Working Paper: NBER ID: w18593
Authors: Patricia M. Danzon; Adrian K. 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. Conditions for efficient pricing in these self-pay countries include that consumers are well-informed about product quality and firms can price discriminate between rich and poor subgroups within and between countries.
Keywords: pharmaceutical pricing; value-based pricing; ICER; dynamic efficiency; static efficiency
JEL Codes: I13; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ICER thresholds (D63) | manufacturer pricing (L11) |
| ICER thresholds (D63) | drug utilization (H51) |
| per capita income (D31) | drug prices (P22) |
| lack of insurance (I13) | higher prices (D49) |
| lack of insurance (I13) | inefficiencies (D61) |