Consumer and Producer Welfare in Price Determination for Pharmaceuticals
September 14, 2018
The real problem that patients face in accessing new medicines and that manufactures face in getting market access and an early return on their investments has been, and remains, the discrepancy between the global prices charged and how much health care systems can afford to pay for the benefits that new medicines offer without damaging health outcomes overall. An evidenced based and accountable assessment of the additional benefits offered by a new drug is required. However, establishing an appropriate temporary monopoly price also requires an assessment of what health could have been gained elsewhere if the additional resources required to fund access to the new drug had been available to offer effective treatments for other patients.
Evidence of the marginal productivity of health care systems is becoming available and indicates the scale of health opportunity costs associated with pharmaceutical prices. Importantly, these estimates start to reveal whether the unavoidable implicit or explicit norms used in making social choices about health care are reasonable and evidence based. They also enable a more appropriate assessment of how the life cycle value of an innovation is shared between consumers and the producers of products protected by patent. The share of value that ought to be offered, conditional on regarding existing levels of patient protection as appropriate, can be identified and compared to the share what is being offered based on the type of implicit or explicit norms currently applied by health care systems. I also enables an examination of how the share of value differs across types of pharmaceutical products and offers the opportunity to adjust pricing policy to achieve any share of value regarded as appropriate for dynamic efficiency without changes to patent protection. This also poses the key empirical question of what share of value would be most appropriate and the policy question of what mechanisms might achieve the type of global price discrimination that would be required.
Karl Claxton is a Professor in the Department of Economics and Related Studies at the University of York. He is also a Senior Research Fellow in the Centre for Health Economics, University of York. His research interests encompass the economic evaluation of health care technologies.