Journal of Pharmaceutical Health Services Research, 2021, Vol 12, 357–362 https://doi.org/10.1093/jphsr/rmab043 Research Paper Advance Access publication 30 August 2021 357 © The Author(s) 2021. Published by Oxford University Press on behalf of the Royal Pharmaceutical Society. All rights reserved. For permissions, please e-mail: journals.permissions@oup.com Research Paper Value-based drug price schemes: a welfare analysis Laura Levaggi 1, and Rosella Levaggi 2, * , 1 Faculty of Science and Technology, Free University of Bolzano-Bozen, Bolzano Bozen, Italy 2 Department of Economics and Management, University of Brescia, Brescia, Italy *Correspondence: Rosella Levaggi, Department of Economics and Management, University of Brescia, Via S. Faustino, 74b, 25122 Brescia, Italy. Tel: 0039-0302988825; Fax: 0039-0302988837; Email: rosella.levaggi@unibs.it Received May 4, 2021; Accepted July 19, 2021. Abstract Objectives 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 un- sustainable increase in healthcare costs. This trade-off is particularly important in Europe, where about 75% of drugs costs are financed by the public sector. Methods 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. Key findings 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. Conclusions 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. Keywords: drug pricing; regulation; value based; risk sharing; welfare analysis Introduction The market for innovative drugs is characterized by high levels of regulation, independently from the choices made to finance health care. Even in the USA, where drug prices are largely unregulated, strict rules for listing as well as forms of bargaining exist between in- surance companies or Health Maintenance Organizations and the in- dustry over price and volume. In Europe, where health care is mostly financed by public providers, the price dynamics has put budgetary pressure on Governments that are responding with more stringent price regulations. [1–3] Bargaining processes between the industry and the regulator are being replaced by more transparent mechan- isms, such as reference pricing, [4] cost effectiveness thresholds, [5–8] value-based schemes, risk sharing agreements [9–14] and indication value-based prices [15] whose welfare effects are still under scrutiny. The use of regulation is controversial (for a review see Wettermark et al.) [16] Opponents argue that strict regulation may adversely affect incentives to develop new and better products, be- cause it may prevent adequate returns for the massive investments to develop new drugs. [17] This argument may explain the fluctuations in the number of new molecular entities (NMEs) which have been approved for market entry by the Food and Drug Administration (FDA) in the USA. The number has declined from 53 in 1996 to only 26 in 2010, [18] with a significant increase in the past few years. In fact, in 2020, the number is the same as in 1996, and 21 of these new molecules are first-in-class. [19] The other interesting trend is that treatments are more and more personalized: according to the study of Schork [20] more than 20% of NME’s approved by the FDA can be considered personalized medicine. Downloaded from https://academic.oup.com/jphsr/article/12/3/357/6359533 by guest on 02 April 2024