The CP incentivizes large life sciences innovation. The larger the innovation, the more money companies win.
Ganjour and Chernyak 11 – Afschin Gandjour is a medical doctor, health economist, and Gandjour received an M.D. from Hannover Medical School in Germany, an M.B.A. from Duke University, a Ph.D. in health economics from the University of Cologne in Germany, and an M.A. in philosophy from the University of Düsseldorf in Germany. He held faculty positions at the University of Cologne Medical School, Baylor College of Medicine, and Louisiana State University Pennington. Nadja Chernyak, Department of Public Health, Center of Health and Society, Heinrich-Heine University Düsseldorf, Düsseldorf, Germany.
Afschin Gandjour and Nadja Chernyak, October 2011, “A new prize system for drug innovation,” Health Policy, !
VBP = Value based pricing
The fundamental principle of the VBP approach is that costs of new medical technologies should not exceed their health benefits. The prize system we propose builds on this fundamental principle of VBP. Compared to existing pricing proposals we make specific suggestions on how to adjust health benefits for uncertainty in cost-effectiveness and equity considerations. Furthermore, we derive the WTP for health benefits from the cost-effectiveness ratio of palliative or nursing care, appropriate the full social value to the innovator, and discuss implications for generic price competition.
To further explain the VBP approach, consider that the relative efficiency of medical intervention is traditionally summarized as the incremental cost-effectiveness ratio (ICER) and assessed with reference to a threshold value for the WTP [33]:(1)C1−C0E1−E0=ΔCΔE<λwhere C1 − C0 denotes incremental costs of the new therapy, i.e., additional cost compared to the current treatment pattern, E1 − E0 denotes incremental health benefit of the new therapy, i.e., the difference in health outcomes between the new therapy and the current treatment pattern, and λ is an acceptable price per unit of health outcome. Current treatment pattern is the appropriate comparator because this is the treatment being substituted in the real world. That is, only incremental costs and benefits compared to current treatment represent the real-world costs and benefits of the new therapy.
Note that with current treatment pattern as a comparator, a new therapy may be compared to several different alternatives including no treatment. Hence, incremental costs and benefits represent weighted averages with weights representing the current market share of the different comparators.
Traditionally, the price of a drug has been set by the manufacturer and is an input to the calculation of the ICER. Alternatively, a cost-effective drug price can be derived from a threshold analysis by setting the ICER equal to the acceptable price per unit of health outcome (λ) [54]:(2)C1−C0E1−E0=ΔCΔE=λ
Decomposing the price of the new drug from its total costs yields:(3)C1−C0E1−E0=C1−p+P−C0ΔE=λwhere P is the price of the new drug and C1−p denotes costs induced by the new drug (i.e., costs of side effects, savings from avoiding morbidity, and costs from avoiding premature death). Rearranging Eq. (3) yields the maximum acceptable drug price:(4)P=ΔE⋅λ−(C1−p−C0)
As price P is a function of λ, the acceptable price per unit of health outcome is explicitly considered. The size of the reward is thus placed into the broader context of societal willingness/ability to pay for health improvements.
Independent of the threshold value λ chosen, innovators that develop drugs providing high incremental health benefits are generally more highly rewarded than firms that develop drugs offering only marginal improvements over existing treatments. Drugs that yield a lower benefit but demonstrate savings compared to existing treatments are also priced based on Eq. (4). Hence, incentives are created to develop cost saving therapies, which are equally or slightly less effective compared to the common practice.