Outcome-based reimbursement: The solution to high drug spending?
Publication Type
Journal Article
Publication Date
7-2022
Abstract
Problem definition: The continuously soaring prices of new drugs and their uncertain effectiveness in clinical practice have put substantial risks on insurers/payers. To induce insurer coverage of their new drugs, manufacturers start to propose an innovative outcome-based reimbursement (OBR) scheme under which manufacturers refund insurers (and possibly patients) if the drugs fail to achieve a prespecified treatment target. We investigate the impact of OBR on insurers, manufacturers, and patients. Academic/practical relevance: Although OBR sounds intuitively appealing, its true impact is under much debate and depends particularly on the design of OBR. Our study sheds light on the optimal design of OBR and the debate around OBR, considering key trade-offs and key elements not covered in prior literature. Methodology: We develop a Stackelberg game under which the manufacturer designs a rebate scheme for its drug, either non-OBR or OBR, considering the trade-off between a favorable formulary position and the rebate provided. The insurer subsequently determines its formulary for the drug as well as other alternative drugs within the same disease category considering the trade-off between its spending and patient health benefits. Using data on 14 drugs treating a common disease, hyperlipidemia, we estimate through a multinomial logit model the demand of the 14 drugs and conduct counterfactual analyses on the impact of OBR. Results: Under the optimal OBR, the manufacturer lowers the insurer’s risk but inflates the wholesale price (hence, may not reduce insurer spending). OBR also induces a better formulary position for the manufacturer, which, hence, improves patient access to new drugs. Further, rebates to the insurer and patients affect demand through different mechanisms. Including patient rebates in OBR lowers patient expenses and increases drug demand but further increases insurer spending. Managerial implications: We demonstrate the structure of an optimal formulary and its application in practice. We caution insurers/payers who are seeking OBR to reduce their spending.
Keywords
outcome-based reimbursement, risk sharing, drug pricing, formulary design, risk aversion, multinomial logit models
Discipline
Operations and Supply Chain Management
Research Areas
Operations Management
Publication
Manufacturing & Service Operations Management
Volume
24
Issue
4
First Page
2029
Last Page
2047
ISSN
1523-4614
Identifier
10.1287/msom.2021.1051
Publisher
Institute for Operations Research and Management Sciences
Citation
XU, Liang; LI, Hongmin; and ZHAO, Hui.
Outcome-based reimbursement: The solution to high drug spending?. (2022). Manufacturing & Service Operations Management. 24, (4), 2029-2047.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/7115
Additional URL
http://doi.org/10.1287/msom.2021.1051