Using price-volume agreements to manage pharmaceutical leakage and off-label promotion

Unapproved or "off-label" uses of prescription drugs are quite common. The extent of this use may be influenced by the promotional efforts of manufacturers. This paper investigates how a manufacturer makes promotional decisions in the presence of a price-volume agreement. We developed an optimization model in which the manufacturer maximizes its expected profit by choosing the level of marketing effort to promote uses for different indications. We considered several ways a volume threshold is determined. We also compared models in which off-label uses are reimbursed and those in which they are forbidden to illustrate the impact of off-label promotion on the optimal decisions and on the decision maker's performance. We found that the payer chooses a threshold which may be the same as the manufacturer's optimal decision. We also found that the manufacturer not only considers the promotional cost in promoting off-label uses but also considers the health benefit of off-label uses. In some situations, using a price-volume agreement to control leakage may be a better idea than simply preventing leakage without using the agreement, from a social welfare perspective.