The Price of Cost-Effectiveness Thresholds

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