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Which valued‐based price when patients are heterogeneous?

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  • Rosella Levaggi
  • Paolo Pertile

Abstract

We use a simple model to study the static and dynamic efficiency of alternative regulation regimes for the reimbursement of medical innovations when responses to a new treatment (effectiveness) are heterogeneous across the eligible population. When the rational behavior of profit‐maximizing firms is taken into account, only average value‐based prices can ensure both static and dynamic efficiency, but they imply higher expenditure and lower consumer surplus. Ignoring dynamic efficiency, if patients' responses are sufficiently homogeneous, marginal value‐based prices may dominate from the payer's perspective. We also present a refinement of average value‐based prices that could reverse this result. Overall, the cost of ensuring static and dynamic efficiency is increasing in the degree of heterogeneity. A real‐world example is used to illustrate these results.

Suggested Citation

  • Rosella Levaggi & Paolo Pertile, 2020. "Which valued‐based price when patients are heterogeneous?," Health Economics, John Wiley & Sons, Ltd., vol. 29(8), pages 923-935, August.
  • Handle: RePEc:wly:hlthec:v:29:y:2020:i:8:p:923-935
    DOI: 10.1002/hec.4033
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    File URL: https://doi.org/10.1002/hec.4033
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Grace Li’s journal round-up for 20th July 2020
      by Grace Li in The Academic Health Economists' Blog on 2020-07-20 11:00:08

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    Cited by:

    1. Joan Costa‐Font & Rosella Levaggi, 2020. "Innovation, aging, and health care: Unraveling “silver” from “red” herrings?," Health Economics, John Wiley & Sons, Ltd., vol. 29(S1), pages 3-7, October.
    2. 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.
    3. Doug Coyle, 2020. "Who would benefit from average value‐based pricing?," Health Economics, John Wiley & Sons, Ltd., vol. 29(8), pages 936-937, August.

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