Dynamic Bargaining Over Public Insurance Coverage For Drugs In Australia

Public funding decisions for pharmaceuticals are the outcomes of a dynamic bilateral bargaining process between the funding agency and a company and can involve considerable delay. Using an empirical duration model of negotiation in Australia from 2005 to 2018, we test if agreement patterns on national public subsidy of pharmaceuticals are consistent with the predictions of dynamic bargaining theory. It took a median of 16 months for the Australian government and companies to reach an agreement, averaging 1.51 rounds of negotiations, with 71% of the rounds failing to reach an agreement. Overall, the results of a process of one- sided offers from companies are consistent with theories of bargaining with incomplete information and delay strategies, where evidence of quality develops over negotiation rounds. Lower value and more risk for the payer delayed agreements and increased the probability of no agreement, while public awareness and interest in a drug reduced the agency’s bargaining power and increased agreement rates. Enhanced knowledge about the drug’s attributes benefits the government and its constituencies, but pharmaceutical companies have a strong incentive to invest in political alliances to raise awareness of potential benefits to patients and hasten public funding of a drug.