Value, Price, Guidance and Evidence Karl Claxton Department of Economics and Related Studies, Centre for Health Economics, University of York. Based on a paper to be published in Health Economics, available at

Overview Common concerns What is value? Value and price Price and guidance Price, uncertainty and the value of evidence Prospects

Common concerns Inward R+D –No incentives from current PPRS –Infrastructure and publicly funded research (Cooksey) NHS Spend –Reallocation of revenue –Total drug spend may well increase Value of innovation –Pay more than its value in the hope that something better will be developed? Subsequent to market –Shorter time until generic entry –True under current PPRS

£20,000 per QALY £40,000 Price = P* Cost-effectiveness Threshold £20,000 per QALY QALYs gained Cost £60,000 £30,000 per QALY Price > P* 3 What is value? £20,000 2 £10,000 per QALY Price < P* 1 Net Health Benefit 1 QALY Net Health Benefit -1 QALY

Price Quantity P* Q* Value and price Value of the innovation = P*.Q* All value is private revenue = P*.Q* No net health benefits to the NHS NHS benefits following patent expiry? 1. Competitive generic entry 2. New technologies priced relative to generic versions of the old

Price P1 Quantity P2 P3 Q1Q* Q2 S1S2 S3 Price and guidance? ChooseGuidanceRevenueNet Benefit P1S1P1.Q10 P2S1+S2P2.Q2A P3S1+S2+S3P3.Q3A+B A CB A

Price P1 Quantity P2 P3 Q1Q* Q2 S1S2 S3 Price and volume/rebate? Perfect discrimination P1 for Q1, P2 for (Q2-Q1), and P3 for (Q*-Q2) Marginal price volume P1 for Q1, and P0 > Q1 P2 for Q2, and P0 > Q2 P3 for Q*, and P0 > Q3 A B C A P0

How should we share value? Should the private sector get all the value? –We don’t care who gets it –No subsidies or publicly funded research and development But it is legitimate to care –NHS should get some of the value –No one has ever argued it should get it all How to share? –Avoid games (commitment, hold up and politicisation) –Other markets where innovation is protected –Give monopoly rights during patent period Explicit rules that mirror other markets –A free choice of price but with associated guidance –No price discrimination (marginal price volume/rebate) –No ‘winner take all’ negotiations

Price and the value of evidence? Approval close to licence –Net benefits of early access –Evidence base is least mature Impact on future research –Incentives for manufacturers –Ethics of experimental research –Recruitment into trials When do we need more evidence?

Why is evidence valuable? What’s the best we can do now?Could we do better? Choose B, expect net benefit of 1 QALY Get an extra 0.6 QALY Maximum benefit of more evidence is 0.6 QALYs or 12,000 per patient How things could turn out Net Health BenefitBest we could do if we knew Treatment ATreatment BBest choice Possibility 1912B Possibility 21210A12 Possibility 31417B Possibility 41110A11 Possibility 51416B Average Wrong decision 2/5 times

Coverage and evidence? Research conducted while approved for use –Publicly funded or sponsored research will be undertaken Questions to ask –Is additional evidence needed? –What type of evidence is needed? –Can this evidence be provided with concurrent NHS use? Type of research –Observational/registry –RCTs generally not possible

Coverage without evidence? Early approval? –Net benefits of early access –Forgo evidence need to support NHS practice If ignore uncertainty –We will undermine evidence base –Current and future technologies Compare costs and benefits to all NHS patients? –Price and guidance depends on uncertainty –As well as effects, other costs and the threshold

Benefits of approval Opportunity costs of approval Only in research? ICER Cost > Benefits

Provide the evidence needed Benefits > Costs

Or reduce price Benefits > Costs ICER

Dangerous omission?An opportunity not to be missed Account for uncertainty and the need for evidence Reward investment in evaluative research Incentivise the critical path envisaged in Cooksey Earlier decisions without undermining the evidence base for future NHS practice

Clear and predictable signals Reduce unnecessary risks and uncertainty –Provide information - display the NHS demand curve –Avoid unexpected no’s and delays Explicit rules –Avoid ‘hold up’ and demonstrate commitment –Threshold based on what is displaced in the NHS –Redress – scientific methods and process Depoliticise allocation decisions in the NHS –A threat to public and private sectors –Share the benefits of ‘yes’ and the responsibility for ‘no’

Prospects? There are potentially significant benefits –Short run but greater in the longer run Opportunity to link price, evidence and guidance –Incentivise/guide the critical path outlined in Cooksey Reduce all risks not necessary for incentives For example, –Expected revenue for a product and total expected spend –Monitor and/or agree a two way rebate –Negotiate bands for growth in spending? OFT is a good deal for private sector – its too good!