title: The Questionable Economic Case for Value-Based Drug Pricing in Market Health Systems.
abstract: This article investigates the economic theory and interpretation of the concept of "value-based pricing" for new breakthrough drugs with no close substitutes in a context (such as the United States) in which a drug firm with market power sells its product to various buyers. The interpretation is different from that in a country that evaluates medicines for a single public health insurance plan or a set of heavily regulated plans. It is shown that there will not ordinarily be a single value-based price but rather a schedule of prices with different volumes of buyers at each price. Hence, it is incorrect to term a particular price the value-based price, or to argue that the profit-maximizing monopoly price is too high relative to some hypothesized value-based price. When effectiveness of treatment or value of health is heterogeneous, the profit-maximizing price can be higher than that associated with assumed values of quality-adjusted life-years. If the firm sets a price higher than the value-based price for a set of potential buyers, the optimal strategy of the buyers is to decline to purchase that drug. The profit-maximizing price will come closer to a unique value-based price if demand is less heterogeneous.
authors.affiliation: Health Care Management Department, The Wharton School of the University of Pennsylvania, Philadelphia, PA, USA. Electronic address: pauly@wharton.upenn.edu.
authors.forename: Mark V
authors.initials: MV
authors.lastname: Pauly
mesh_terms: D016527:Drug Costs; D004345:Drug Industry / Q000191:economics; D004465:Economic Competition / Q000191:economics; D017850:Economics, Pharmaceutical; D008962:Models, Theoretical; D010330:Patents as Topic; D014481:United States; D062505:Value-Based Purchasing / Q000191:economics*
keywords: health care markets; insurance; pharmaceuticals; value-based pricing