20 Pages Posted: 20 Dec 2007
Date Written: December 2007
The Janssen-Cilag proposal for a risk-sharing agreement regarding bortezomib received a welcome signal from NICE. The Office of Fair Trading report included risk-sharing agreements as an available tool for the National Health Service. Nonetheless, recent discussions have somewhat neglected the economic fundamentals underlying risk-sharing agreements.
We argue here that risk-sharing agreements, although attractive due to the principle of paying by results, also entail risks. Too many patients may be put under treatment even with a low success probability. Prices are likely to be adjusted upward, in anticipation of future risk-sharing agreements between the pharmaceutical company and the third-party payer. An available instrument is a verification cost per patient treated, which allows obtaining the first-best allocation of patients to the new treatment, under the risk sharing agreement. Overall, the welfare effects of risk-sharing agreements are ambiguous, and care must be taken with their use.
Keywords: risk sharing agreements, pharmaceutical prices
JEL Classification: I11, I18
Suggested Citation: Suggested Citation
Barros, Pedro P., The Simple Economics of Risk-Sharing Agreements between the NHS and the Pharmaceutical Industry (December 2007). Available at SSRN: https://ssrn.com/abstract=1077539 or http://dx.doi.org/10.2139/ssrn.1077539