TY - JOUR AU - Danzon,Patricia M. AU - Towse,Adrian K. AU - Mestre-Ferrandiz,Jorge TI - Value-Based Differential Pricing: Efficient Prices for Drugs in a Global Context JF - National Bureau of Economic Research Working Paper Series VL - No. 18593 PY - 2012 Y2 - December 2012 UR - http://www.nber.org/papers/w18593 L1 - http://www.nber.org/papers/w18593.pdf N1 - Author contact info: Patricia M. Danzon Health Care Management Department The Wharton School University of Pennsylvania 3641 Locust Walk Philadelphia, PA 19104 Tel: 215/898-0694 Fax: 215/573-2157 E-Mail: danzon@wharton.upenn.edu Adrian K. Towse Office of Health Economics Southside, 7th Floor 105 Victoria St. London SW1E 6QT United Kingdom E-Mail: atowse@ohe.org Jorge Mestre-Ferrandiz Office of Health Economics Southside, 7th Floor 105 Victoria St. London SW1E 6QT United Kingdom E-Mail: jmestre-ferrandiz@ohe.org AB - This paper analyzes pharmaceutical pricing between and within countries to achieve second best static and dynamic efficiency. We distinguish countries with and without universal insurance, because insurance undermines patients’ price sensitivity, potentially leading to prices above second-best efficient levels. In countries with universal insurance, if each payer unilaterally sets an incremental cost effectiveness ratio (ICER) threshold based on its citizens’ willingness to pay for health; manufacturers price to that ICER threshold; and payers limit reimbursement to patients for whom a drug is cost-effective at that price and ICER, then the resulting price levels and use within each country and price differentials across countries are roughly consistent with second best static and dynamic efficiency. These value-based prices are expected to differ cross-nationally with per capita income and be broadly consistent with Ramsey Optimal Prices. Countries without comprehensive insurance avoid its distorting effects on prices but also lack financial protection and affordability for the poor. Conditions for efficient pricing in these self-pay countries include that consumers are well-informed about product quality and firms can price discriminate between rich and poor subgroups within and between countries. ER -