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Pricing policies when patients are heterogeneous: a welfare analysis

Author

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  • Rosella Levaggi

    (University of Brescia)

  • Paolo Pertile

    (Department of Economics (University of Verona))

Abstract

We use a simple theoretical model to compare alternative regulation regimes for the reimbursement of medical innovations when responses to a new treatment (effectiveness) are heterogeneous within the eligible population. We study two dimensions: i) efficiency in selecting sub-groups of patients for which the new technology is reimbursed, ii) distribution of the rent between firm and payer. We show that, when rational behaviour of profit maximizing firms is taken into account, stratified cost-effectiveness analysis and marginal value-based prices lead to the same equilibrium, which is efficient only if the population is sufficiently homogeneous. Inefficiency arises because some patients that should be treated are not. On the other hand, prices based on the average value may allow for an efficient solution even when heterogeneity is large. With this pricing policy, efficiency may be achieved even when part of the rent is retained by the payer, provided that the degree of heterogeneity is sufficiently small.

Suggested Citation

  • Rosella Levaggi & Paolo Pertile, 2016. "Pricing policies when patients are heterogeneous: a welfare analysis," Working Papers 17/2016, University of Verona, Department of Economics.
    • Handle: RePEc:ver:wpaper:17/2016
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    References listed on IDEAS

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    Cited by:

    1. Gregory J. Critchley & Gregory S. Zaric, 2019. "The impact of pharmaceutical marketing on market access, treatment coverage, pricing, and social welfare," Health Economics, John Wiley & Sons, Ltd., vol. 28(8), pages 1035-1051, August.
    2. Rosella Levaggi & Paolo Pertile, 2020. "Value-Based Pricing Alternatives for Personalised Drugs: Implications of Asymmetric Information and Competition," Applied Health Economics and Health Policy, Springer, vol. 18(3), pages 357-362, June.

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    More about this item

    Keywords

    value-based prices; cost-effectiveness analysis; static and dynamic efficiency; personalized medicine;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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