The Price of Cost-Effectiveness Thresholds

31 Pages Posted: 12 Sep 2022

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)

Abstract

Health systems around world are adopting cost-effectiveness (CE) analysis to inform decisions about access and reimbursement. We study how CE thresholds imposed by health plans affect drug producers' pricing and access to new drugs. Analysing a sequential pricing game between an incumbent producer and a potential entrant, 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, stricter CE thresholds are never pro-competitive and may facilitate a collusive outcome with higher prices. 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 loss to patients not getting access to the new drug.

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

Suggested Citation

Brekke, Kurt Richard and Dalen, Dag Morten and Straume, Odd Rune and Straume, Odd Rune, The Price of Cost-Effectiveness Thresholds. Available at SSRN: https://ssrn.com/abstract=4216643 or http://dx.doi.org/10.2139/ssrn.4216643

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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