Pertile P. (2017)

Pertile P., Levaggi R., Moretto M. (2017).

The Dynamics of Pharmaceutical Regulation and R&D Investments. Journal of Public Economic Theory, 19: 121-141.

Abstract:

The paper uses a real option approach to investigate the properties of two widely used schemes of regulating the reimbursement of new pharmaceutical products: standard cost-effectiveness thresholds and performance-based risk-sharing agreements. The use of the latter has been quickly spreading and often criticized in recent times. The results show that the exact definition of the risk-sharing agreement is key in determining its economic effects. In particular, despite the concerns expressed by some authors, the incentive for a firm to invest in R&D may be the same or even greater than under cost-effectiveness thresholds. The greater flexibility on the timing of commercialization allowed by risk-sharing schemes plays a key role, by increasing the value of the option to invest in R&D under uncertainty. Under this scheme, a higher value for the firm is associated with earlier access to innovations for patients. The price for this is less value for money for the insurer at the time of adoption of the innovation.