Going through the roof: On prices for drugs sold through insurance

Jurjen Kamphorst and Vladimir Karamychev

Games and Economic Behavior, 2025, vol. 151, issue C, 218-242

Abstract: This paper studies public concern grounds for high prices of drugs treating rare and debilitating diseases. We offer a theory that explains how drug indivisibility, individual budget constraints, and insurance interact to drive up drug prices, especially for drugs treating rare and severe diseases. For a broad range of drug production costs and income distributions, our model predicts that drug prices are either set at their highest levels covered by insurance or inversely related to the prevalence of the disease. In the latter case, producer profits decrease with prevalence. The effect of production costs on prices and profits is non-monotonic.

Keywords: Monopoly pricing; Insurance; Drug pricing; Orphan drugs (search for similar items in EconPapers)
JEL-codes: D42 G22 I13 L12 (search for similar items in EconPapers)
Date: 2025
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Working Paper: Going Through The Roof: On Prices for Drugs Sold Through Insurance (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:151:y:2025:i:c:p:218-242

DOI: 10.1016/j.geb.2025.03.006

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