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The relationship of drug reimbursement with the price and the quality of pharmaceutical innovations

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  • García-Alonso, M. D. C.
  • Mariñoso, B. G.

Abstract

This paper studies the strategic interaction between pharmaceutical firms' pricing decisions and government agencies' reimbursement decisions which discriminate between patients by giving reimbursement rights to patients for whom the drug is most effective. We show that if the reimbursement decision preceeds the pricing decision, the agency only reimburses some patients if the private and public health benefits from the new drug diverge. That is, when (i) there are large externalities of consuming the drug and (ii) the difference in costs between the new drug and the alternative treatment is large. Alternatively, if the firm can commit to a price in advance of the reimbursement decision, we identify a strategic effect which implies that by committing to a high price ex ante, the firm can force a listing outcome and make the agency more willing to reimburse than in the absence of commitment.

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File URL: http://openaccess.city.ac.uk/1437/1/0502_garciaalonso%2Dgarciamarinoso.pdf
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Bibliographic Info

Paper provided by Department of Economics, City University London in its series Working Papers with number 05/02.

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Date of creation: 2005
Date of revision:
Handle: RePEc:cty:dpaper:05/02

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Postal: Department of Economics, Social Sciences Building, City University London, Whiskin Street, London, EC1R 0JD, United Kingdom,
Phone: +44 (0)20 7040 8500
Web page: http://www.city.ac.uk
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Related research

Keywords: Pharmaceutical industry; innovation; health policy;

References

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  1. Michael Dickson & Jeremy Hurst & Stéphane Jacobzone, 2003. "Survey of Pharmacoeconomic Assessment Activity in Eleven Countries," OECD Health Working Papers 4, OECD Publishing.
  2. Francis, Peter J., 1997. "Dynamic epidemiology and the market for vaccinations," Journal of Public Economics, Elsevier, vol. 63(3), pages 383-406, February.
  3. Olmstead, Todd & Zeckhauser, Richard, 1999. "The menu-setting problem and subsidized prices: drug formulary illustration," Journal of Health Economics, Elsevier, vol. 18(5), pages 523-550, October.
  4. Joan-Ramon Borrell, 2003. "Drug Price Differentials Caused by Formularies and Price Caps," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 10(1), pages 35-48.
  5. Hoel, Michael & Saether, Erik Magnus, 2003. "Public health care with waiting time: the role of supplementary private health care," Journal of Health Economics, Elsevier, vol. 22(4), pages 599-616, July.
  6. Laux, Fritz L., 2000. "Addiction as a market failure: using rational addiction results to justify tobacco regulation," Journal of Health Economics, Elsevier, vol. 19(4), pages 421-437, July.
  7. Mark Duggan & Fiona Scott Morton, 2004. "The Distortionary Effects of Government Procurement: Evidence from Medicaid Prescription Drug Purchasing," NBER Working Papers 10930, National Bureau of Economic Research, Inc.
  8. Calcott, Paul, 2000. "Health care evaluation, utilitarianism and distortionary taxes," Journal of Health Economics, Elsevier, vol. 19(5), pages 719-730, September.
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