The Risk-Based Price: Incorporating Uncertainty and Risk Attitudes in Health Technology Pricing

Abstract

Decision-makers often determine if technologies are good value for money and should therefore be adopted through value-based decision rules that compare cost-effectiveness analysis results to threshold values. Value-based decisions rules assume that decision-makers are indifferent between interventions with the same expected value but different underlying uncertainty. We argue that such indifference is unlikely to hold in practice.

We propose a risk-based price and accompanying decision rules to address this limitation. Risk is characterised as the per-patient expected value of perfect independent information (EVPII), a modification of standard EVPI. The EVPII estimates the expected value of net benefit losses caused by uncertainty related to a technology, independent of the uncertainty related to alternative treatments. ‘Payer risk tolerance’ is the maximum per-patient risk of making wrong decisions that payers will accept, expressed in monetary terms. The risk-based price is the price at which the EVPII is equal to the payer risk tolerance. The risk-based decision rules are as follows: (i) a technology is acceptable for adoption if the incremental net benefit of the technology is greater than or equal to zero, and if the EVPII is less than or equal to the payer risk tolerance, and (ii) the optimal technology has the greatest expected net benefit at the lower of the sponsor submitted or risk-based price.

We demonstrate that both risk-averse and risk-neutral payers prefer risk-based pricing outcomes. Risk-based pricing improves incentives for evidence development. Its implementation could increase health system net benefits.

Keywords: Decision Rules, Value of Information Analysis, Independent Expected Value of Perfect Information