Analysis of a pharmaceutical risk sharing agreement based on the purchaser's total budget.

Many public and private healthcare payers use formularies as a tool for controlling drug costs and quality. Although the price per dose is often negotiated as part of the formulary listing, payers may still face unlimited financial risk if demand is much greater than expected at the time of listing. The requirement for drug manufacturers to submit a budget impact analysis as part of the drug approval process suggests that payers are concerned not only with the cost effectiveness of a proposed drug but also with the potential increase in total expenditures that may result from new formulary listings. In this paper we define and analyze a model for financial risk sharing based on the total budget. Our analysis focuses on optimal decision making by manufacturers in the presence of a specific risk sharing agreement. We derive a manufacturer's optimal statement of budget impact and discuss several properties of the optimal solution. (c) 2005 John Wiley & Sons, Ltd.