, meals, and freebies offered by pharmaceutical firms?

2. (Introductory) What is the mixed blessing noted in the article about the use of formularies?

3. (Advanced) What is the incentive created by the Affordable Care Act for hospitals to account for both benefits and costs in placing drugs on formularies? Note: While the article does not mention the ACA explicitly, it does note the incentives created by the ACA.

Reviewed By: James Dearden, Lehigh University