Trust, constraints and the counterfactual: reframing the political economy of new drugs.

Abstract

This thesis uses an applied game theoretic framework to address the following question: What is the population health maximising decision threshold price for a new drug? This threshold accommodates: strategic behaviour; inefficiencies in the health care system; budget constraints; suboptimality of displacement to finance the additional cost of new drugs; failure of markets to develop evidence of unpatented services; and the relationship between drug price and future innovation and health. A framework (price effectiveness analysis, PEA) for the analysis of the reimbursement process as a strategic interaction is proposed and tested. PEA uses the results of cost effectiveness analyses as inputs in a model that derives the population health outcomes of reimbursement: the net health effect of i) adoption of the new drug; and ii) displacement to finance its additional costs. The first result is that the health shadow price, βc, is the population health maximising decision threshold, under the conditions of a fixed and allocatively inefficient budget: βc = (1/n-1/m + 1/d)⁻¹ where n is the most cost effective of existing programs in expansion or adoption; m is the least cost effective in contraction, and d is the average ICER of services displaced to finance the additional costs of the new drug at the offer price. Allocative inefficiency is characterised by m-n and suboptimality of displacement by m-d. The second result is that there are restrictive conditions under which there is an incentive for a rational institution to pay a price above βc to take into account the relationship between price and future innovation. However, if these conditions are met, the firm will prefer to raise funds through the capital market rather than contract with an institution. Currently, reimbursing institutions provide an incentive to develop evidence of the cost and effect of patented health technologies. Adopting βc as the new drug decision threshold places a value on evidence of the least and most cost effective services, regardless of whether they are being proposed for reimbursement. Hence, the market’s failure to provide evidence of unpatentable and unpatented health services is addressed and the health gains possible from a budget increased.