A Subscription Model for Prescription Drugs

Abstract

Several states in the U.S. have piloted a type of subscription model for prescription drugs, under which a state pays a fixed amount to a pharmaceutical manufacturer for a targeted population (e.g., inmates) over a contract horizon. We analyze the implications of executing the subscription model by characterizing a healthcare provider’s drug-administering decisions, which entails delivering both services and products. In a public-health setting in which service delivery is commonly contracted out using a capitation system, the subscription model additionally contracts out product delivery, meaning drug-administering decisions are subject to a global budget cap. Thus, pressures to minimize costs can lead to the rationing of care despite the promise of unlimited drug supply. We characterize the provider’s cost-minimizing decisions and show increasing the capped amount does not change the propensity for rationing. To induce the provider away from a singular focus on cost minimization, we analyze a case in which the provider faces two objectives — maximizing cures and minimizing mortality — subject to a budget constraint. We develop a novel approach that determines the efficient frontier of this bi-objective problem in a polynomial time; our approach entails converting the bi-objective problem into a tri-objective problem, which is then decomposed into multiple subproblems. The efficient frontier captures trade-offs resulting from the provider’s actions. In addition, and importantly, we show the efficient frontier can be attained through a variety of performance-based incentive schemes.

Keywords: Subscription models, prescription drugs, healthcare delivery, health policy

JEL Classification: I11, C61, H42