DHS H2 ECONS P1(with Mark Scheme)

1    Name: Index Number: Class: DUNMAN HIGH SCHOOL Preliminary Examination Year 6 ECONOMICS 9732/1 (Higher 2) Paper 1 25 September 2015 2 hours 15 minutes Additional Materials: Writing Papers READ THESE INSTRUCTIONS FIRST Answer all questions. Write your name and class on all pieces of work handed in. Write in dark blue or black pen on both sides of the paper. You may use a soft pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid. The number of marks is given in brackets [ ] at the end of each question or part question. At the end of the examination, fasten all your work securely into two separate bundles (one for Question 1 and one for Question 2). This document consists of 7 printed pages including this cover page. [Turn over

2    Answer all questions. Question 1 The US Pharmaceutical Industry Table 1: Healthcare and overall inflation rate in the US Year 2012 2013 2014 Healthcare Inflation (%) 3.5 3.3 2.1 Overall Inflation (%) 1.7 1.5 0.8 Source: www.ycharts.com, and www.usinflationcalculator.com Extract 1: How does growth in healthcare costs affect the US consumers? When the price of a gallon of gas or a pound of hamburger rises, consumers can anticipate how the increase will affect what they have left to spend on other goods. It is far less obvious to consumers how increases in healthcare costs hit their pockets due to the uncertainties of healthcare needs. In 2011 when US healthcare costs increased by 3.5 percent, US healthcare expenditure per capita increased by 3.1 percent. According to the November 2013 issue of the Journal of the American Medical Association, the primary reason for the rise in healthcare costs in 2011 accounting for 91 percent, was an increase in the price of drugs, medical devices, and hospital care. In 2013, when US healthcare costs increased by 3.3 percent; US healthcare expenditure per capita increased by 3.4 percent. Back in 2009, even when the US economy plunged into recession and millions lost their jobs, healthcare costs grew by 4 percent and healthcare expenditure per capita grew by 2.9 percent. Although these numbers are striking, they may not be easily translated into figures that are meaningful to individual Americans. Sources: Various Table 2: Top five US pharmaceutical companies: share of pharmaceutical industry Share of pharmaceutical industry (by value of US sales) 2012 (%) Novartis 20.0 Merck 19.8 Pfizer 18.2 AstraZeneca 17.3 Teva 16.3 Source: www.statista.com, 26 May 2014

3    Extract 2: Pricing strategies of US pharmaceutical companies Once drugs reach the mass market, they are often relatively inexpensive to produce. Therefore, selling these drugs at lower prices outside the US can still be good for business. However, these drugs could find their way back to the US market and undercut the higher price set initially. Pharmaceutical companies tr y to prevent this by selling drugs at a lower price in developing countries, while promoti ng regulations barring re-importation of these drugs. A recent trend observed is that prices paid for a drug vary depending on how well it works for some set of patients. Expensive cancer drugs may help with a variety of different cancers but often work better for one in particular. For instance, Tarceva, a cancer drug extends survival of lung cancer patients by months while survival of pancreatic cancer patients is only by weeks. Sources: Forbes, 12 December 2013 & LDI, University of Pennsylvania, 11 June 2015 Extract 3: Hot drugs show sharp price hikes On May 30 last year, the price for a bottle of Lantus diabetes medication went up by 16.1 percent. On the next day, Lantus’s direct competitor, Levemir, also registered a price increase of 16.1 percent. The pattern repeated itself six months later when Lantus was marked up 11.9 percent, and Levemir, matched again exactly. Contrary to the consumer’s ideal in which rivals cut prices to grab market share, competitors in branded pharmaceuticals often drive each other’s prices higher. Prescription spending rose 13 percent last year to $374 billion, according to IMS Health Holdings Inc. The price of Lantus is set independently, according to a company statement. Experts pointed that if firms make independent price decisions not due to collusion, it could have been a business decision to follow price increments of their competitors. It was also noted that greater demand for diabetes medication is helping to drive price increases. Source: Bloomberg, 6 May 2015 Extract 4: Pharmaceutical industry gets high on fat profits Pharmaceutical companies have developed the majo rity of medicines known to humankind, but they have profited handsomely from doing so, and not always by legitimate means. Pharmaceutical companies justify the high prices they charge by arguing that their research and development (R&D) costs are huge even though t heir marginal cost of manufacturing is just a tiny fraction of the price charged. On average, only three in 10 drugs launched are profitable. Many more do not even make it to market. Pharmaceutical companies however, spend far more on marketing drugs - in some cases twice as much - than on developing them. The industry also argues that the wider value of the drug needs to be considered. Drugs do save money for consumers over the longer term. Take hepatitis C, a virus that kills people and used to require a liver transplant; with a 12-week course of a drug, 90 percent of people are cured, will never need surgery or looking after, and can continue to support their families. Even then, critics argue that just because you can charge a high price for something does not necessarily mean you should, especially when it comes to health.

4    Big pharmaceutical companies also say they only have a limited time in which to make profits. Patents are generally awarded for 20 years, but 10 to 12 of those are typically spent developing the drug at a high cost. This leaves eight to 10 years to make money before the formula can be taken up by generic drug companies, which sell the medicines for a fraction of the price. Once this happens, sales fall by more than 90 percent. This is why pharmaceutical companies go to extraordinary lengths to extend their patents. New formulations and combining two existing drugs to give a wider use are some legal ways to eke out patents. Until recently, paying bribes to doctors to prescribe their drugs was commonplace, although this is now illegal in many places. Rules on gifts, educational grants and sponsoring lectures are less clear cut. A recent study found that doctors in the US receiving payments from pharmaceutical companies were twice as likely to prescribe their drugs. This may change when new rules force doctors to disclose all gifts and payments received. Pharmaceutical companies have also been accused of colluding with chemists to overcharge for their medicines and of publishing trial data that highlight the positive at the expense of the negative. They have also been found guilty of mis-branding and wrongly promoting various drugs, and have been fined billions as a result. The rewards are so great, it would seem, that pharmaceutical companies have continually been prepared to push the boundaries of legality. No wonder, then, that the World Health Organisation (WHO) has talked of the "inherent conflict" between the legitimate business goals of the drug companies and the medical and social needs of the wider public. Source: BBC News, 6 November 2014 Questions a) (i) Compare US healthcare inflation rate with the US overall inflation rate between 2012 and 2014. [2] (ii) Using the concept of opportunity cost, explain the effect of an increase in healt