The simple economics of risk-sharing agreements between the NHS and the pharmaceutical industry

The Janssen-Cilag proposal for a risk-sharing agreement regarding bortezomib received a welcome signal from NICE. The Office of Fair Trading report included risk-sharing agreements as an available tool for the National Health Service. Nonetheless, recent discussions have somewhat neglected the economic fundamentals underlying risk-sharing agreements. We argue here that risk-sharing agreements, although attractive due to the principle of paying by results, also entail risks. Too many patients may be put under treatment even with a low success probability. Prices are likely to be adjusted upward, in anticipation of future risk-sharing agreements between the pharmaceutical company and the third-party payer. An available instrument is a verification cost per patient treated, which allows obtaining the first-best allocation of patients to the new treatment, under the risk sharing agreement. Overall, the welfare effects of risk-sharing agreements are ambiguous, and care must be taken with their use.