Modeling risk-sharing contracts

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With healthcare spending being the largest segment of the economy, largely driven by prescription drug expenditures, my research program will identify how these costs can be controlled while improving the health outcomes of consumers. This research is motivated by observing a novel type of contract applied in the pharmaceutical industry. "Risk-sharing" contracts have been proposed in various forms in countries including Canada, England, Australia and New Zealand. However, little research has theoretically investigated how such a contract is designed. This research applies methods in economics, operations research and mathematics to explore the theoretical basis of different contracts in the pharmaceutical market and to provide managerial insights regarding the management of contracts. I will consider two main contract forms: cost-oriented and outcome-oriented contracts. The former is used when the cost of a drug or its demand is uncertain while the latter is used when a drug's health benefit is uncertain. The contract specifies a threshold for the sales volume or health outcome of a drug. I will develop a series of mathematical models to investigate how optimal decisions are made when a drug payer, such as government-run insurance plans and insurance companies, and a manufacturer (or several manufacturers) negotiate a contract under various situations. Now that drug expenditures are the fastest growing segment of healthcare costs in many countries, risk-sharing contracts are important to drug payers to control costs. As well, they are vital to improve patient health and for drug manufacturers in negotiating favourable contract terms. Very few papers have theoretically investigated the application of risk-sharing contracts to the real world. This research will contribute to the literature on supply chain management as a novel approach in health-care sectors and for contracting problem literature on the development of new techniques to solve such issues.