This comprehensive text presents a rigorous framework from within which
regulators can respond strategically to the claim by the pharmaceutical
industry that lower drug prices today lead to a loss for the
population's future health due to less innovation. It starts with a
critical review of the empirical evidence of the return to consumers on
their ongoing investment into high drug prices in order to increase
future innovation. The implicit, critical and unrealistic assumption
inherent in these studies is identified, namely that the health budget
can be expanded to purchase drugs at higher prices without an
opportunity cost, for example, the foregone benefits of alternative
investments in health care infrastructure.
Price effectiveness analysis (PEA), is introduced. PEA informs the
question of how the innovative surplus from the new drug should be
allocated between the manufacturer and the consumer so as to optimise
society's welfare. The method allows the decisions by the regulator and
the firm to be analysed jointly by specifying the firm's production and
revenue functions in terms of the clinical innovation of a new drug; the
incremental effect used in the summary metric of cost effectiveness
analysis. An economic value of innovation that takes into account
opportunity cost under conditions of economic efficiency in the health
system is proposed: the health shadow price.
The limitations of the non-strategic methods that currently inform the
highly contested new drug subsidy game are presented and the relative
strengths of PEA are demonstrated. Health technology assessment
quantifies both the clinical innovation of a new drug and its financial
impact on the health system. Cost effectiveness analysis tests the
relationship between the incremental cost and incremental effect of a
new drug for target patients, at a given price. PEA tests the
relationship between the price of a new drug and the health of the whole
population, now and into the future. It achieves this by taking into
account current inefficiency in both resource allocation and the
displacement process, and the relationship between price and future
innovation.
