Tuesday, November 18, 2014

Drug pricing 101 (2)

The New Drug Reimbursement Game. A Regulator’s Guide to Playing and Winning

In my former post I was backing a complete review of current drug pricing regulation. Any official that has to perform this task needs some fresh ideas and knowledge and this is precisely what a new book provides. In The New Drug Reimbursement Game by Brita A.K. Pekarsky you'll find the economic foundations for a new drug pricing regulation.
The basic argument:
Higher prices today mean increased economic rent for the pharmaceutical industry (Pharma) otherwise firms would not lobby for them. It is in Pharma’s interest to protect and seek these economic rents. Whether higher prices and more R&D today increase future health remains an empirical question. If higher prices also mean a higher net present value of the population’s health, then it is in the institution’s interest to increase prices. Given the institution’s objectives, the most effective strategy Pharma can use to protect these rents is “the Threat”: lowering prices is against the interest of health funders because it will reduce a population’s future health.
Therefore,
 The regulator’s challenge is to answer the following question:
• “How should rational institutions respond to the Threat?” (A rational response is one that is consistent with a given institution’s stated objective function, whatever this may be.)
This introduction places this research question in the context of current evidence and research, by addressing the following three questions.
• Is it plausible that the Threat exists and that it influences the price of new drugs?
• Is there rigorous empirical evidence that suggests that lower drug prices will result in reduced future health?
• Are economists in agreement as to the value of a decision threshold for new  drugs that accommodates characteristics of the health budget such as allocative and technical inefficiency?
And the conclusion:
When the Institution buys this new drug, it buys the health effects from this drug and the health benefits from future innovation. This is not the case with other health programmes. Therefore, unless the Institution pays a premium for the health effects from the new drug, the population will be worse off because innovation will be suboptimal and the future drug will not be produced.
Unfortunately, when you get to the end you'll miss any consideration about what innovation means. If you look at recent patterns of effectiveness of new drugs, you'll see that the value of innovation is under scrutiny, and most drugs would not pass the test. In my opinion, the regulator has to send signals about the value of health improvement in certain diseases and pharmaceutical companies should focus R+D on such fields and avoid others.
Therefore, a new companion to this book should be written. This is only a regulator's guide to play, but not to win. Take it only as a starting point.

PS. Just FYI, you'll not find the term "Budget impact analysis"  in the book, a close term Programme budgeting marginal analysis PBMA is what you'll find. It is suggested a price effectiveness analysis as a previous requirement for any PBMA, otherwise it makes no sense. This approach seems quite different to  yesterday's news.



Thomas Piketty speech at UPF Oct 2014, it starts at min 8:10. My post, last May.

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