Modeling tiered pricing frameworks: a simulation approach

Published:November 14, 2022DOI:
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      Drug plans take different approaches to determining reimbursement prices for generic drugs. One common approach is to set the maximum reimbursement price as a percentage of the price of the interchangeable branded drug. In many countries this percentage depends on the number of generic entrants, a model we call “tiered pricing.” This paper analyzes different tiered pricing strategies using simulation methods; this provides insights into how different pricing schemes work in different market environments and suggests some policy implications. First, the choice of tiers has substantial welfare implications. Second, our analysis suggests that there should be at least two and at most four tiers, with more tiers in larger markets. Third, tiers should not be bunched together closely. Finally, we suggest a model tier structure drawing on our findings.


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