Getting value today and incentivising for the future: Pharmaceutical development and healthcare policies

Kasper Munk Johannesen, Martin Henriksson


To manage the challenge of limited healthcare resources and unlimited demand for healthcare, decision makers utilise a variety of demand side policies, such as health technology appraisals and international reference pricing to regulate price and utilisation. By controlling price and utilisation demand side policies determine the earnings potential, and hence the incentives to invest in research and development (R&D) of new technologies. However, the impact of demand side policies on R&D incentives is seldom formally assessed.

Based on the key assumption that intellectual property rights, i.e. patents, and expected rent are key drivers of pharmaceutical R&D, this work outlines a framework illustrating the link between demand side policies and pharmaceutical R&D incentives. By analysing how policies impact expected rent and consumer surplus, the framework is used to understand how commonly used demand side policies (including timing and length of reimbursement process, international reference pricing, parallel trade, and sequential adoption into clinical practice) may influence R&D incentives.

The analysis demonstrates that delayed reimbursement decisions as well as sequential adoption into clinical practise may in fact reduce both expected rent and consumer surplus. It is also demonstrated how international reference pricing is likely to increase consumer surplus at the expense of lower rent and thus lower R&D incentives.

Although this work illustrates the importance of considering how demand side policies may impact long-term R&D incentives, it is important to note that the purpose has not been to prescribe which demand side policies should be utilised or how. Rather, the main contribution is to illustrate the need for a structured approach to the analysis of the complex, and at times highly politicised question of how demand side policies ultimately influence population health, both in the short and in the long term. 


Pharmaceutical market, pharmaceutical regulation, R&D incentives, intellectual property rights

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