Pricing policies when patients are heterogeneous: a welfare analysis

Rosella Levaggi and Paolo Pertile

No 17/2016, Working Papers from University of Verona, Department of Economics

Abstract: We use a simple theoretical model to compare alternative regulation regimes for the reimbursement of medical innovations when responses to a new treatment (effectiveness) are heterogeneous within the eligible population. We study two dimensions: i) efficiency in selecting sub-groups of patients for which the new technology is reimbursed, ii) distribution of the rent between firm and payer. We show that, when rational behaviour of profit maximizing firms is taken into account, stratified cost-effectiveness analysis and marginal value-based prices lead to the same equilibrium, which is efficient only if the population is sufficiently homogeneous. Inefficiency arises because some patients that should be treated are not. On the other hand, prices based on the average value may allow for an efficient solution even when heterogeneity is large. With this pricing policy, efficiency may be achieved even when part of the rent is retained by the payer, provided that the degree of heterogeneity is sufficiently small.

Keywords: value-based prices; cost-effectiveness analysis; static and dynamic efficiency; personalized medicine (search for similar items in EconPapers)
JEL-codes: I18 L51 (search for similar items in EconPapers)
Pages: 18
Date: 2016-10
New Economics Papers: this item is included in nep-ind
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Citations: View citations in EconPapers (2)

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