Converting a drug from off-label to on-label use: Government subsidies and patient welfare

Most rare diseases have no approved treatments available, and doctors often prescribe existing drugs for "off-label" use in the sense that a drug is prescribed for a medical condition that is different from the original condition approved by regulatory authorities. To develop approved treatments for rare diseases quickly without starting from scratch, governments have introduced different subsidy programs to entice pharmaceutical companies to exert extra efforts to "convert" certain drugs from off-label to "on-label" use. However, the impact of this subsidized conversion strategy on patient welfare remains unclear because both efficacy and price can change once a drug is converted from off-label to on-label use. This paper represents an initial attempt to investigate the effectiveness of different types of government subsidies (e.g., offer subsidies to manufacturers, patients, or both) for improving patient welfare through the drug conversion strategy. We present a three-stage Stackelberg game-theoretic model that captures the interactions among the government, manufacturer, and patients, and determine whether it is optimal to subsidize the manufacturer, patients, or both. We identify requisite (market and subsidy) conditions for a manufacturer to convert a drug from off-label to on-label use. We also determine the optimal extra development effort to convert an off-label drug, and the optimal unit selling price for the on-label drug after conversion. Contrary to the generally held public opinions, our analysis reveals that subsidizing pharmaceutical manufacturers is more effective than subsidizing patients. This result implies that subsidies offered to manufacturers would incentivize higher conversion efforts, and subsequently increase the expected patient welfare. Furthermore, we show that this result continues to hold even when the patients are risk-averse or on-label market size is uncertain. Our numerical analysis on the drugs Aralen, Humira, Revlimid, and Zostex reveals that government subsidies are necessary for enticing conversion from off-label to on-label use.