The Price of Pharmaceuticals and the Value of Human Life Years

There is a great deal of attention in the popular media and by politicians on pharmaceutical pricing. In particular, there is a view that prices are both too high and irrational. In the more technical literature there is substantial discussion of value-based pricing, partly as a way to reduce prices. I bring together several strands of scholarship to make several related points: 1) the value of a life-year is higher than it is generally thought to be, 2) prices are already strongly related to value in both market and bureaucratic settings, 3) the prices of many new pharmaceuticals are well below value. The last proposition suggests that prices may often be too low to induce a reasonably efficient amount of innovative effort.