Value-based drug price schemes: a welfare analysis

Abstract

The market for innovative drugs is characterized by high levels of regulation, whose impact on the market is not neutral. On the one hand, strict regulation may in fact adversely affect incentives to develop new and better products; on the other hand, high prices may drive an unsustainable increase in healthcare costs. This trade-off is particularly important in Europe, where about 75% of drugs costs are financed by the public sector. We develop a simple model that allows to compare the impact of different listing and pricing strategies on the social value of innovative drugs, the consumer surplus and the expected profit of the industry. Uncertainty in the expected price, as well as other forms of access regulation, may lead to a fairer division of the social value between patients and the industry, at the cost of leaving some of the potential value of the drug unexploited. The regulator may improve value for money if it is prepared either to restrict access to the drug or to reduce the expected price. In both cases, the number of groups of patients treated may be different from the social optimum.