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eight percent for those diagnosed with Stage IV cancer (NCCN).

There are other important reasons we decided to study colorectal cancer treat- ment. For most health conditions, if a physician writes a prescription for a drug, the patient takes the prescription to a pharmacy, the patient pays a co-payment or co-insurance rate, and the patient’s health insurance company pays the balance of the price. By observing the price (co-payment) patients face and their decisions, one could estimate patients’ demand for prescription drugs only for a portion of the demand curve, which would make it impossible to estimate consumers’ total willingness to pay for a product.

Most oncology drugs are infused into a patient intravenously in a physician’s office or an outpatient hospital clinic by a nurse under a physician’s supervision.5 Unlike drugs that are distributed through pharmacies, physicians (and some hos- pitals on behalf of their physicians) purchase oncology drugs from wholesalers or distributors (who have previously purchased the drugs from the manufacturers), store the drugs, and administer them as needed to their patients. Physicians then bill the patient’s insurance company for an administration fee and the cost of the drug. Although physicians are eventually reimbursed by health insurers, they do take temporary ownership of oncology drugs. As such, physicians face the pos- sible risk of not being reimbursed by health insurers and may incur substantial carrying costs. For example, a physician who pays $20,000 for the drugs in a patient’s regimen and experiences a three-month delay between when he acquires the drugs and when he is reimbursed by a health insurer would incur an inventory carrying cost of $533 at an interest rate of eight percent. Because we observe the full price that physicians pay for colorectal cancer drugs, we can estimate physi- cians’ demand for those drugs. If physicians act as agents for their patients, we indirectly observe patients’ willingness to pay for these drugs.

5Based on data from IMS Health, 59% of colorectal cancer drugs in the third quarter of 2005 were purchased by physician offices/clinics and 28% by hospitals. The remainder was purchased by retail and mail order pharmacies, health maintenance organizations, and long-term care facilities.

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