Value-Based Differential Pricing: Efficient Prices for Drugs in a Global Context
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.
This research was supported in part by Eli Lilly Inc.'s Project on Fair Prices for Pharmaceuticals. We would like to thank the sponsor for this support. The conclusions and views expressed here are not necessarily those of Eli Lilly Inc, nor of the National Bureau of Economic Research.
Adrian K. Towse
The Office of Health Economics receives research funding from the Association of the British Pharmaceutical Industry.Jorge Mestre-Ferrandiz
The Office of Health Economics receives research funding from the Association of the British Pharmaceutical Industry.
Patricia Danzon & Adrian Towse & Jorge Mestre‐Ferrandiz, 2015. "Value‐Based Differential Pricing: Efficient Prices for Drugs in a Global Context," Health Economics, John Wiley & Sons, Ltd., vol. 24(3), pages 294-301, 03. citation courtesy of