Compassion and Cost. The Dual Role of Reference Pricing

Abstract

Providing health insurance involves a trade-off between the benefits from risk spreading and the costs due to moral hazard. Focusing on pharmaceuticals consumption, this paper examines theoretically whether reference pricing, requiring individuals to pay the price difference if, in this case, they don’t buy the cheaper parallel imported drug, can ease this trade-off – an issue which has not previously been pointed out in the debate on health insurance. The results indicate that, if individuals are extremely risk-averse, a policy shift from coinsurance to reference pricing would do this by providing more insurance while decreasing moral hazard.