Optimal insurance coverage and pricing of outpatient drugs in Iran: a cost- and chronicity-based adaptation of the vertical equity model

OBJECTIVE: To estimate welfare-optimal insurance coverage and drug prices in Iran's NHI outpatient market, using drug cost and chronicity as proxies for patient financial vulnerability in the absence of income data. SETTING: A complete administrative census of 88,565 outpatient prescription claims across all NHI fund types and provinces in Iran, fiscal year 2023, covering 7,977 unique pharmaceutical products. DESIGN: Cross-sectional welfare analysis using the Westerhout-Folmer framework, adapted to replace income-based vertical equity with drug costliness and treatment chronicity as observable equity axes. Drugs were grouped into four categories (Low-cost Acute, High-cost Acute, Low-cost Chronic, High-cost Chronic). Claims-derived parameters were used to estimate consumer and supply-side surplus, insurer spending, and total welfare under observed versus second-best optimal scenarios, with sensitivity analyses over the social cost of public funds and fixed provision costs. RESULTS: The welfare model recommended higher insurance coverage than currently observed for all four equity groups, with zero bounding violations in any sensitivity scenario. The largest coverage gap was identified for Low-cost Chronic drugs (Δr = + 0.279; observed mean 0.493, optimal 0.773) - the group with the lowest observed coverage ratio of all categories and the oldest mean patient age (64.1 years). Low-cost Acute drugs had the second largest gap (Δr = + 0.260). High-cost groups, which already benefit from cost-tier formulary reimbursement, showed smaller but positive recommended increases (+ 0.032 and + 0.081 respectively). Positive welfare gaps were observed for all groups (median per drug: Int$ +308 to + 436 PPP). All directional findings were fully stable across all 12 sensitivity scenarios. CONCLUSION: Iran's NHI under-covers low-cost chronic medicines, leaving patients with the highest recurrent out-of-pocket burden despite the lowest reimbursement rates. Increasing coverage for this group is the most welfare-improving and administratively feasible reform within the current system. The framework also offers a replicable, income-independent approach to equity-oriented pharmaceutical policy in comparable middle-income settings.