Paying for pharmaceuticals: uniform pricing versus two-part tariffs
In a publication in the Journal of Health Economics, Kurt Richard Brekke, Dag Morten Dalen, and Odd Rune Straume study uniform and two-part pricing models in the pharmaceutical market under monopoly and competition
We congratulate Kurt on his latest publication in the Journal of Health Economics
ABSTRACT
Two-part pricing (the Netflix model) has recently been proposed instead of uniform pricing for pharmaceuticals. Under two-part pricing the health plan pays a fixed fee for access to a drug at unit prices equal to marginal costs. Despite two-part pricing being socially efficient, we show that the health plan is worse off when the drug producer is a monopolist, as all surplus is extracted. This result is reversed with competition, as two-part pricing yields higher patient utility and lower drug costs for the health plan. However, if we allow for exclusive contracts, uniform pricing is preferred by the health plan. The choice of payment scheme is also shown to influence on the incentives to spend resources on drastic innovations relative to incremental, me-too innovations.
The paper is available at https://www.sciencedirect.com/science/article/pii/S0167629622000339?via%3Dihub#!