Abstract
This chapter introduces five concepts central to this book. The opportunity cost of a strategy in an institutional setting is identified when the decision maker values all states of the world that could emerge under different allocations of resources, not just the alternative options available to her or him. Price-effectiveness analysis is a method of assessing the decision to reimburse a new drug by testing the relationship between the incremental price-effectiveness ratio (IPER) of the new drug and the population’s health. The strategy of reimbursement comprises the actions of adoption and financing. The health shadow price, β c is the IPER of the health effects gained by the target patients as a consequence of the strategy of reimbursing (adopting and financing) the new drug with clinical innovation and additional financial cost such that the funder is indifferent between the strategy of reimbursement and the best alternative strategy available to the funder using the same financial resources. The economic value of clinical innovation (EVCI) is the gross clinical benefit of the new drug, constrained twice: by the clinical opportunity cost (the best alternative therapy to the new drug) and the economic opportunity cost (the best alternative use of resources). The health shadow price β c and EVCI are derived for the case of an economically efficient fixed budget with no failure in the market for health inputs.
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Notes
- 1.
From the New Palgrave Dictionary of Economics, Buchanan’s definition of opportunity cost in the institutional setting emphasises the significance of considering strategies that might lead to outcomes that are not possible from strategies that are considered practical or physical options for decision makers. He contrasts this understanding of choice and cost with the subjectivity of opportunity cost in its non-institutional setting. He describes institutional choices as “higher level choices” (Buchanan 2008).
- 2.
Drummond et al. (2005) provide guidance on how to deal with a non-market price. The authors argue that while there is a theoretical imperative to adjust the “market price” of an input in certain situations, in order to make such an adjustment it was also necessary for health economists to establish a likely benefit to decision making and to use a clear and objective method of making this adjustment. Using the approach suggested by Drummond et al., if there were an acceptable method of adjusting the drug price, the Reimburser could perform a CEA using this adjusted price instead of the firm offer price and then make a decision as to whether the drug was cost-effective. The Reimburser needs to signal the value of the health effects of the new drug to the firm rather than decide of a price of the drug that reflects social opportunity cost.
- 3.
The qualitative value of a decision threshold is its value referenced to an economic, financial or administrative concept such as the shadow price of the budget constraint, the maximum willingness to pay or the aICER of displacement. It is preferable to express it algebraically and with reference to economic theory, for example, the shadow price of the budget constraint. The quantitative value of a decision threshold is its numeric value, for example $75,000 per QALY.
- 4.
The uncertainty in the qualitative value is suggested by Culyer et al. (2007) when the authors refer to potential qualitative values (for example shadow price of the budget constraint or societal willingness to pay) and then go on to that NICE has not specified what it thinks this threshold represents. The relative certainty in its quantitative value (and debate as to whether it should be increased) is indicated by Rafferty (2009) and also Towse(2009).
- 5.
See page 59 in Drummond et al. (2005).
- 6.
This approach is nominated by Drummond et al. (2005). It appears to have its origins in Sugden and Williams (1978) and has two problems. The first is that the social opportunity cost appears to be calculated with reference to the maxWTP for the output. The second is that it does not recognise that if the producer has market power, then the price of the input is endogenous to the decision regarding the adoption or otherwise of a program (See example of the dung beetle program).
- 7.
In PEA, the price of a new drug is referred to as an incremental price per additional effect (IPER = \( f \)). Arithmetically, it is identical to the additional cost per unit effect of the new drug. The term “price” is used instead of the term “cost” to recognise that, unlike the ICER of a QUIT smoking counselling session (for example), the ICER of a new drug is endogenous to the decision to reimburse—it is a price that is up for negotiation.
- 8.
The IPER (the incremental price-effectiveness ratio) is used instead of the ICER (the incremental cost-effectiveness ratio) because the additional cost of the new drug to the health system is a function of the price of the new drug, which is in turn the subject of negotiation not the empirical result of a clinical trial.
- 9.
The mutually exclusive alternative strategy to R for this group of patients is already accommodated in the definition of clinical innovation which is estimated against the best alternative mutually exclusive therapeutic strategy for this patient group.
References
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Culyer A, McCabe C, Briggs A, Claxton K, Buxton M, Akehurst R, Sculpher M, Brazier J (2007) Searching for a threshold, not setting one: the role of the National Institute for Health and Clinical Excellence. J Health Serv Res Policy 12(1):56–58
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Pekarsky, B.A.K. (2015). The Health Shadow Price, β c . In: The New Drug Reimbursement Game. Adis, Cham. https://doi.org/10.1007/978-3-319-08903-4_6
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