June 11, 2015 [Cross-posted with US News]
A recent trend favored by some large insurers who cover prescription drugs, according to the Wall Street Journal, is to negotiate prices paid for a drug that vary depending on how well it works for some set of insured patients. The issue, known as pay-for-performance, primarily arises with very expensive cancer drugs that may help with a variety of different cancers but often work better for one in particular.
The underlying concept does, however, have a long and checkered history in economics, where it goes by the unlovely name of price discrimination and already occurs in a variety of settings where the seller has the power to control its price and to tell who is using its product. For example, airlines charge more for the same seat when purchased by a late-booking business traveler than by a foresighted retiree, or theaters charge more for the same movie on a Saturday night compared to a Sunday matinee.