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

Author

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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.

Suggested Citation

  • García-Alonso, M. D. C. & Mariñoso, B. G., 2005. "The relationship of drug reimbursement with the price and the quality of pharmaceutical innovations," Working Papers 05/02, Department of Economics, City University London.
  • Handle: RePEc:cty:dpaper:05/02
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    References listed on IDEAS

    as
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    5. Mark Duggan & Fiona M. Scott Morton, 2006. "The Distortionary Effects of Government Procurement: Evidence from Medicaid Prescription Drug Purchasing," The Quarterly Journal of Economics, Oxford University Press, vol. 121(1), pages 1-30.
    6. Calcott, Paul, 2000. "Health care evaluation, utilitarianism and distortionary taxes," Journal of Health Economics, Elsevier, vol. 19(5), pages 719-730, September.
    7. 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.
    8. Michael Dickson & Jeremy Hurst & Stéphane Jacobzone, 2003. "Survey of Pharmacoeconomic Assessment Activity in Eleven Countries," OECD Health Working Papers 4, OECD Publishing.
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