The price of cost-effectiveness thresholds under therapeutic competition in pharmaceutical markets

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

Journal of Health Economics, 2023, vol. 90, issue C

Abstract: Health systems around world are increasingly adopting cost-effectiveness (CE) analysis to inform decisions about access and reimbursement. We study how CE thresholds imposed by a health plan for granting reimbursement affect drug producers’ pricing incentives and patients’ access to new drugs. Analysing a sequential pricing game between an incumbent drug producer and a potential entrant with a new drug, we show that CE thresholds may have adverse effects for payers and patients. A stricter CE threshold may induce the incumbent to switch pricing strategy from entry accommodation to entry deterrence, limiting patients’ access to the new drug. Otherwise, irrespective of whether entry is deterred or accommodated, a stricter CE threshold is never pro-competitive and may in fact facilitate a collusive outcome with higher prices of both drugs. Compared to a laissez-faire policy, the use of CE thresholds when an incumbent monopolist is challenged by therapeutic substitutes can only increase the surplus of a health plan if it leads to entry deterrence. In this case the price reduction by the incumbent necessary to deter entry outweighs the health loss to patients who do not get access to the new drug.

Keywords: Pharmaceuticals; Health plans; Cost-effectiveness analysis; ICER; Therapeutic competition (search for similar items in EconPapers)
JEL-codes: I11 I18 L13 L65 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jhecon:v:90:y:2023:i:c:s0167629623000553

DOI: 10.1016/j.jhealeco.2023.102778

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