The strategic interaction between firms and formulary committees: Effects on the prices of new drugs

• Published in: Journal of health economics Vol. 27; no. 2; pp. 377 - 404
• Main Authors: García-Alonso, María D.C., García-Mariñoso, Begoña
• Format: Journal Article
• Language: English
• Published: Netherlands Elsevier B.V 01.03.2008; Elsevier; Elsevier Sequoia S.A
• Series: Journal of Health Economics
• Subjects: Businesses; Cost effectiveness; Cost-Benefit Analysis; Decision making; Decision Making, Organizational; Drug formularies; Drug Industry; Drugs; Drugs, Investigational - economics; Government-business relations; Health administration; Health care; Humans; Impact analysis; Models, Econometric; Pharmaceutical industry; Pharmacy and Therapeutics Committee; Price formation; Prices; Pricing; Pricing policies; Public health; Reimbursement; Reimbursement Mechanisms; Strategic behaviour; Studies; Subsidies; United States; United States; I18; I10; Subsidies; L65; Drug formularies; H42
• ISSN: 0167-6296; 1879-1646
• DOI: 10.1016/j.jhealeco.2007.06.003

We study the strategic interaction between the pricing decisions of a pharmaceutical firm and the reimbursement decisions of a government agency which grants reimbursement rights to patients for whom new drugs are most cost-effective. If the reimbursement decision precedes pricing, the agency only reimburses some patients if the drug’s private and public health benefits diverge. This is, there are consumption externalities and the variable cost of the drug exceeds the alternative’s. Contrarily, if the firm can commit to a price before reimbursement, a strategic effect implies that by setting a sufficiently high price, the firm can make the agency more willing to reimburse than without commitment.