Abstract
If a new drug’s incremental price-effectiveness ratio (IPER) is above the health shadow price, β c , the best alternative strategy to new drug reimbursement will result in more health benefits to the population, for the same financial cost. The historic decision threshold (k) in most countries is likely to be significantly higher that the health shadow price. If a regulator chooses to reject a new drug as a consequence of adopting the lower threshold, firms might make the following threat: At IPERs below k, it will not be financially viable to supply most new drugs to this country. The weight of this threat could be significant, particularly when the new drugs have substantial clinical benefit for some patient groups. How should a rational institution respond? In this chapter, this question is first analysed in a conventional decision theoretic (non-strategic) model as the optimal response by regulators to historic evidence of the price of new drugs. Then the question is analysed within a price-effectiveness analysis (PEA) framework. PEA uses an applied game theoretic model that assumes firms act strategically and that the health of the population, not the target patients, is the maximand. I conclude that the decision to reimburse a new drug is best analysed as a game with multiple players who act strategically and where the objective of the Institution is to maximise the population’s health. The second conclusion is that the population health-maximising response to the threat is to maintain a threshold price of \( \beta \) c.
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Notes
- 1.
This hypothetical value was derived as follows. The most cost-effective of existing programs (n) is a dental program with a aICER in expansion of $7,500 per QALY. The least cost-effective of current programs in contraction is a screening program with an ICER of $110,000 per QALY. The program most likely to be replaced is a respite care program with an aICER of $13,500. The value of \( {\beta}_c={\left(\frac{1}{7,500}+\frac{1}{13,500}-\frac{1}{110,000}\right)}^{-1}=\$5,042 \).
- 2.
This estimate would be difficult to derive in practice. It could be derived by multiplying the average incremental QALY gain per patient (derived when the ICER is calculated) by the number of patients who commence a course of treatment each year and calculated for the expected duration of their treatment and benefits. In following years, it would be necessary to ensure that the continuing patients whose benefits were included as a future benefit for patients commencing in previous years are not double (triple, quadruple…) counted.
- 3.
Whether or not above marginal cost pricing is justified by the need to cover the fixed costs of R&D (historic and/or future) is a separate issue addressed in Chaps. 9 and 10. The point here is simply that, once the drug has been developed, it will only be unprofitable to produce it if the price is below marginal cost of production. In the absence of perfect competition there is no pressure from other firms to lower the price if the price is above the marginal cost of production. Therefore, provided that the maximum price is not lowered below the marginal cost of production, it will remain profitable for the Firm to produce the drug at the lower price.
- 4.
We could also ask why the monopsonist purchaser does not bargain with the producer to identify the price at which the producer will no longer sell. One reason is strategy; bargaining games tend to have outcomes which result in a share of the surplus being appropriated by each player, unless there is a rule or threat that results in a corner solution (see Watson 2002, pp. 170–203) The second reason is that information on the threshold is in the public domain (or can be inferred from historic decisions) whereas the cost of production is in the private domain and varies across drugs. The third reason is the particular rules of reimbursement processes such as those in Australia. In Australia, the firm is required to provide evidence of the incremental cost and effect, and to demonstrate it is cost-effective (at or below the threshold). If the drug is not cost-effective, the Reimburser could signal that the firm should lower the price until it becomes cost-effective. There is no lever beyond this threshold that can be invoked by the Reimburser. This, as I argue later in this chapter, is what the CEO of Roche is referring to in the quotation at the start of this chapter: “the health economics holds up”, that is, if the only criterion for a new drug to be reimbursed is to be cost-effective, then why would it lower the price below this threshold.
- 5.
This game about optimal trial design from a strategic perspective is probably the most intuitively accessible of these three games, from the perspective of a pharmaco-economist. The Risk Sharing game is also accessible. Both illustrate the idea of characterising players and their actions.
- 6.
The Firm is a player in a game and a capital letter is used to signify this particular use of the term. Players have particular characteristics, defined mathematically, and firms with a small “f” do not necessarily have these characteristics.
- 7.
Leakage is a term used to describe the practice by prescribers of prescribing to all patients for whom there is a possible therapeutic benefit not just the patients for whom a subsidy has been approved on the grounds that it is cost-effective. The effect of leakage is to increase the budget for that drug beyond the expected expenditure and increase the aICER in actual practice above what was expected due to decreasing marginal benefits and increasing marginal costs.
- 8.
It’s complicated. If we assume that all drugs with acceptable cost-effectiveness are reimbursed at the offer price, then the benefits of a firm choosing not to have a drug reimbursed and instead sell it unsubsidised to consumers would appear limited, particularly if the new drug is very high cost. Furthermore, to sell a drug that is not subsidised when it is demonstrated to not be “value for money” would appear to be a strategy with little value. However, what is acceptable to a firm might not be acceptable to the regulator. Firms and regulators would dispute whether there are any new drugs that are not reimbursed that have acceptable evidence to support their evidence of incremental cost and effect, and have an acceptable ICER. Hence it is difficult if not impossible to count the number of drugs that meet these criteria of evidence quality and ICER acceptability and are not listed (subsidised) because the firm is unwilling to sell at that cost-effective price.
- 9.
A cursory review of the PBS schedule in a class with both generics and on-patent drugs indicates that the price per course is not identical.
- 10.
The highest profile RSA is that between the UK regulators and the firms that owned the patent for a range of drugs for Multiple Sclerosis (Boggild et al. 2009).
- 11.
This particular idea of multiple solutions is distinct from the idea of a non-unique solution to a given problem. The authors describe this idea as each solution concept capturing a specific notion of rationality and that game theory tools offer to “model specific situations at varying degrees and kinds of rationality”. Narratives have a role in supporting the particular rationality being used to solve a given game. Hence, the multiple solutions are a consequence of multiple rationalities, whereas non-unique solutions refer to the consequences of a single rationality.
- 12.
When economists refer to economic profit they are referring to profit that is over and above the opportunity cost of a firm’s capital, hence the Economics 101 result of the perfectly competitive market: “All firms earn zero profits in the long run competitive equilibrium.” For an explanation without the maths, see Landsburg (1988) pp. 191–193.
- 13.
The somewhat stochastic process of displacing existing service to finance new drugs tends to be a less directed largely politically determined process than reimbursement. It might be spread over many smaller programs and described as “budget cut-backs”. There are no Institutions analogous to the reimbursement Institutions that systematically determine whether a given service or technology should be disinvested (planned contraction of programs), although there is an increasing interest in establishing such a process (Pearson and Littlejohns 2007). It is proposed such processes would be driven by the evidence of a program or technology's lack of effect (e.g. some surgical procedures).
- 14.
Watson (2002) defines the solution concept of backward induction as analysing a game by starting at the end of the game and working back and identifying and “striking out” any action that is dominated and leaving the terminal nodes that can be reached.
- 15.
This Game assumes that the Firm chooses not to lobby for the price to be above the economic threshold, once it has been declared. There are some situations where the Firm can offer a price above the threshold price and then provide a case for this price, for example the high cost of R&D needs to be financed (Chap. 9), that new drugs need a premium over the standard maximum price because Firms invest in future innovative drugs (Chap. 10), or that new drugs have additional qualities beyond health [Pekarsky (2012, Appendix 10)].
- 16.
In Consumer Theory, an example of the corner solution is when the utility maximising solution occurs when the entire income is allocated to one good rather than across two goods. In this situation—the drug reimbursement game—it is describing an outcome in a case where there is no negotiation to lower the price when an offer price is at the threshold, even if this price could be tolerated by the Firm (it still makes an economic rent). There is no negotiation because the necessary and sufficient condition of this game—the price being at or below the threshold—is met at the IPER = threshold. It is a situation where the outcome is “extreme”, given the threshold selected by the Institution.
- 17.
Who are these target patients who will be worse off? Until the drugs become available, there is no information about who these patients will be. This leads to the following situation. If we focus on the health benefit to the patients who will benefit from the new drug and not patients whose health is reduced because services are withdrawn to finance the drug, then we are saying that our value of the health gain for a patient is a function of the method by which it is produced, namely patented drugs, rather than say, unpatented respite care. One of the assumptions in the introduction to this book is that a universal access health care system will not have a preference for the method of producing a health gain. This assumption is revisited in Chap. 11.
- 18.
For a discussion of the possibility that the Institution will reject the drug but not reallocate, refer to the Conclusion to his book (Chap. 11).
- 19.
For example Willan and Briggs (2006).
- 20.
Consider Drummond’s commentary on this scheme where he noted that a company needs to assume a price when it calculates an ICER and asks whether “the economic evaluation become an instrument for open price negotiation?” (Drummond 1992 p. 195)
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Pekarsky, B.A.K. (2015). The “New Drug Reimbursement” Game. In: The New Drug Reimbursement Game. Adis, Cham. https://doi.org/10.1007/978-3-319-08903-4_8
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