Shifting the risk in pricing and reimbursement schemes? A model of risk-sharing agreements for innovative drugs

Risk sharing is becoming an increasingly popular instrument to regulate the price of new drugs. In the recent past, forms of risk-sharing agreements between the public regulator and the industry have been proposed and implemented, but their effects on price and profits are still controversial. in this paper we propose a model aimed at studying the effects on price and expected profit of several risk-sharing agreements between a regulator and the industry, based on the ex post effectiveness of the drug (i.e. the efficacy resulted in the real medical practice). We assume that the probability of being listed (approved and reimbursed) depends on the relative performance of the new drug in terms of effectiveness and budget required. The price is set according to the declared efficacy of the new drug, but if ex post the effectiveness falls short of what declared, several forms of penalties may be used by the regulator. We show that the number of patients that are treated is not necessarily affected by risk-sharing/risk-shifting mechanisms; the price for which the drug is listed may be higher than without risk-sharing, but the expected profit of the industry is: a) always lower for risk-shifting schemes; b) for true risk-sharing it depends on the bargaining power of the company. This result is however valid only if the listing process is not affected by risk sharing. If this is not the case, risk sharing mechanisms may increase the expected profit of the industry.