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

30 Pages Posted: 18 Nov 2021 Last revised: 16 Jun 2023

See all articles by Erin Kirwin

Erin Kirwin

Institute of Health Economics; The University of Manchester

Mike Paulden

University of Alberta

Christopher McCabe

University of Alberta - Emergency Medicine

Jeff Round

Institute of Health Economics

Matt Sutton

The University of Manchester

Rachel Meacock

The University of Manchester

Date Written: June 16, 2023

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

Suggested Citation

Kirwin, Erin and Paulden, Mike and McCabe, Christopher and Round, Jeff and Sutton, Matt and Meacock, Rachel, The Risk-Based Price: Incorporating Uncertainty and Risk Attitudes in Health Technology Pricing (June 16, 2023). Available at SSRN: https://ssrn.com/abstract=3956084 or http://dx.doi.org/10.2139/ssrn.3956084

Erin Kirwin (Contact Author)

Institute of Health Economics ( email )

Edmonton
Canada

The University of Manchester ( email )

Oxford Road
Manchester, N/A M13 9PL
United Kingdom

Mike Paulden

University of Alberta ( email )

Edmonton, Alberta T6G 2R3
Canada

Christopher McCabe

University of Alberta - Emergency Medicine ( email )

116 St. and 85 Ave
Edmonton, Alberta T6G 2R3
Canada
(780) 492-4202 (Phone)

Jeff Round

Institute of Health Economics ( email )

Edmonton
Canada

Matt Sutton

The University of Manchester ( email )

Oxford Road
Manchester, N/A M13 9PL
United Kingdom

Rachel Meacock

The University of Manchester ( email )

Oxford Road
Manchester, N/A M13 9PL
United Kingdom

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