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Value‐Based Differential Pricing: Efficient Prices for Drugs in a Global Context

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  • Patricia Danzon
  • Adrian Towse
  • Jorge Mestre‐Ferrandiz

Abstract

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. Improving pricing efficiency in these self‐pay countries includes improving regulation and consumer information about product quality and enabling firms to price discriminate within and between countries. © 2013 The Authors. Health Economics published by John Wiley & Sons Ltd.

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  • 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, March.
  • Handle: RePEc:wly:hlthec:v:24:y:2015:i:3:p:294-301
    DOI: 10.1002/hec.3021
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    Cited by:

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    2. Berdud, M. & Chalkidou, K. & Dean, E. & Ferraro, J. & Garrison, L. & Nemzoff, C. & Towse, A., 2019. "The Future of Global Health Procurement: Issues around Pricing Transparency," Research Papers 002150, Office of Health Economics.
    3. Levaggi, Rosella, 2014. "Pricing schemes for new drugs: A welfare analysis," Social Science & Medicine, Elsevier, vol. 102(C), pages 69-73.
    4. Chen, Xu & Yang, Huan & Wang, Xiaojun, 2019. "Effects of price cap regulation on the pharmaceutical supply chain," Journal of Business Research, Elsevier, vol. 97(C), pages 281-290.
    5. Neri, M. & Towse, A. & Garau, M., 2018. "Multi-Indication Pricing (MIP): Practical Solutions and Steps to Move Forward," Briefings 002084, Office of Health Economics.
    6. Mahlich Jörg & Sindern Jörn & Suppliet Moritz, 2015. "Vergleichbarkeit internationaler Arzneimittelpreise," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 16(2), pages 164-172, June.
    7. R. Rovbel L. & Р. Ровбель Л., 2018. "Анализ проблем и возможностей использования референтного ценообразования органами государственной власти и местного самоуправления в сфере закупок и жилищного строительства // Analyzing the Problems a," Управленческие науки // Management Science, ФГОБУВО Финансовый университет при Правительстве Российской Федерации // Financial University under The Government of Russian Federation, vol. 8(2), pages 44-51.
    8. Jobjörnsson, Sebastian & Forster, Martin & Pertile, Paolo & Burman, Carl-Fredrik, 2016. "Late-stage pharmaceutical R&D and pricing policies under two-stage regulation," Journal of Health Economics, Elsevier, vol. 50(C), pages 298-311.
    9. Berdud, M. & Garau, M. & Neri, M. & O'Neill, P. & Sampson, C. & Towse, A., 2018. "R&D, Competition and Diffusion of Innovation in the EU: The Case of Hepatitis C," Research Papers 002040, Office of Health Economics.
    10. Gregory S. Zaric, 2016. "Cost Implications of Value-Based Pricing for Companion Diagnostic Tests in Precision Medicine," PharmacoEconomics, Springer, vol. 34(7), pages 635-644, July.
    11. Michael Drummond & Adrian Towse, 2019. "Is rate of return pricing a useful approach when value-based pricing is not appropriate?," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 20(7), pages 945-948, September.
    12. Suzanne Hill & Leslie Olson, 2014. "NICE, Social Values, and Balancing Objectivity and Equity," PharmacoEconomics, Springer, vol. 32(11), pages 1039-1041, November.

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    JEL classification:

    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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