This is a piece I’ve written for The SWITCH project website. SWITCH is a research project addressing issues related to the social market economy in Europe. The topics addressed in the project range from macro financial sustainability conditions to the dynamics of science and innovation. I’m self-syndicating the piece here.

The OECD has just released an interesting working paper comparing the issue of value of pharmaceutical innovations and its impact on pricing. The main well known argument is that policy on pricing should have impact in the short term (by lowering costs with respect to benefits) as well as in the long term (by encouraging R&D and innovation). The report analyses 12 countries mostly (but not exclusively) in qualitative terms. One obvious result is that heterogeneity among them is observed particularly among countries which have guidelines on the use of economic evaluation to drive the process of reimbursement and pricing and those which do not.

Of course, even among those formally considering cost-effectiveness considerations there are differences and the evidence is not conclusive as to, for example, which cost-effectiveness threshold should be selected. In particular, this has implications when discussing specific diseases and thus pharmaceutical interventions, such as terminal illnesses (eg cancer). In that respect, there is perhaps an argument to suggest the use of alternative utility functions, which for example include a measure of lower risk aversion on the part of the decision-maker.

While this aspect is only marginally hinted in the report, the tremendous implications from the technical point of view is clear. Tools such as the expected value of information can be used more extensively to aid in quantifying the value of deferring decisions (on reimbursement or pricing) in order to reduce the uncertainty characterising the evidence presented by the company. This is relevant as, almost invariably, files are based on limited evidence from clinical trials, which may need complementing from post-marketing or observational data.

Finally (a point missing from the report — although to be fair, this was not their main objective), the all important issue of the underlying assumption that the market is able to adjust instantly to the introduction of new, cost-effective interventions: most of the times, we observe older interventions staying on the market for a longer time. While this can be justified (eg by bringing to bear the uncertainty in the cost-effectiveness profile of the new intervention), it is also likely to produce a loss of optimality. Again, the expected value of information could be used to determine a form of pay back (eg from the companies allowed to remain on the market with a drug which is potentially non cost-effective), which could lead to alternative pricing policies Baio, G., Russo, P. (2009). A Decision-Theoretic Framework for the Application of Cost-Effectiveness Analysis in Regulatory Processes.

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