Going Through the Roof : On Prices for Drugs Sold Through Insurance
This paper confirms public concerns for high prices of drugs that cure rare and debilitating diseases, such as orphan drugs. We offer a theory that explains how health insurance and individual budget constraints interact to drive up drug prices. For a large range of production costs, we find that the drug price is inversely related to the prevalence of the disease. Moreover, if the benefit offered by a drug treatment is larger than disposable wealth (in the first-order stochastic dominance sense), then its price equals its expected benefit to patients. Other interesting results include that (i) monopoly profits can decrease the prevalence of the disease, and that (ii) the effect of insurance is non-monotonic in the marginal costs of the drug. The inverse relationship that we find is supported by empirical evidence in the literature. As a result, monopoly prices for orphan drugs are doomed to go sky high
Year of publication: |
2022
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Authors: | Kamphorst, Jurjen ; Karamychev, Vladimir |
Publisher: |
[S.l.] : SSRN |
Saved in:
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