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Paying for pharmaceuticals: uniform pricing versus two-part tariffs

Author

Listed:
  • Kurt R. Brekke

    (Norwegian School of Economics)

  • Dag Morten Dalen

    (Norwegian Business School)

  • Odd Rune Straume

    (NIPE and Department of Economics, University of Minho and Department of Economics, University of Bergen)

Abstract

Two-part pricing (the Netflix model) has recently been proposed instead of uniform pricing for pharmaceuticals. Under two-part pricing the health plan pays a fixed fee for access to a drug at unit prices equal to marginal costs. Despite two-part pricing being socially efficient, we show that the health plan is worse off when the drug producer is a monopolist, as all surplus is extracted. This result is reversed with competition, as two-part pricing yields higher patient utility and lower drug costs for the health plan. However, if we allow for exclusive contracts, uniform pricing is preferred by the health plan.

Suggested Citation

  • Kurt R. Brekke & Dag Morten Dalen & Odd Rune Straume, 2021. "Paying for pharmaceuticals: uniform pricing versus two-part tariffs," NIPE Working Papers 01/2021, NIPE - Universidade do Minho.
    • Handle: RePEc:nip:nipewp:01/2021
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    References listed on IDEAS

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    Cited by:

    1. Kurt R. Brekke & Dag Morten Dalen & Odd Rune Straume, 2022. "The price of cost-effectiveness thresholds," NIPE Working Papers 5/2022, NIPE - Universidade do Minho.
    2. Brekke, Kurt R. & Dalen, Dag Morten & Straume, Odd Rune, 2023. "The price of cost-effectiveness thresholds under therapeutic competition in pharmaceutical markets," Journal of Health Economics, Elsevier, vol. 90(C).
    3. Straume, Odd Rune, 2023. "Therapeutic reference pricing and drug innovation incentives," Economics Letters, Elsevier, vol. 222(C).

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    More about this item

    Keywords

    Pharmaceuticals; Health Plans; Payment schemes;
    All these keywords.

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics

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