Health and environment

In this paper, we explore the possible consequences that pricing and reimbursement regulation may have on pharmaceutical innovation. We first investigate qualitatively how a pharmaceutical firm is likely to strategically respond in its R&D activities to pricing and reimbursement regulation. We then quantitatively evaluate these effects in the context of a calibrated decision-theoretic model of drug development in which a pharmaceutical firm is forward-looking and takes future pricing regulation into account in making current development decisions. Our findings indicate that, in designing optimal pharmaceutical pricing and reimbursement regulation, the benefits of more affordable or cost-effective drugs must be traded against the costs of less pharmaceutical innovation, with fewer projects being developed in general and in particular in low-margin therapeutic areas and with little potential of being considered highly innovative at the time of market launch.