Consider your answer to question 3 above. Do you believe that the source of the reduction in price rivalry that you identified should increase the profits of the Part D insurer? If so, why? If not, why not?

Aradrim is a hypothetical drug that is the only treatment for a rarely-occurring but life- threatening complication from surgery. This complication affects only a few thousand patients a year. Aradrim's patent expired almost a decade ago and therefore any company is free to manufacture and sell this molecule. Even though aradrim is not protected by a patent, it is currently manufactured by a single pharmaceutical firm called MSP. Each aradrim treatment costs MSP only a few dollars to manufacture. MSP sells aradrim for thousands of dollars per treatment.

You are the manager of a rival pharmaceutical company that also produces generic (off- patent) drugs using the same basic manufacturing technology that is used by MSP. Your R&D team is confident that you could also produce aradrim, although it would require a substantial investment to ramp up production capacity and to obtain the necessary generic drug approval from the U.S. Food and Drug Administration (FDA). Your firm's market research shows that customers would view your aradrim product as being identical to aradrim made by MSP.

You do not know for sure how large your sales would be if you entered the aradrim market. As a benchmark, your analysts forecast that if you were able sell 50% of the current market volume at the current market price, you would be able to recoup this investment within 5 to 7 years.

Question:Should you pursue this opportunity? If so, why? If not, why not? If uncertain, what would you need to know to make a decision?(Hint: Think strategy, not finance. This question is not about calculating an NPV.)

In the United States, public health insurance is generally available only to people who are old, disabled, or who earn low incomes. As a result, most Americans must purchase private health insurance.2Health insurance companies contract with doctors and hospitals to

2Some people's health insurance is paid for in part by their employers, but most people have to pay a substantial part themselves. How much depends on the plan they choose.

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provide care for the individuals they insure. The insurance company and the hospital negotiate the fees that the insurance company pays for this care.

Some insurance plans offer individuals a limited choice of doctors and hospitals they can use. These plans can be purchased at lower prices than "large network" plans. "Large network" plans are offered at higher prices, but include most hospitals - including the very best - in an individual's region. Consumers choose insurance plans based on both price and the size and quality of the hospital network.

Large academic medical centers (AMCs), such as Northwestern Memorial, offer high quality care, especially for patients with very complex, serious, or rare diseases. In recent years, AMCs have made large investments in quality. For example, they have aggressively recruited the best physicians and hired large medical support staffs. They have purchased expensive, state-of-the-art medical equipment, some of which is for extremely specialized uses. They have also improved the luxury and comfort of private rooms and lobby interiors. Local community hospitals (which make up the vast majority of hospitals in any particular region) have not made similar investments.

Health care is very expensive. Health insurance for the average American family now costs approximately $20,000 per year.

Question:Why might AMCs believe that their profits are likely to increase as a result of the investments they have made? Are there investments an AMC could make that would not increase their profits? Explain.

7.Consider a metropolitan hospital market that is dominated three systems (i.e. these firms satisfy more than 80 percent of demand in the market). System A has facilities located throughout the entire market and enjoys approximately a 30 percent market share. System B has facilities in the city and northern suburbs, while the System C has facilities in the city and the western suburbs. The market has a number of large employers - and employees live in the center city as well as both the Northern and Western suburbs. On average, employees living in the suburbs commute 30-45 minutes into the city, and it is hard to drive between the suburbs quickly.

This market has two dominant insurers and a few smaller insurance plans that earn little profits. In addition, System B recently began offering a provider sponsored insurance plan where they are both the insurer and the healthcare provider. As part of this insurance plan, System B offers "value based" care where patients are required to receive all healthcare within the system and practitioners focus on providing lower cost care. Despite successfully achieving a lower cost basis for the patients in the provider sponsored plan compared to patients covered dominant insurer, to date most of the enrollees for that plan come from Medicare Advantage. Despite extensive marketing efforts. System B has been largely unsuccessful selling this plan to employers in the market.

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System B proposes to purchase System C and integrate its facilities into its provider sponsored insurance plan. After reviewing clinical practices at System C, the managmement of System B believes the assets of this system are well suited to the practice style of their value-based insurance plan.

Question:Do you believe System B's acquisition of System C will ultimately increase its profits? Who will be the primary beneficiaries of this merger? How exactly will those parties benefit? Would you approve this merger?

8.HappyDrugCo manufactures LittleHappy, a pill that is recommended to treat mild depression. This drug has been a blockbuster success for the firm but its intellectual property protection (i.e. its controlling patents) is expiring in three years.

It has another potential product in development, BigHappy, that it is considering launching a Phase III trial for. This product also treats mild depression. It had very positive Phase II results - in particular there was evidence of both a similar effect on depression symptoms and a reduction in some annoying (but not debilitating) side effects for LittleHappy.

Your team is considering two strategies for developing this product:

Clinical Strategy 1: Your clinical scientists believe that they can complete a clinical trial within 2 years that convincingly demonstrates BigHappy is effective at treating mild depression. However, this trial would not be able to provide evidence that BigHappy is significantly different from LittleHappy on any dimension.

Clinical Strategy 2:Your clinical scientists have a second plan to complete a trial that demonstrates both that BigHappy is as effective as LittleHappy and confirms that reduction in side effects compared to LittleHappy. This trial would take four years to complete.

In considering your launch of BigHappy, you must decide which of these two clinical strategies to pursue. You are only able to pursue one of these two strategies. As we discussed in class, the clinical strategy should inform your advertising, physician detailing, and other commercialization decisions.

Please identify what you believe is the biggest commercial advantage and disadvantage of pursuing each strategy (Hint: An optimal answer will consider the incentives of all of the other players in the value chain).