By Prof. Dr. Lieven Annemans, expert-trainer of the Health Economics for Non-Health-Economists course, How to Optimally Manage HTA Criteria & Processes in Europe and the Online Self-Study Programme - Basics of Health Economics.

At the OECD Ministerial Meeting on ‘Next Generation of Health Reforms’ (17January 2017), Ministers concluded that several new generation treatments are on the one hand very effective but are on the other hand very costly and have significant budget impact and wider implications for our health systems. ⁽¹⁾

In search for a solution for this dilemma, it is sometimes argued that prices of innovative medicines should better reflect investments for Research and Development (R&D), a logic which is sometimes referred to as “cost plus pricing”. Although this approach might at first sight seem fair, it raises several issues:

• Firstly, it may lead to the wrong incentives, in that the higher the R&D costs, the higher the price which could be justified.
• Secondly, investment costs for medicines that eventually do not make it to the final stage (because of insufficient effect or due to toxicity, or other reasons) must be amortised and factored into the cost of R&D, which may then lead to a perverse situation where a company with many failures could justify a higher price for a few products that make it to market authorisation.
• Finally, this approach does not sufficiently encourage true innovation. Irrespective of the benefit to patients, reward will be according to R&D costs.

A better approach is to start from the principle that decisions on pricing and reimbursement for innovative medicines should account for the added value that they deliver for patients and society, the so called “value based pricing”. Value can thereby be defined as “the importance, worth, or usefulness of something”. ⁽²⁾ This principle is based on the general economic concept that prices of new goods indicate the difference between what currently available goods offer and the outcomes that the new goods can provide. ⁽³⁾ High value then originates from substantially better treatment outcomes versus the actual standard of care. However, better outcomes should not be the sole criterion. For instance, from the work of Erik Nord, it appears that societal willingness to pay for new treatments is dependent on the degree of severity or suffering associated with the current situation. ⁽⁴⁾ Value should therefore be defined by both disease and treatment related characteristics. ⁽⁵⁾

But value does not necessarily mean “value for money”. Price and reimbursement levels of medicines should correspond with an acceptable value for money from a societal perspective. This means that the cost-effectiveness, i.e. the ratio between the net cost of the treatment and the net health benefits always needs to be calculated. Net cost means that predicted savings or additional costs elsewhere in the system or in society are explicitly taken into account. In the interpretation of cost-effectiveness it is then important to have societal thresholds: the maximum amount of money a society is willing to pay for gaining healthy life years or Quality Adjusted Life Years (QALYs) needs to be made explicit.
Moreover, decision makers should also systematically take into consideration the budget impact and affordability for the healthcare system. Indeed, even if a treatment is cost-effective, it does not mean automatically that it is affordable. ⁽⁶⁾ This is undoubtedly a matter of opportunity cost. Putting too much money in one basket, i.e. one disease, takes away the opportunity to help other patients. Budget impact analyses are therefore required to assess the extent to which the healthcare system can afford to pay for the innovation. In this scenario, the possible offsets elsewhere in the system are to be taken into account as well. ⁽⁷⁾

Bringing all the above together, this means that the abovementioned societal thresholds need to be modulated depending on the disease burden, as already proposed in The Netherlands ⁽⁸⁾ as well as on the budget impact of the innovative medicine. ⁽⁹⁾ Hence, for a treatment in an area with a high burden, and with a low budget impact, the societal willingness to pay for additional health outcomes should be higher. ⁽¹⁰⁾ The opposite is true for a treatment in a disease with low burden and a high budget impact. Of course, specific characteristics of each country, such as ability to pay, epidemiological and cultural factors and societal values play a prominent role here.

When healthcare payers communicate explicitly about the societal thresholds in value based pricing, and how they are modulated in function of disease burden and budget impact it should be possible to reward value and at the same time account for affordability. This approach can be called “value informed and affordable prices” (VIA pricing) and may become a solution for the current dilemma.
 

⁽¹⁾ Ministerial Statement ‘"The next generation of health reforms’. OECD Health Ministerial Meeting 17 January 2017

⁽²⁾ https://en.oxforddictionaries.com/definition/value

⁽³⁾ Taylor D and Craig T. Value based pricing for NHS medicines: magic bullet, counterfeit treatment or the mixture as before? Health Economics, Policy and Law (2009), 4: 515–526

⁽⁴⁾ Nord E. Concerns for the worse off: fair innings versus severity. Social Science & Medicine 60 (2005) 257–263

⁽⁵⁾ Annemans L et al. Recommendations from the European Working Group for Value Assessment and Funding Processes in Rare Diseases. OJRD 2017 accepted for publication.

⁽⁶⁾ Birch S, Gafni A; Information created to evade reality (ICER): things we should not look to for answers. Pharmacoeconomics. 2006;24(11):1121-31.

⁽⁷⁾ Niezen et al. Finding legitimacy for the role of budget impact in drug reimbursement decisions. Int J Technol Assess Health Care. 2009 Jan;25(1):49-55

⁽⁸⁾ Zorginstituut Nederland (ZIN). Kosteneffectiviteit in de praktijk (cost-effectiveness in practice); 26 June 2015

⁽⁹⁾ Griffits EA et al. Acceptance of health technology assessment submissions with incremental cost-effectiveness ratios above the cost-effectiveness threshold. Clinicoecon Outcomes Res. 2015 Aug 31;7:463-76

⁽¹⁰⁾ Paulden M et al. Value-Based Reimbursement Decisions for Orphan Drugs: A Scoping Review and Decision Framework. PharmacoEconomics (2015) 33:255–269

Last update: September 2021

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