The Health Shadow Price and the Economic Context

Abstract

The value of clinical innovation of a new drug is specific to a particular clinical context; the patient group, the clinical protocol and the best alternative therapy. Similarly, the economic value of a given clinical value of innovation is specific to a particular economic context; the financial costs of the proposed and existing therapy, the method of financing the additional costs (budget expansion or displacement of services), the efficiency of the existing allocation and the competition in the market for health inputs. In Chap. 8 the ways in which the health shadow price, β _c and Economic value of clinical innovation, EVCI, capture the economic context of the health budget are illustrated. β _c is derived for four different economic contexts. I show that when the budget is fixed and allocatively inefficient: β _c  = (1/n − 1/m + 1/d) ^ (−1) where n is the average Incremental Cost-Effectiveness, aICER, of the most cost-effective existing technology or programme (in expansion), m is the aICER of the least cost-effective of currently funded technologies or programmes (in contraction) and d is the aICER of the services displaced to finance the additional costs, ΔC ^P, of the new drug. The health shadow price is conditional on an economic context, indicated by c. The economic context is defined by factors including the sub-optimality of displacement (m-d), the level of allocative inefficiency in the health budget (m-n), the additional costs that need to be financed (ΔC ^P) and the current price structure in the health input market.