The menu-setting problem and subsidized prices: drug formulary illustration

The menu-setting problem (MSP) determines the goods and services an institution offers and the prices charged. It appears widely in health care, from choosing the services an insurance arrangement offers, to selecting the health plans an employer proffers. The challenge arises because purchases are subsidized, and consumers (or their physician agents) may make cost-ineffective choices. The intuitively comprehensible MSP model--readily solved by computer using actual data--helps structure thinking and support decision making about such problems. The analysis uses drug formularies--lists of approved drugs in a plan or institution--to illustrate the framework.