Value of Outcome-based Pricing Strategy with the Consideration of Capacity Planning

Abstract

The continued spike in the prices of new drugs and their various postmarketing uncertainties have posed significant challenges for insurers. To induce insurers to cover their new drugs, pharmaceutical firms develop an innovative outcome-based pricing (OBP) strategy through which drugs are paid only if they are valid for specific patients within specified time periods. While the OBP strategy addresses the effectiveness uncertainty of the new drugs, the performance of this strategy in addressing demand uncertainty, another major challenge faced by pharmaceutical supply chains, remains unclear. To address this gap, we develop a stylized model to analyse the impact of the OBP strategy with the consideration of capacity planning for new drugs on pharmaceutical firms, insurers, and patients from the perspective of demand uncertainty. Compared to uniform pricing strategies, we find that when demand uncertainty is relatively high, the OBP strategy benefits both the firm and the insurer by reducing demand uncertainty through capacity planning and sharing limited drug effectiveness. Otherwise, only one stakeholder benefits. Moreover, for drugs with limited effectiveness, a coordinating OBP contract with an additional fee transferred from the firm to the insurer can make both better off under different demand uncertainty scenarios.

Keywords

Supply chain management in healthcare / outcome-based reimbursement / capacity planning / risk sharing / health insurance

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Systems Engineering Society of China and Springer-Verlag GmbH Germany