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Paying for pharmaceuticals: uniform pricing versus two-part tariffs

Kurt Brekke (), Dag Morten Dalen and Odd Rune Straume ()

Journal of Health Economics, 2022, vol. 83, issue C

Abstract: Two-part pricing (the Netflix model) has recently been proposed instead of uniform pricing for pharmaceuticals. Under two-part pricing the health plan pays a fixed fee for access to a drug at unit prices equal to marginal costs. Despite two-part pricing being socially efficient, we show that the health plan is worse off when the drug producer is a monopolist, as all surplus is extracted. This result is reversed with competition, as two-part pricing yields higher patient utility and lower drug costs for the health plan. However, if we allow for exclusive contracts, uniform pricing is preferred by the health plan. The choice of payment scheme is also shown to influence on the incentives to spend resources on drastic innovations relative to incremental, me-too innovations.

Keywords: Pharmaceuticals; Health plans; Payment schemes (search for similar items in EconPapers)
JEL-codes: I11 I18 L13 L65 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jhecon:v:83:y:2022:i:c:s0167629622000339

DOI: 10.1016/j.jhealeco.2022.102613

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Journal of Health Economics is currently edited by J. P. Newhouse, A. J. Culyer, R. Frank, K. Claxton and T. McGuire

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