The Simple Economics of Risk-Sharing Agreements between the NHS and the Pharmaceutical Industry

20 Pages Posted: 20 Dec 2007  

Pedro P. Barros

Universidade Nova de Lisboa

Date Written: December 2007

Abstract

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

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

Pedro Luis Pita Barros (Contact Author)

Universidade Nova de Lisboa ( email )

Campus de Campolide
Lisboa, 1099-032
Portugal
+351 21 383 3624 (Phone)
+351 21 388 6073 (Fax)

HOME PAGE: http://ppbarros.fe.unl.pt

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