The Price of Cost-Effectiveness Thresholds

49 Pages Posted: 15 Mar 2023

See all articles by Kurt Richard Brekke

Kurt Richard Brekke

Norwegian School of Economics (NHH) - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Dag Morten Dalen

BI Norwegian Business School - Department of Economics

Odd Rune Straume

CESifo (Center for Economic Studies and Ifo Institute); University of Minho - Economic Policies Research Unit (NIPE)

Multiple version iconThere are 2 versions of this paper

Date Written: March 13, 2023

Abstract

Health systems around world are increasingly adopting cost-effectiveness (CE) analysis to inform decisions about access and reimbursement. We study how CE thresholds imposed by a health plan for granting reimbursement affect drug producers pricing incentives and patients access to new drugs. Analysing a sequential pricing game between an incumbent drug producer and a potential entrant with a new drug, we show that CE thresholds may have adverse effects for payers and patients. A stricter CE threshold may induce the incumbent to switch pricing strategy from entry accommodation to entry deterrence, limiting patients access to the new drug. Otherwise, irrespective of whether entry is deterred or accommodated, a stricter CE threshold is never pro-competitive and may in fact facilitate a collusive outcome with higher prices of both drugs. Compared to a laissez-faire policy, the use of CE thresholds can only increase the surplus of a health plan if it leads to entry deterrence in which the price reduction by the incumbent necessary to deter entry outweighs the health loss to patients not getting access to the new drug.

Keywords: Pharmaceuticals, Health Plans, Cost-effectiveness analysis, ICER, Therapeutic competition

JEL Classification: I11, I18, L13, L65

Suggested Citation

Brekke, Kurt Richard and Dalen, Dag Morten and Straume, Odd Rune and Straume, Odd Rune, The Price of Cost-Effectiveness Thresholds (March 13, 2023). NHH Dept. of Economics Discussion Paper No. 04, 2023, Available at SSRN: https://ssrn.com/abstract=4387291 or http://dx.doi.org/10.2139/ssrn.4387291

Kurt Richard Brekke (Contact Author)

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5035 Bergen
Norway

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Dag Morten Dalen

BI Norwegian Business School - Department of Economics ( email )

N-0442 Oslo
Norway
+47 46410774 (Phone)

Odd Rune Straume

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

University of Minho - Economic Policies Research Unit (NIPE) ( email )

Campus de Gualtar
Braga, 4710-057
Portugal

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