Regulated Pricing Decisions and Diagnostic Test Choices in Personalized Medicine: Navigating the Implications Within Legal Frameworks.

Abstract

The emerging risk of personalized medicine is driving drug manufacturers to seek collaborations with advanced diagnostic firms, aiming to improve detection and treatment outcomes. However, the government's regulated pricing in personalized medicine affects manufacturers' strategic decisions, particularly regarding the selection of diagnostic partners. In this context, this study investigates whether the government should regulate the price of personalized medicine and how the government's regulated pricing decisions affect drug manufacturers' diagnostic test choices. A stylized analytical model was developed, employing game-theoretic analysis. Numerical studies are also conducted to validate our results. The study reveals that in the absence of the government's regulated pricing, drug manufacturers benefit from partnering with high-level diagnostic firms, enhancing consumer surplus and social welfare. However, when the government regulates pricing, the choice of partnering with a high-level diagnostic firm depends on specific conditions, such as low patient sensitivity to treatment failure and a low unit cost coefficient of diagnostic effort. The government's decision to regulate prices is influenced by three key parameters: patients' sensitivity to treatment failure, the unit cost coefficient of the diagnostic test effort, and the proportion of the price of specialized drugs in the regulated pricing. The findings underscore the importance of legal frameworks in the personalized medicine industry. The absence of the government's regulated pricing incentivizes collaborations with high-level diagnostic firms, enhancing consumer surplus and social welfare. However, government intervention in pricing makes such decisions contingent on specific conditions, requiring nuanced regulatory policies that balance the interests of patients, manufacturers, and diagnostic firms.