The relationship of drug reimbursement with the price and the quality of pharmaceutical innovations

García-Alonso, M. D. C. & Mariñoso, B. G. (2005). The relationship of drug reimbursement with the price and the quality of pharmaceutical innovations (Report No. 05/02). London, UK: Department of Economics, City University London.

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Abstract

This paper studies the strategic interaction between pharmaceutical firms' pricing decisions and government agencies' reimbursement decisions which discriminate between patients by giving reimbursement rights to patients for whom the drug is most effective. We show that if the reimbursement decision preceeds the pricing decision, the agency only reimburses some patients if the private and public health benefits from the new drug diverge. That is, when (i) there are large externalities of consuming the drug and (ii) the difference in costs between the new drug and the alternative treatment is large. Alternatively, if the firm can commit to a price in advance of the reimbursement decision, we identify a strategic effect which implies that by committing to a high price ex ante, the firm can force a listing outcome and make the agency more willing to reimburse than in the absence of commitment.

Item Type: Monograph (Discussion Paper)
Additional Information: © 2005 the authors
Uncontrolled Keywords: Pharmaceutical industry, innovation, health policy
Subjects: H Social Sciences > HB Economic Theory
R Medicine > RA Public aspects of medicine
Divisions: School of Social Sciences > Department of Economics > Department of Economics Discussion Paper Series
URI: http://openaccess.city.ac.uk/id/eprint/1437

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