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Analysis of a pharmaceutical risk sharing agreement based on the purchaser's total budget

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  • Gregory S. Zaric
  • Bernie J. O'Brien

Abstract

Many public and private healthcare payers use formularies as a tool for controlling drug costs and quality. Although the price per dose is often negotiated as part of the formulary listing, payers may still face unlimited financial risk if demand is much greater than expected at the time of listing. The requirement for drug manufacturers to submit a budget impact analysis as part of the drug approval process suggests that payers are concerned not only with the cost effectiveness of a proposed drug but also with the potential increase in total expenditures that may result from new formulary listings. In this paper we define and analyze a model for financial risk sharing based on the total budget. Our analysis focuses on optimal decision making by manufacturers in the presence of a specific risk sharing agreement. We derive a manufacturer's optimal statement of budget impact and discuss several properties of the optimal solution. Copyright © 2005 John Wiley & Sons, Ltd.

Suggested Citation

  • Gregory S. Zaric & Bernie J. O'Brien, 2005. "Analysis of a pharmaceutical risk sharing agreement based on the purchaser's total budget," Health Economics, John Wiley & Sons, Ltd., vol. 14(8), pages 793-803, August.
    • Handle: RePEc:wly:hlthec:v:14:y:2005:i:8:p:793-803
    DOI: 10.1002/hec.976
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    1. repec:bla:glopol:v:8:y:2017:i::p:84-92 is not listed on IDEAS
    2. Levaggi, Rosella, 2014. "Pricing schemes for new drugs: A welfare analysis," Social Science & Medicine, Elsevier, vol. 102(C), pages 69-73.
    3. Ferrario, Alessandra & Kanavos, Panos, 2015. "Dealing with uncertainty and high prices of new medicines: A comparative analysis of the use of managed entry agreements in Belgium, England, the Netherlands and Sweden," Social Science & Medicine, Elsevier, vol. 124(C), pages 39-47.
    4. Simona Gamba & Paolo Pertile & Sabine Vogler, 2020. "The impact of managed entry agreements on pharmaceutical prices," Health Economics, John Wiley & Sons, Ltd., vol. 29(S1), pages 47-62, October.
    5. Park, Sun-Young & Han, Euna & Kim, Jini & Lee, Eui-Kyung, 2016. "Factors influencing the difference between forecasted and actual drug sales volumes under the price–volume agreement in South Korea," Health Policy, Elsevier, vol. 120(8), pages 867-874.
    6. A. Carletto & A. Cicchetti & S. Coretti & V. Moramarco & M. Ruggeri, 2019. "Money back guarantee? A cost–benefit framework of performance-based agreements (PBAs) for the reimbursement of pharmaceuticals," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 9(1), pages 89-101, March.
    7. Panos Kanavos & Olivier Wouters & Panos Kanavos & Alessandra Ferrario & Giovanni Tafuri & Paolo Siviero, 2017. "Managing Risk and Uncertainty in Health Technology Introduction: The Role of Managed Entry Agreements," Global Policy, London School of Economics and Political Science, vol. 8(s2), pages 84-92, March.
    8. Gregory J. Critchley & Gregory S. Zaric, 2019. "The impact of pharmaceutical marketing on market access, treatment coverage, pricing, and social welfare," Health Economics, John Wiley & Sons, Ltd., vol. 28(8), pages 1035-1051, August.
    9. Rick A Vreman & Thomas F Broekhoff & Hubert GM Leufkens & Aukje K Mantel-Teeuwisse & Wim G Goettsch, 2020. "Application of Managed Entry Agreements for Innovative Therapies in Different Settings and Combinations: A Feasibility Analysis," IJERPH, MDPI, vol. 17(22), pages 1-20, November.
    10. Jeremy D. Goldhaber-Fiebert & Lauren E. Cipriano, 2023. "Pricing Treatments Cost-Effectively when They Have Multiple Indications: Not Just a Simple Threshold Analysis," Medical Decision Making, , vol. 43(7-8), pages 914-929, October.
    11. Hammerman, Ariel & Greenberg, Dan, 2009. "Estimating the budget impact of new technologies added to the National List of Health Services in Israel: Stakeholders' incentives for adopting a financial risk-sharing mechanism," Health Policy, Elsevier, vol. 89(1), pages 78-83, January.
    12. Stefano Capri & Rosella Levaggi, 2008. "Drug pricing and risk sharing agreements," Working Papers 0810, University of Brescia, Department of Economics.
    13. Arieh Gavious & Dan Greenberg & Ariel Hammerman & Ella Segev, 2014. "Impact of a financial risk-sharing scheme on budget-impact estimations: a game-theoretic approach," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 15(5), pages 553-561, June.
    14. Biancalani, Francesco & Gnecco, Giorgio & Riccaboni, Massimo, 2022. "Price-volume agreements: A one principal/two agents model," European Journal of Operational Research, Elsevier, vol. 300(1), pages 296-309.
    15. Alessandra Ferrario & Diāna Arāja & Tomasz Bochenek & Tarik Čatić & Dávid Dankó & Maria Dimitrova & Jurij Fürst & Ieva Greičiūtė-Kuprijanov & Iris Hoxha & Arianit Jakupi & Erki Laidmäe & Olga Löblová , 2017. "The Implementation of Managed Entry Agreements in Central and Eastern Europe: Findings and Implications," PharmacoEconomics, Springer, vol. 35(12), pages 1271-1285, December.
    16. Antoñanzas, Fernando & Juárez-Castelló, Carmelo & Rodríguez-Ibeas, Roberto, 2013. "Risk-Sharing Agreements in Pharmaceutical Markets/Los acuerdos de riesgo compartido en mercados farmacéuticos," Estudios de Economia Aplicada, Estudios de Economia Aplicada, vol. 31, pages 359-378, Septiembr.

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