Value-Based Pharmaceutical Pricing From the Patient Perspective Could Incentivize Innovation

The pharmaceutical industry is characterized by high risk, high capital investment requirements, and comparatively low marginal costs of production. While drug patents incentivize innovation by granting producers of new drugs monopoly pricing power, social expectations pressure manufacturers to keep prices low. This tension leaves the question of how drug development should be financed, and how to address the needs of special subpopulations, unresolved. This paper proposes a new approach that shifts the focus of the debate from producer costs to patient value, based on treatment outcomes. The principal consequence of this patient-centric view is that variability in patient outcomes and circumstances would result in individualized drug prices—a practice known as price discrimination that has already taken hold in other high capital investment industries such as airlines and software. In this model, fixed costs are typically borne by market segments that reap the greatest economic value, while other segments pay lower prices set relative to marginal production costs. Given the high uncertainty and variability characteristic typical of patient populations, several obstacles must be overcome before this strategy can be made practical for pharmaceuticals. Chief among these is determining broad economic measures of treatment benefits that include health-related quality of life outcomes from the patient perspective.