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Economic Evaluation and Cost-Effectiveness Thresholds

Signals to Firms and Implications for R&D Investment and Innovation

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Abstract

In this article we describe how reimbursement cost-effectiveness thresholds, per unit of health benefit, whether set explicitly or observed implicitly via historical reimbursement decisions, serve as a signal to firms about the commercial viability of their R&D projects (including candidate products for in-licensing). Traditional finance methods for R&D project valuations, such as net present value analyses (NPV), incorporate information from these payer reimbursement signals to help determine which R&D projects should be continued and which should be terminated (in the case of the latter because they yield an NPV < 0). Because the influence these signals have for firm R&D investment decisions is so significant, we argue that it is important for reimbursement thresholds to reflect the economic value of the unit of health benefit being considered for reimbursement.

Thresholds set too low (below the economic value of the health benefit) will result in R&D investment levels that are too low relative to the economic value of R&D (on the margin). Similarly, thresholds set too high (above the economic value of the health benefit) will result in inefficiently high levels of R&D spending. The US in particular, which represents approximately half of the global pharmaceutical market (based on sales), and which seems poised to begin undertaking cost effectiveness in a systematic way, needs to exert caution in setting policies that explicitly or implicitly establish cost-effectiveness reimbursement thresholds for healthcare products and technologies, such as pharmaceuticals.

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Notes

  1. Some of the material in this paper is based on previous research undertaken jointly with several co-authors. See, for example, Vernon et al.[1,2] Portions of the introduction section and Section 2 come from unpublished earlier versions of the aforementioned joint research.

  2. A QALY is a year of life in perfect health; because life-years are often not lived in perfect health, utility scores ranging from 0 (death) to 1 (perfect health) are used to adjust life-years based on the degree of health in a given year. As such, these utility adjustments place survival and life-years on a level playing field. For example, 2 years lived in a state of poor health associated with a utility score of 0.5 would be equivalent to a year of life in perfect health, in which the utility score would be 1 (this ignores discounting).

  3. In a previously published paper,[1] we describe the various methods used within this context by firm managers, especially for potential projects in the earliest stages of drug development.

  4. In addition to the aforementioned studies, the interested reader is also referred to the paper by Devlin and Parkin.[32]

  5. This assumes several things. Abbott and Vernon[33] provide a detailed analysis and discussion of these assumptions. In simple terms, a lower equilibrium price, i.e. P max, all else held constant, will lead to lower net present values (NPVs) for developmental products (or potential in-license products) and fewer R&D projects will satisfy the NPV > 0 investment criterion, and thus will be discontinued. A similar but more complicated logic holds when R&D projects are modelled as real options.

  6. As was suggested to us by one of the referees of this article, publicly subsidized R&D and potential inefficiencies resulting from patent races might result in an optimal value of k < v.

  7. It is also true that hedonic estimates of the value of a life-year have been undertaken and conclude that a life-year is valued at levels greater than $US175 000.

  8. We thank an anonymous reviewer for bringing this point to our attention.

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Acknowledgements

The authors would like to thank the following individuals who have influenced this work in a significant manner: Keener Hughen, Scott Johnson, Antonio Tujillo, Fred Cox, Larry Gorkin, Jack McMillan, Lesley Shane and Dick Willke. The authors are very grateful to three anonymous referees who provided excellent feedback and suggestions for improving this article. Any errors in this paper are those of the authors. Finally, Anna Thomson and the editorial staff at PharmacoEconomics were enormously helpful in finalizing the published version of this paper. The authors are indebted to them for their painstaking review of citations and edits. The Center for Medicine in the Public Interest provided a $5 000 grant for the commissioning of this paper.

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Authors and Affiliations

  1. Department of Health Policy and Management, The University of North Carolina at Chapel Hill, Chapel Hill, North Carolina, USA

    John A. Vernon

  2. Center for Medicine in the Public Interest, New York, NY, USA

    Robert Goldberg

  3. Finance Department, School of Business, University of Connecticut, Storrs, Connecticut, USA

    Joseph Golec

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  1. John A. Vernon
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  2. Robert Goldberg
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Correspondence to John A. Vernon.

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Vernon, J.A., Goldberg, R. & Golec, J. Economic Evaluation and Cost-Effectiveness Thresholds. Pharmacoeconomics 27, 797–806 (2009). https://doi.org/10.2165/11313750-000000000-00000

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