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Affordability – When is it a Concern?
Patricia Danzon, PhD
Celia Moh Professor Emeritus
The Wharton School
University of Pennsylvania
Affordability within CEA/Value-Based Systems:
CEA Threshold and Budget must be Related
 Sustained affordability requires that the Cost-Effectiveness threshold (K) is
consistent with the Budget (B)
 Larger budget => higher K
Higher K => more drugs are reimbursed/at higher prices
 In market-based health systems, K and the budget (premium) are
simultaneously chosen, may differ across plans
Reflect enrollees Willingness to Pay (WTP) for health care
 In public health systems, K and B should reflect taxpayer WTP in long run
In short run, if B is fixed, K may have to adapt to assure affordability
Expanding the Measure of Value:
Implications for Thresholds, Budgets and Affordability
 Measuring secondary benefits beyond QALYs (e.g. insurance value) is often
suggested to support use of a higher threshold K
 But if secondary benefits are measured for drugs, they must be measured for
all other goods and services, health and non-health
 Expanding the measure of value could raise or lower K* (the threshold cost per
expanded QALY), if B is fixed
 All services have more “value” => the cut-off may have to be lower
 Expanding measure of value may not support a higher health Budget
 Non-health goods (the opportunity cost of health spending) also have
secondary benefits
Specific Affordability Challenges: 1. High Price/High Volume
 High price/high volume drugs can appear unaffordable initially
 i.e. paying for all potentially eligible patients for a cost-effective new
treatment would exceed budget
 High price/high volume is most likely if new drug is:
 1) highly effective (“cure”) => high price reflects future cost offsets, and
 2) treats chronic, progressive disease => large stock of eligible patients
 Such high price/high volume affordability challenge is often transitory
 After treating initial patient stock, annual volume is modest + savings accrue
 => Stratified treatment of initial patient stock resolves affordability impact
 And allows time for competitive entry
2. Very Low Volume/Very High Price: Orphan Drugs
 1984 Orphan Drug Act (ODA): statutory R&D incentives for orphan drugs
 R&D tax credits
 5 year market exclusivity, etc.
 Informally, orphan drugs get significantly higher prices than non-orphans
 ROI for orphan drugs now higher than non-orphans (Evaluate Pharma)
 ODs now raise affordability concerns: ODs account for 30-40% of NDAs
Should Volume – Blockbuster or Orphan -- Be Considered
in Value Assessment?
 An inverse price/volume relationship cannot be rationalized if price is
based on Value
 An inverse price/volume relationship might be rationalized if price is
based on Costs, and some costs are fixed (invariant to patient volume)
 E.g. Drug discovery costs may be quasi-fixed
 But FDA adapts trial size and other regulatory requirements to reflect
patient volume etc. => total R&D costs pre-tax are not fixed
Even before ODA’s extra tax credits and exclusivities
 Incorporating Volume into Value frameworks lacks theoretical and
empirical support, for either blockbuster or orphan drugs
 Incorporating R&D cost into Value reimbursement distorts R&D
Conclusions
 Affordability implies a relationship between Budget and Threshold K
 Expanded value measurement for drugs may not justify a higher K
 Consistency requires expanded value measurement for all goods and
services….and resources are fixed
 Unaffordability appears related to volume: blockbusters and orphans
 Unaffordability of high volume/high price drugs is usually transitory
 Budget impact dissipates, once accumulated patient stock is treated
 Incorporating high/low volume in value assessment for pricing raises
unresolved theoretical + empirical issues
 Should R&D cost be included with value assessment? Why? How?
 Cost-based reimbursement distorts dynamic efficiency

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Affordability – When is it a Concern? (4:3 format)

  • 1. Affordability – When is it a Concern? Patricia Danzon, PhD Celia Moh Professor Emeritus The Wharton School University of Pennsylvania
  • 2. Affordability within CEA/Value-Based Systems: CEA Threshold and Budget must be Related  Sustained affordability requires that the Cost-Effectiveness threshold (K) is consistent with the Budget (B)  Larger budget => higher K Higher K => more drugs are reimbursed/at higher prices  In market-based health systems, K and the budget (premium) are simultaneously chosen, may differ across plans Reflect enrollees Willingness to Pay (WTP) for health care  In public health systems, K and B should reflect taxpayer WTP in long run In short run, if B is fixed, K may have to adapt to assure affordability
  • 3. Expanding the Measure of Value: Implications for Thresholds, Budgets and Affordability  Measuring secondary benefits beyond QALYs (e.g. insurance value) is often suggested to support use of a higher threshold K  But if secondary benefits are measured for drugs, they must be measured for all other goods and services, health and non-health  Expanding the measure of value could raise or lower K* (the threshold cost per expanded QALY), if B is fixed  All services have more “value” => the cut-off may have to be lower  Expanding measure of value may not support a higher health Budget  Non-health goods (the opportunity cost of health spending) also have secondary benefits
  • 4. Specific Affordability Challenges: 1. High Price/High Volume  High price/high volume drugs can appear unaffordable initially  i.e. paying for all potentially eligible patients for a cost-effective new treatment would exceed budget  High price/high volume is most likely if new drug is:  1) highly effective (“cure”) => high price reflects future cost offsets, and  2) treats chronic, progressive disease => large stock of eligible patients  Such high price/high volume affordability challenge is often transitory  After treating initial patient stock, annual volume is modest + savings accrue  => Stratified treatment of initial patient stock resolves affordability impact  And allows time for competitive entry
  • 5. 2. Very Low Volume/Very High Price: Orphan Drugs  1984 Orphan Drug Act (ODA): statutory R&D incentives for orphan drugs  R&D tax credits  5 year market exclusivity, etc.  Informally, orphan drugs get significantly higher prices than non-orphans  ROI for orphan drugs now higher than non-orphans (Evaluate Pharma)  ODs now raise affordability concerns: ODs account for 30-40% of NDAs
  • 6. Should Volume – Blockbuster or Orphan -- Be Considered in Value Assessment?  An inverse price/volume relationship cannot be rationalized if price is based on Value  An inverse price/volume relationship might be rationalized if price is based on Costs, and some costs are fixed (invariant to patient volume)  E.g. Drug discovery costs may be quasi-fixed  But FDA adapts trial size and other regulatory requirements to reflect patient volume etc. => total R&D costs pre-tax are not fixed Even before ODA’s extra tax credits and exclusivities  Incorporating Volume into Value frameworks lacks theoretical and empirical support, for either blockbuster or orphan drugs  Incorporating R&D cost into Value reimbursement distorts R&D
  • 7. Conclusions  Affordability implies a relationship between Budget and Threshold K  Expanded value measurement for drugs may not justify a higher K  Consistency requires expanded value measurement for all goods and services….and resources are fixed  Unaffordability appears related to volume: blockbusters and orphans  Unaffordability of high volume/high price drugs is usually transitory  Budget impact dissipates, once accumulated patient stock is treated  Incorporating high/low volume in value assessment for pricing raises unresolved theoretical + empirical issues  Should R&D cost be included with value assessment? Why? How?  Cost-based reimbursement distorts dynamic efficiency