Which valued‐based price when patients are heterogeneous?

Summary We use a simple model to study the static and dynamic efficiency of alternative regulation regimes for the reimbursement of medical innovations when responses to a new treatment (effectiveness) are heterogeneous across the eligible population. When the rational behavior of profit‐maximizing firms is taken into account, only average value‐based prices can ensure both static and dynamic efficiency, but they imply higher expenditure and lower consumer surplus. Ignoring dynamic efficiency, if patients' responses are sufficiently homogeneous, marginal value‐based prices may dominate from the payer's perspective. We also present a refinement of average value‐based prices that could reverse this result. Overall, the cost of ensuring static and dynamic efficiency is increasing in the degree of heterogeneity. A real‐world example is used to illustrate these results.