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Value-Based Differential Pricing: Efficient Prices for Drugs in a Global Context

23 Pages Posted: 7 Dec 2012 Last revised: 16 Oct 2014

Patricia M. Danzon

University of Pennsylvania - Health Care Systems Department; National Bureau of Economic Research (NBER)

Adrian Towse

Office of Health Economics

Jorge Mestre-Ferrandiz

Office of Health Economics

Date Written: December 2012

Abstract

This paper analyzes pharmaceutical pricing between and within countries to achieve second best static and dynamic efficiency. We distinguish countries with and without universal insurance, because insurance undermines patients' price sensitivity, potentially leading to prices above second-best efficient levels. In countries with universal insurance, if each payer unilaterally sets an incremental cost effectiveness ratio (ICER) threshold based on its citizens' willingness to pay for health; manufacturers price to that ICER threshold; and payers limit reimbursement to patients for whom a drug is cost-effective at that price and ICER, then the resulting price levels and use within each country and price differentials across countries are roughly consistent with second best static and dynamic efficiency. These value-based prices are expected to differ cross-nationally with per capita income and be broadly consistent with Ramsey Optimal Prices. Countries without comprehensive insurance avoid its distorting effects on prices but also lack financial protection and affordability for the poor. Conditions for efficient pricing in these self-pay countries include that consumers are well-informed about product quality and firms can price discriminate between rich and poor subgroups within and between countries.

Suggested Citation

Danzon, Patricia M. and Towse, Adrian and Mestre-Ferrandiz, Jorge, Value-Based Differential Pricing: Efficient Prices for Drugs in a Global Context (December 2012). NBER Working Paper No. w18593. Available at SSRN: https://ssrn.com/abstract=2186322

Patricia M. Danzon (Contact Author)

University of Pennsylvania - Health Care Systems Department ( email )

3641 Locust Walk
Colonial Penn Center
Philadelphia, PA 19104-6358
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Adrian Towse

Office of Health Economics ( email )

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London, SW1A 2DY
United Kingdom
+44 207 747 1407 (Phone)
+44 207 747 1419 (Fax)

HOME PAGE: http://www.ohe.org

Jorge Mestre-Ferrandiz

Office of Health Economics ( email )

12 Whitehall
London, SW1A 2DY
United Kingdom

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