Economic Evaluation and Comparative-Effectiveness Thresholds: Signals to Firms and Implications for R&D Investment and Innovation

22 Pages Posted: 24 Apr 2009

See all articles by John A. Vernon

John A. Vernon

University of North Carolina (UNC) at Chapel Hill; National Bureau of Economic Research (NBER)

Joseph H. Golec

University of Connecticut - Department of Finance

Date Written: March 30, 2009

Abstract

In this article we describe how reimbursement cost-effectiveness thresholds, per unit of health benefit, whether set explicitly or observed implicitly via historical reimbursement decisions, serve as a signal to firms about the commercial viability of their R&D projects (including candidate products for in-licensing). Traditional finance methods for R&D project valuations, such as net present value analyses (NPV), incorporate information from these payer reimbursement signals to help determine which R&D projects should be continued and which projects should be terminated (in the case of the latter because they yield an NPV < 0). Because the influence these signals have for firm R&D investment decisions is so significant, we argue it is important that reimbursement thresholds reflect the economic value of the unit of health benefit being considered for reimbursement. Thresholds set too low (below the economic value of the health benefit) will result in R&D investment levels that too low relative to the economic value of R&D (on the margin). Similarly, thresholds set too high (above the economic value of the health benefit) will result in inefficiently high levels of R&D spending. The U.S. in particular, which represents approximately half of the global pharmaceutical market (based on sales), and which seems poised to begin undertaking cost effectiveness in a systematic way, needs to exert caution in setting polices that explicitly or implicitly establish cost-effectiveness reimbursement thresholds for health care products and technologies, such as pharmaceuticals. In this paper we consider how cost-effectiveness thresholds influence R&D spending because firms react to payer reimbursement signals and guidelines.

Suggested Citation

Vernon, John A. and Golec, Joseph, Economic Evaluation and Comparative-Effectiveness Thresholds: Signals to Firms and Implications for R&D Investment and Innovation (March 30, 2009). Available at SSRN: https://ssrn.com/abstract=1392928 or http://dx.doi.org/10.2139/ssrn.1392928

John A. Vernon (Contact Author)

University of North Carolina (UNC) at Chapel Hill ( email )

102 Ridge Road
Chapel Hill, NC NC 27514
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Joseph Golec

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

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