The economics of alternative payment models for pharmaceuticals

Jakub Hlavka, Jeffrey C. Yu, Dana Goldman and Darius Lakdawalla
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Jeffrey C. Yu: University of Southern California

The European Journal of Health Economics, 2021, vol. 22, issue 4, No 6, 559-569

Abstract: Abstract Pharmaceuticals are priced uniformly by convention, but vary in their degree of effectiveness for different disease indications. As more high-cost therapies have launched, the demand for alternative payment models (APMs) has been increasing in many advanced markets, despite their well-documented limitations and challenges to implementation. Among policy justifications for such contracts is the maximization of value given scarce resources. We show that while uniform pricing rules can handle variable effectiveness in efficient markets, market inefficiencies of other kinds create a role for different value-based pricing structures. We first present a stylized theoretical model of efficient interaction among drug manufacturers, payers, and beneficiaries. In this stylized setting, uniform pricing works well, even when treatment effects are variable. We then use this framework to define market failures that result in obstacles to uniform pricing. The market failures we identify include: (1) uncertainty of patient distribution, (2) asymmetric beliefs, (3) agency imperfection by payer, (4) agency imperfection by provider, and (5) patient behavior and treatment adherence. We then apply our insights to real-world examples of alternative payment models, and highlight challenges related to contract implementation.

Keywords: Optimal Pricing; Price Discrimination; Pharmacoeconomics; Health Insurance; Health Care Financing; Deadweight Loss (search for similar items in EconPapers)
JEL-codes: I11 I13 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s10198-021-01274-4

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