In this presentation, OHE's Pistollato explains why it is important to consider price changes after marketing in CEA analysis and presents an approach for doing so.

1. Incorporating Life-cycle Price Modelling into Pharmaceutical Cost-effectiveness Analysis
Michele Pistollato
PharmAccessLeaders Forum
Berlin• 8–10 October 2014

2. 2
Content
•
Introduction
•
Implications of ignoring “life-cycle pricing”
•
Method
•
An example
•
The impact of “life-cycle pricing” on cost- effectiveness analysis (CEA)
•
Findings
•
Possible solutions

3. 3
Introduction –1/2
•
The cost-effectiveness (CE) and the reimbursabilityof a new drug can be assessed through the incremental cost- effectiveness ratio (ICER), which compares the incremental cost of funding a new drug with the incremental benefits it provides to patients
•
When the benefits of a medicine can be accrued also into the future and the treatment may need to be provided over the years (possibly for the patient's lifetime), a health sector decision maker needs to assess also the present value of future costs and benefits when evaluating the CE of a new drug
•
In particular, when discounting future costs, the price of a drug is typically assumed to be constant in real terms (i.e. the price increases at the same rate as inflation) and it is discounted at a real interest rate reflecting the time preferences of patients
•
This approach does not account for drug life cycle pricing

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Introduction –2/2
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Theories and methods to measure and model current and future efficacy/effectiveness of a drug are well developed
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Traditionally, CEA models consider real prices (i.e. inflation adjusted) and discount them at a real discount rate reflecting time preferences
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the starting point is the launch price
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no guidance suggests how to model future changes in price (due, for instance, to patent expiry)
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Gold et al. (1996): “We are unaware of any published CEAs that have included any adjustment for changes in the relative cost of producing ‘effectiveness’ over time.”

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An exception
The New Zealand agency recognisesthat the future costs of using a drug should take into account the lower price of future generic medicines, as it is very likely that the price of a new drug will drop substantially after generic entry:
“When calculating the cost of a pharmaceutical intervention and comparator pharmaceutical(s), consideration should also be given to the length of the pharmaceutical patent and time until a generic pharmaceutical is likely to become available. It is recommended that in cases where the patent expiry is within 10 years from expected date of pharmaceutical funding, the expected time and price reduction from a likely generic pharmaceutical should be included in the analysis. If the patent expiry is after 10 years from expected date of funding, a conservative proxy should be used for the estimated time until the introduction of a generic pharmaceutical and subsequent price reduction (e.g. 25 years until expiry and 70% price reduction with introduction of generic).” (Pharmac, 2012)

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Implications of ignoring “life-cycle pricing”
•
Ignoring future price changes can have important implications for cost-effectiveness analyses:
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Some new medicines may be deemed as not cost-effective (and, therefore, not be included in reimbursement formularies)
•
Public policies might provide the ‘wrong’ incentives
•
It is necessary to understand how cost-effectiveness analysis can account for future price variation:
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Analysewhether different factors (i.e. parameters) can impact future prices
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Understand if “traditional” CEA not including future pricesfavours(vs. hinder) some particular types of drugs
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Consider policy implications, i.e. how to address possible flaws in the “traditional”CEA

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Methods
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Literature review
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Review of the literature on CEA to asses the extent of the “issue” and possible solutions
•
Theoretical modelling
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Build a theoretical model to analyse the impact of the life-cycle pricing on CEA
•
Derive policy conclusions and recommendations from the theoretical analysis

8. 8
A stylisedexample
Year
DrugB
Drug C
Cost (price)
Benefit
Cost (price)
Benefit
1
200
15
100
10
2
200
15
100
10
…
200
15
100
10
20
200
15
100
10
Table 1: astylised example
A new drug B is marketed for a specific (chronic) indication that is currently treated with drug C
What if the patent on Bexpires in year 10 and generics enter the market at a cheaper price?

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Incremental cost-effectiveness
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The present and future differences between the cost (price) of B and C are discounted at a given rate rpto compute the present value of the incremental costs:
푃푃푃푃퐶퐶=200−100+ 200−1001+푟푟푝푝 +⋯+ 200−1001+푟푟푝푝 19
•
The present and future differences between the benefit of B and C are discounted at a given rate rbto compute the present value of the incremental benefits:
푃푃푃푃퐵퐵=15−10+ 15−101+푟푟푏푏 +⋯+ 15−101+푟푟푏푏 19

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Main determinants of CE
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Efficacy/effectiveness
•
New drug and comparator(s)
•
Discount rates
•
Price of the comparator or current best practice
•
Price of the new drug
•
Demand/market size
–
at launch and future
–
“differentiation” from the comparator(s)
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Discount factor of future revenues
•
Years to patent expiry
•
Number of years on treatment

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Life-cycle pricing
Year
DrugB
Drug C
Cost (price)
Benefit
Cost (price)
Benefit
Originator
Generic
1
200
-
15
100
10
2
200
-
15
100
10
…
200
-
15
40
10
10
200
50
15
40
10
…
200
50
15
40
10
20
200
50
15
40
10
Table 2: a stylisedexample accounting for life-cycle pricing

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How understand the impact of life- cycle pricing on CEA?
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Empirical and statistical analysis of evidence (Hoyle 2009, 2011)
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Suggests a “correction factor”
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It does not need any simplification but it is not generalisable
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Theoretical quantitative and qualitative analysis of the method to calculate CE
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It can be generalised but needs some “stylisation” of the reality

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Findings from the theoretical analysis of the “traditional” CE
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Theoretical analysis shows that the CE of drugs with
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Long life after patent expiry
•
Close thereaputic substitutes
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Lower (future) competition from generics
might be misjudged when assessed using “traditional” CE methods

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Examples of possible “misjudgement”
1.
When the price of the comparator is reduced:
•
The “traditional” ICER implies that cost-effectiveness of the new drug decreases
•
A “life-cycle adjusted” ICER might imply that the cost- effectiveness of the new drug increases.
2.
When more patients/GPs may remain “loyal” to the branded originator after patent expiry:
•
The “traditional” ICER implies that cost-effectiveness of the new drug increases
•
A “life-cycle adjusted” ICER might imply that the cost- effectiveness of the new drug decreases.

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Possible solutions
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Taking into account the lower price of future generic medicines (as in New Zealand)
•
Using a correction factor (Hoyle)
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Based on the analysis of historical data, the ICER in the UK should be 2/3 of the current value
•
Refining ICER (or other formulae used in CEA)
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Using a more sophisticated formula accounting for future changes in prices

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Conclusions
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The inclusion of future price considerations into CEA must be made with caution as, under specific conditions, the cost-effectiveness of new drugs might be “reversed” compared to the traditional CEA
•
It is necessary to understand which types of drug can systematically be favoured(or hindered) using a traditional vs. adjusted CEA
•
Some of the characteristics of the market for these potentially “misjudged”drugs:
–
Long life after patent expiry
–
Close thereaputic substitutes
–
Lower (future) competition from generics
•
A policy maker might consider providing support for drugs hindered under a traditional CEA instead of switching to an adjusted CEA

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About OHE
To enquire about additional information and analyses, please contact Michele Pistollatoat mpistollato@ohe.org.
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