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A reply to “Who would benefit from average value‐based pricing?”

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Coyle(2020) offers a comment to Levaggi and Pertile(2020a), raising some concerns as to the role of Average Value-Based
Price (AVBP), one of the pricing policies we consider. We would like to clarify the main implications of our contribution
and discuss some directions for future research aiming at the reconciliation of affordability and availability of innovation
in health care.
In Levaggi and Pertile(2020a), we study the equilibrium price and the number of patients treated when effectiveness
of a new treatment is heterogeneous within the eligible population and a profit-maximizing firm can set the number of
patients to treat, given the pricing rule.
The schemes we consider are Marginal Value-Based Price (MVBP) and AVBP. For the latter, we also allow for the price
to be set equal to an appropriately defined fraction of the average value of the innovation. Our analysis includes both stat-
ic and dynamic efficiency considerations. In line with the Laffont and Tirole(1994) tradition, our objective function is the
weighed sum of consumer surplus and profit.1 Dynamic efficiency considerations are based on the expected value of in-
novation at the time when the firm decides on the size of the R&D investment. As in other contributions in the literature
(see e.g., Gravelle,1998; Jena & Philipson,2008; Rietzke & Chen,2020), the probability that an R&D project is successful
increases with the size of investment, which is in turn related to expected profit through the firms' profit-maximizing
policy. In line with what other authors did (see e.g., Danzon etal.,2015), we believe that the availability of innovation, to
which the dynamic efficiency dimension refers, should always be explicitly included in the economic analysis of alterna-
tive pricing policies. Regulators' decisions would be far less complicated if they could disregard this dimension: simple
rules such as marginal cost pricing would allow to maximize population health.
In our model, the efficient number of patients treated maximizes the weighted sum of the logarithms of consumer
surplus and producer surplus. The resulting efficient number of patients is independent of the weights introduced into
the welfare function.
Both MVBP and AVBP ensure that the efficient number of patients receives the new treatment if the eligible pop-
ulation is sufficiently homogeneous in terms of response to the treatment. With MVBP and a greater degree of hetero-
geneity, the firm's profit-maximizing strategy may lead to an inefficiently low number of patients treated. Hawkins and
Scott(2011) used a case study to show that, when the firm's optimal response is taken into account, it is possible to depart
from MVBP—or, equivalently, stratified cost-effectiveness analysis—to find a price that allows to achieve greater net (of
costs) health benefits and higher profit for the firm. In Levaggi and Pertile(2020a), we generalize this result and show un-
der which conditions, in terms of patient heterogeneity, it holds. We also show that the size of this distortion grows with
the degree of heterogeneity. Intuitively, a profit-maximizing firm may exploit its monopoly power to reduce the number
of sub-groups to treat to those with the highest effectiveness so to benefit from a higher price. This leaves some patients
A reply to “Who would benefit from average value-based
Rosella Levaggi1 | Paolo Pertile2
1Department of Economics and Management, University of Brescia, Brescia, Italy
2Department of Economics, University of Verona, Verona, Italy
Paolo Pertile, Department of Economics, University of Verona, Via Cantarane 24, Verona, 37129, Italy.
DOI: 10.1002/hec.4392
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We use a simple model to study the static and dynamic efficiency of alternative regulation regimes for the reimbursement of medical innovations when responses to a new treatment (effectiveness) are heterogeneous across the eligible population. When the rational behavior of profit‐maximizing firms is taken into account, only average value‐based prices can ensure both static and dynamic efficiency, but they imply higher expenditure and lower consumer surplus. Ignoring dynamic efficiency, if patients' responses are sufficiently homogeneous, marginal value‐based prices may dominate from the payer's perspective. We also present a refinement of average value‐based prices that could reverse this result. Overall, the cost of ensuring static and dynamic efficiency is increasing in the degree of heterogeneity. A real‐world example is used to illustrate these results.
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The market for new drugs is changing: personalised drugs will increase the heterogeneity in patients’ responses and, possibly, costs. In this context, price regulation will play an increasingly important role. In this article, we argue that personalised medicine opens new scenarios in the relationship between value-based prices, regulation and industry listing strategies. Our focus is on the role of asymmetry of information and competition. We show that, if the firm has more information than the payer on the heterogeneity in patients’ responses and it adopts a profit-maximising listing strategy, the outcome may be independent of the choice of the type of value-based price. In this case, the information advantage that the manufacturer has prevents the payer from using marginal value-based prices to extract part of the surplus. However, in a dynamic setting where competition by a new entrant is possible, the choice of the type of value-based price may matter. We suggest that more research should be devoted to the dynamic analysis of price regulation for personalised medicines.
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