Ex post value reimbursement for pharmaceuticals

The paper examines the welfare properties of an ex post value regulation scheme in which a pharmaceutical firm's revenue varies with the social value of its product. The mechanism, which is a variant of that proposed by Loeb and Magat, leads to efficient investment in research and development (R&D), production, consumption, and promotion under certain market and technologic conditions. The mechanism's attractive simplicity is lost when account is taken of the rivalrous nature of R&D, the fact that drugs can be complements or substitutes, the excess cost of taxes needed to finance the mechanism, and the multinational character of most pharmaceutical firms.