Abstract
This chapter presents “The pharmacotherapy needs a premium” Game where the Institution that lowers the decision threshold must respond to the industry’s Threat. The pharmaceutical industry’s claim is that while the health shadow price β c captures information about the budget constraint and can improve static efficiency in a fixed budget, β c does not capture information about the loss in future health as a consequence of lower drug prices today. The industry claims that new drugs should have a premium above the threshold for other programmes because when a fund holder buys new drugs they are also buying future innovation. The Game is structured as a Firm’s choice between two strategies: (1) invest in research and development; or (2) do nothing. The Game extends over three periods and up to two drugs (a new drug and a future drug) can be developed. The key decision by the Institution is whether or not to pay a premium over β c for the new drug (the first drug) in order to facilitate development of the future (second) drug. The result of the Game is that there is no incentive for an Institution to price above β c for the new drug in order to generate an incentive for the Firm to develop the future drug. Furthermore, pricing above β c is found to be neither a necessary nor sufficient condition for the development of the future drug. I conclude that the Institution should respond to the Threat by suggesting that the Firm approach the Capital Market and that this is the social-welfare-maximising solution.
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Notes
- 1.
It is unclear whether the authors are conflating the ideas of cheap and expensive technologies and cost-effective and cost-ineffective technologies unintentionally.
- 2.
By static efficiency the authors are referring to the aICER of the current budget and current technologies. The capacity for innovation to change dynamic efficiency refers to its influence on the aICER of a future budget.
- 3.
The IMER of Araamax relative to Rathmab the additional cost of manufacturing the additional health effects in each vial.
- 4.
In 2005, the cost of etanercept (a disease modifying agent) was estimated at £178.75 per dose, 52 doses of 50 mg per year, which is £9,295 per year (Chen et al. 2006). A person with severe RA is likely to earn less than the average salary, therefore it is conceivable that a new RA drug could be more than 75 % of the salary of a person with severe RA.
- 5.
The IMER = IPER if there is perfect competition in the generic drug market and the drug is off-patent. If the drug is on patent, the IPER could still be equal to the IMER. This situation is a consequence of the choice of threshold IPER and the cost function for the drug, which can be assumed to be independent. However, provided that the Firm only produces and sells the drug if it makes a normal profit, then the IMER cannot be greater than the IPER.
- 6.
The reason that the Institution can anticipate the outcome of Stage 4 when the Game is at Stage 3 is because all information is in the public domain, the motivations for players are in the public domain and each player makes decisions that take into account the other Player’s responses. This is effectively the rationale for solving this game using backward induction.
- 7.
The reasons why this return is likely to be a significant overestimate of the ratio intended by the authors are discussed in Pekarsky (2012, Appendix 1). The reasons why the ratio intended by the authors could result in an overestimate of the ratio of interest to a country with a fixed or constrained budget are discussed in Chaps. 1 and 3 and also Pekarsky (2012, Appendix 2). In short, it does not consider the allocation of surplus between the firm and consumers.
- 8.
In simple terms the strong compensation test means that the policy of a premium in the situation specified by Eq. (10.9) and Eq. (10.11) will always result in a gain in npvSW—the gain in economic rent in Period 3 to the Firm is greater that the loss to consumers in Period 2. In this case, policy of a premium always passes the hypothetical compensation test. If only the weak compensation test is met, then the hypothetical compensation test can be passed by the policy conditionally only. [For a more extensive discussion see Pekarsky (2012, Appendix 9)].
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Pekarsky, B.A.K. (2015). The “Pharmacotherapy Needs a Premium” Game. In: The New Drug Reimbursement Game. Adis, Cham. https://doi.org/10.1007/978-3-319-08903-4_10
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