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The role of economic evaluation in the pricing and reimbursement of medicines
ELSEVIER
Health Policy 40 (1997) 199-215
The role of economic evaluation in the pricing and reimbursement of medicines Michael Drummond a,*, Bengt JGnsson b, Frans Rutten ’ ’ Centre for Health Economics, b Centre for Health Economics, ’ Institute for Medical Technology
University of York, Heslington, York YOI SDD, UK Stockholm School of Economies, Stockholm, Sweden Assessment, Erasmus University, Rotterdam. Netherlands
Received 24 December 1996; received in revised form 20 January 1997; accepted 20 January 1997
Abstract In most countries, governments or health insurershave taken initiatives to influencethe price and utilization of medicines.One stated objective of these schemesis to encourage efficiency, or cost-effectiveness.In principle, economicevaluation should to be relevant to decisionsabout the pricing and reimbursementof health technologies,sinceit offers a way of estimatingthe additional value to society of a new intervention (e.g. medicine)relative to current therapy. However, the application of economic evaluation in drug pricing and reimbursementschemesis variable. Therefore, this paper reviews the actual and potential role of economicevaluation in different drug pricing and reimbursementschemes,such as ‘free pricing’ systems(United Kingdom, United States), two-stage administeredsystems (France), referencepricing systems(Germany, Netherlands,Sweden)and economicevaluation systems(Australia, Canada).It is concludedthat, other than in the caseof Australia and Canada, the potential role of economicevaluation could be greatly developed,especiallyin the caseof new medicines,for which there is no closesubstitute.Commentsare alsogiven on the practical problems of using this approach. However, it is noted that economic evaluation alone cannot seta price for a medicine,sincea decisionhasto be madeabout the proportion of added value going to society and the proportion going to the pharmaceutical company as a reward for innovation. 0 1997Elsevier ScienceIreland Ltd. Keywords:
Cost-effectivenessanalysis;Pharmaceuticals;Referencepricing
* Corresponding
author. Tel.: + 44 1904 433709; fax: + 44 1904 433644, e-mail: [email protected]
016%8510/97/$17.00 0 1997 Elsevier Science Ireland Ltd. All rights reserved. PII SOl68-8510(97)00901-9
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1. Introduction The pricing and reimbursement of pharmaceuticals is a source of continuing policy debate. On the one hand, governments are worried about expenditure on health care and view the pharmaceuticals budget as one easily identifiable component that could threaten their goal of cost containment. On the other hand, the pharmaceutical industry argues that its investments in research and development should be adequately rewarded and that patients (and their physicians) should have adequate choice of therapies. In most countries, governments or health insurers have taken initiatives to influence the price and utilization of pharmaceuticals. Measures to influence utilization include the establishment of national formularies (or ‘positive lists’), the development of treatment guidelines, the encouragement of generic prescribing and the provision of information to prescribers on the costs or cost-effectiveness of therapeutic alternatives. Measures to inlluence price include the establishment of national price or profit control schemes and reference pricing. Under reference pricing, the government or health insurer sets the level of public payment for a given group or ‘cluster’ of drugs. Manufacturers are free to set the price of their product above the reference price, but the patient has to pay the difference. Also, in some jurisdictions, there are restrictions on the indications for which drugs are reimbursed, even though the licensed indications may be broader. For example, when simvastatin (a new drug to treat elevated cholesterol) was first launched in the Netherlands, its reimbursement was restricted to patients with high risk of a coronary heart disease event (i.e. those with pre-treatment cholesterol level of 6.5 mmol/l or above with at least two additional risk factors and those with pre-treatment cholesterol level of 8.0 mmol/l or above with at least one additiona risk factor). Of course, a prior question is that of whether any controls on the pricing and/or reimbursement of pharmaceuticals are justified. It is generally assumed that the market for pharmaceuticals is likely to be imperfect for two reasons. First, the consumer (the patient) does not normally pay the full cost of the medications concerned. Therefore, he or she does not have an incentive to seek out the option giving the best value for money. Secondly, the decision on the choice of drug is usually taken by the doctor, acting as the agent of the patient. Therefore, the decision maker does not incur any costs and may even be unduly influenced by promotional activities to recommend one product rather than another, although attempts are made in most jurisdictions to ensure that promotional activities are appropriate and do not offer inducements. Where there are good reasons to think that markets are not operating perfectly, economic evaluation has been proposed as a way of estimating the costs and consequences to society of various health care interventions [l]. The role of economic evaluation in the pricing and reimbursement of medicines has been debated more widely since the Australian government made the provision of economic data mandatory in January 1993. Since this time, submissions for
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inclusion of drugs on the Pharmaceutical Benefits Schedule (PBS), a national positive list of drugs reimbursed by the government, have had to include an economic evaluation of the drug concerned, compared with a relevant alternative, at a price determined by the applicant company [2]. Australia’s lead was followed by the Province of Ontario (in Canada) in 1994 [3], within the framework of Canadian guidelines also published in 1994 [4]. Recently another province, British Columbia, has announced its intention to request economic data prior to listing on the provincial formulary [5]. There are a number of possible objectives of pricing and reimbursement policies. One is merely cost containment. However, most governments claim that the encouragement of efficiency is one of the objectives, in the absence of a well functioning market for drugs. In principle, economic evaluation should be relevant to pricing and reimbursement decisions within an environment where value-for-money considerations are important. After all, it offers an approach to estimating the additional value of a drug relative to current therapy. Therefore, it provides an estimate of the maximum amount society should be willing to pay to adopt the new drug instead of the alternative. However, a number of practical difficulties exist. First, in some countries, the pricing and reimbursement decisions are made by different committees. Conversely, economic evaluation implicitly links them, since value-for-money of a drug can only be assessed if a price is assumed. Secondly, Drummond et al. [6] pointed to the wide range of approaches to the pricing and reimbursement of medicines currently in existence in Europe, and the corresponding uncertainties about the role of economic evaluation. Therefore, this paper seeks to clarify the role of economic evaluation in the pricing and reimbursement of medicines. In the next section, the main types of pricing and reimbursement systems are reviewed. Then the problems and prospects of using economic evaluation in each system are outlined. Finally, some conclusions are drawn.
2. Pricing and reimbursement
2.1. ‘Free pricing’
systems
systems
In some countries there is no centralized approach to pricing and reimbursement of drugs. Here the majority of medicines are automatically listed for reimbursement under the national or social health insurance scheme (or national health service) and pricing is at the discretion of the manufacturer. Examples of this approach are the systems operating in the UK and the USA. It would be wrong, of course, to suggest that the price and utilization of medicines is totally unregulated in such countries. Some have a list of drugs that are not reimbursed, such as the Selected List operating in the UK. In addition, a number of indirect controls may exist, such as drugs budgets for medical practi-
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tioners. In the UK there is also a profit control measure, the Pharmaceuticals Price Regulation Scheme. Indirectly, this imposes limits on prices since companies exceeding their profit target may be subject to ‘claw back’ of revenues by the government. Therefore, companies may prefer to limit price rises rather than pay monies to the Department of Health. Finally, in some settings, most notably the USA, market forces may go some way to controlling drug prices. 2.2. Two stage administered
systems
Under this system a new drug is first assessed in terms of its therapeutic equivalence to other existing medicines. This assessment may also determine what percentage of the drug price is reimbursed to the patient. Once the medicine has been classified in this way, the price of the product is set by negotiation between the manufacturer and the government. Different criteria are applied in the price negotiations in different countries. In some cases prices are set in comparison with similar products already marketed for the therapeutic indication concerned. In others, prices are set by reference to those of the same product in other countries. Pelt and Castan [7] have described the French system in detail. After receiving marketing authorization for its new drug, the manufacturer must complete a two-part dossier in order to negotiate a price. The first part goes to the Transparency Commission, which assesses whether the new medicine can be considered an innovation and the potential medical benefit in comparison with drugs already on the market. It then determines the reimbursement status and the reimbursement rate. New pharmaceuticals are now awarded reimbursement for a 3 year period only. After this, the Health and Social Security Ministry may decide not to renew reimbursement, in which case it must justify its decision in accordance with the recommendation by the Transparency Commission. After the Transparency Commission has given its opinion, the company must negotiate price with the Economic Committee. A number of factors are considered alongside the assessment of medical benefit given by the Transparency Commission. These include the daily treatment cost, the daily treatment cost of comparable drugs, the sales forecast, the total treatment cost and, for innovative drugs, the European price, if the drug has been introduced in other countries. The Committee also considers some characteristics of the company as well as the particular product. 2.3. Reference pricing systems Under this system drugs are grouped (or ‘clustered’) according to chemical, pharmacologic or therapeutic equivalence. Then a single reimbursement level (the ‘reference price’) is set for the whole cluster. This approach is similar to the two-stage administered system outlined above, but differs in that manufacturers can choose, if they so wish, to set the drug price higher than the reference price. In this case the patient pays the difference.
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Reference pricing has been gaining popularity with policy makers in a number of countries. The main reason for this is that it offers the possibility of limiting public reimbursement, whilst not restricting the choice of medicines available to patients and their physicians. Slightly different reference pricing schemes operate in different European countries. As a result of the growing interest in reference pricing systems, these are discussed in some detail below. 2.3.1. The German system The first reference price system was introduced in Germany, with the implementation of the Health Care Reform Act in 1989. Under the German system three classes of drugs are distinguished: drugs with the same active ingredients (class I), drugs with therapeutically comparable active ingredients (class II), and drugs with comparable pharmacotherapeutic effects (class III). A statistical methodology is used to calculate what is, in effect, an average price of the drugs within a cluster and this reference price varies with the strength and package size. The price is finalized after conferring with drug manufacturers and pharmacists and adjusted annually taking into account inflation and other factors [8]. Establishing reimbursement levels for the three classes of drugs took place in overlapping periods from 1989 onwards. By mid-1992 84 active ingredients were covered in class I, 89 in class II and only a few in class III [9]. In 1996 prescription drugs in these categories represented 61.4% of the total sales of pharmaceuticals in Germany. Drugs not covered by reference pricing are specified prescription drugs defined in the German Drug Act (e.g. vaccines), pharmacy-made drugs and patented prescription drugs with a new active ingredient representing a therapeutic improvement or having fewer side effects than existing drugs. The initial response of the pharmaceutical industry to the introduction of price-referencing was as follows. Prices of drugs in the system were lowered to, or near, the reference price (an average 1.6O/areduction in 1989), but prices of other drugs. not in the system, were raised. The reduction of brand name prices reduced the attractiveness of generics, resulting in lost sales volumes for generic firms [lo]. Multi-source drugs accounted for about 36% of prescriptions and 28% of turnover in 1994. 2.3.2. The Dutch system The leading principle of the Dutch system, which was introduced in July 1991, is the clustering of pharmaceuticals with similar therapeutic effectiveness (Class III in the German system). For each pharmaco-therapeutic area a cluster of pharmaceuticals is indicated and a reimbursement limit is established for each cluster. This limit is based on the average standard dose price within each cluster (e.g. all non-selective P-blockers are in one cluster).The criteria for clustering are: l pharmacologically comparable active ingredients l similar indication (e.g. hypertension) l no clinically relevant differences in desired or undesired effects l similar administration l indicated for similar age groups
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In principle all pharmaceutical products are assigned to a cluster, the most important exception being prescription drugs that cannot be clustered because there are no comparable pharmaceutical products on the market. The cost explosion in this category of drugs led to a ruling by the State Secretary of Health that, from July 1993, new drugs that cannot be clustered will be fully reimbursed only if they are used to treat conditions for which there are no therapeutic interventions. Drugs on the market before this date remain fully reimbursed. This fundamental reform in pharmaceutical policy was not introduced without problems. First, there were a number of examples of clustering of drugs where therapeutic equivalence was arguable. Second, the system has had the initial effect of lowering the prices of drugs that were clustered and reimbursed. In 1992 clustered drugs constituted 71% of total reimbursed sales. This effect (an average 5% in 1991-1993) was, however, fully offset by an increase in the price of those drugs which could not be clustered, which is why the reimbursement of those drugs was limited. Nevertheless, the Health Insurance Executive Board estimated the savings from reference pricing to be NLG 95 million in 1993. In addition to the reference price system there is an agreement between insurers, general practitioners and pharmacists that provides financial incentives for pharmacists to substitute expensive drugs, when lower priced alternatives are available. When a parallel-imported or generic formulation of the prescribed medication is dispensed, the pharmacist receives l/3 of the price difference between the dispensed medication and the domestic branded product. This incentive, and the reference pricing initiative, have led to a substitution of branded products by generic or parallel-imported drugs on a large scale. The market share of the latter products has increased from 18% by volume in 1990 to about 30% in 1993 [l 11. 2.3.3. The Swedish system
In Sweden a price reference system was introduced on 1 January 1993. It only includes products with the same ingredient, same form of administration and same strength. The method of clustering in this system is similar to that in Class I of the German system, but the reimbursement level is set at 10% above the price of the cheapest generic. Before the introduction of the reference price system, prices of drugs had to be approved by the Medical Products Agency. In 1996, 70 substances were included in the reference price system, and accounted for about 8% of total sales. Prices were reduced by manufacturers, in many cases before 1 January 1993, towards the reimbursement level. Hence, very few manufacturers decided to keep a higher price and thus force the patient to pay the difference above the reimbursement level. Jijnsson has summarised the effects of the reference price system on the market share of original and generic products, comparing the first 6 months of 1992 with the first 6 months of 1993 [12]. The total market for substances within the reference price system was reduced in value from SEK 650 million to SEK 474 million. The market share for original products was reduced from 65 to 51%, while the market share for generic products increased. The share of total sales associated with products within the reference price system decreased from 14 to 10%. The
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expected savings from introducing reference pricing was estimated to be SEK 400 million on an annual basis, representing around 5% of total drug expenditure. Therefore, it is possible to observe a number of patterns in the introduction of reference pricing in Germany, the Netherlands and Sweden. Prices of drugs within the reference pricing system are generally decreased to or near the level of reimbursement within a cluster, whilst companies attempt to make up for these losses by increasing the prices of those pharmaceutical products not covered by the price reference scheme. Therefore, although the introduction of reference pricing indeed has brought about some savings for government, these are still small in relation to total sales in the pharmaceutical market. 2.4. Economic evaluation systems
These systems are similar to the two-stage administered systems outlined in Section 2.2. However, the difference is that here the reimbursement decision is linked explicitly to the provision of economic data. Typically, guidelines are specified for the provision of such data, including the viewpoint (or perspective) to be adopted, the comparisons to be made, the form(s) of economic evaluation to be used and the sources of data. Apart from the use of this system in Australia and some provinces of Canada (discussed above), the nearest analogy in Europe would be the situation in the Netherlands, where the Health Insurance Executive Board stated that new expensive health care programmes would only be added to the health insurance ‘envelope’ if cost-effectiveness was demonstrated [ 131. Also, in Sweden, the regulations for the pricing of drugs within the reimbursement system [14] state that an economic evaluation (halsoekonomiskt vbrde) is one of the factors that should be taken into account when the National Social Insurance Board (NSIB) decides the price. This is interpreted by NSIB as a demand for an economic evaluation. However, there are no specified guidelines for such a study and no formal decision rules laid down. The economic evaluation is an input to the negotiation process. in economic evaluation systems the economic data are provided to the committee making the reimbursement decision. In Australia the price included in the economic evaluation is usually viewed as the maximum price that the company seeks, since it can be negotiated downwards in subsequent price negotiations with another committee. In Canada the price of the drug is set in national (Federal) negotiations before submissions are made to the various provincial formulary committees. At first sight these approaches may seem a little strange, in that the decision to offer public subsidy (i.e. buy for society) should be linked to the price and not made separately. However, in reality all the key actors are making the required link. For example, in Canada, a company making a price application to the Federal Pricing Committee knows that subsequently it will need to seek reimbursement from ten provincial formuiary committees. It might therefore moderate its price expectations. In Australia the committee making the reimbursement decision also makes a recommendation to the pricing committee. Therefore, the apparent detachment of pricing decision from reimbursement decision may not be as significant as it seems.
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3. The current role of economic evaluation 3.1. ‘Free pricing ’ systems
By definition, there is no centralized role for economic evaluation in free pricing and reimbursement systems. However, there is some use in decisions about the inclusion of medicines in local formularies or in treatment guidelines [6]. Two recent surveys of the use of economic evaluation in Germany [ 1.51 and the UK [16] indicated that such use is rather spasmodic, with only isolated examples being identified. If free pricing systems are to bring about efficiency there needs to be adequate competition in the market for pharmaceuticals. Therefore, the role of economic evaluation would be to provide information on the relative value for money of alternative products. In the UK the government has encouraged the pharmaceutical industry to undertake economic evaluations of its products [ 171. 3.2. Two stage administered
systems
There is little or no use of economic evaluation at Stage 1, where decisions are made about the equivalence of different medicines, although economic data have been discussed at the French Transparency Commission. Also, the decision about the level of reimbursement for a given medicine (e.g. 40, 70 or 100%) is driven more by the seriousness of the health condition concerned, rather than the added value provided by the medicine itsetf. There has been more use of economic data (although not necessarily full economic evaluations) at Stage 2, where prices are set. However, the price for a medicine tends to be determined largely by the banding agreed at Stage 1. There may be a greater role for economic evaluation when the medicine represents a new class of drugs, where there is no obvious comparison to be made with the price of existing medicines. To a limited extent there may also be a role for economic evaluation in pointing out the value of improvements in side-effect profile or route of administration, even where the new drug is ‘therapeutically equivalent’ to existing medicines in terms of efficacy. Pelt and Castan 173 estimate that, in France, at least one in three dossiers for new drugs (especially new chemical entities) in the last 5 years has included an economic study. However, they argue that it is difficult to know how these studies, when submitted, are taken into account in the price negotiation. One example of the influence of economic evaluation in France may be in the establishment of a premium price for sparfloxacine in treatment of pneumonia. In this case the economic dossier seemed to be influential in obtaining a price, which was about 30% higher than the comparators, although the product was not seen as a major innovation [18].
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systems
The decisions (e.g. about clustering or banding of drugs) under reference pricing are similar to those in two stage administered systems, the only difference being that the price set is essentially a reimbursement limit rather than a final market price for the medicine. There is, to date, no documented case of economic evaluation playing a role in reference pricing. This is understandable in the case of the systems operating in Germany (Class I) and Sweden, since the ‘clusters’ are based on pharmacologic substance. Therefore, one would not expect the medicines to be substantially different in their clinical effect (or value), other than possibly through the impact of different formulations (e.g. sustained release preparations). In Sweden only products with the same route of administration and the same strength are clustered. However, under the Dutch system and the German Class II and III systems, where clusters are determined by therapeutic equivalence rather than pharmacologic equivalence, one might expect more use of economic evaluation. For example, in a well-publicised decision, sumatriptan (a new drug for treatment of migraine) was clustered with ergotamine (a generic product), despite the manufacturer’s claim (supported by some evidence) that sumatriptan is more effective [19]. This required patients to pay an extra NLG 22 per tablet for sumatriptan, representing about 97% of the total price per tablet. The question of whether the value of the two medicines is equivalent or not can, in principle, be addressed by economic evaluation. Under reference pricing there are two potential audiences for such data: the authorities who make the clustering decision and the patients who would have to pay any price differential, 3.4. Economic evaluation systems
There is now considerable experience from Australia, where economic submissions have been mandatory since January 1993. By the end of the first 2 years there had been 133 submissions to the Pharmaceutical Benefits Advisory Committee (PBAC), with the distribution among forms of economic evaluation as follows: cost-minimization analysis (28O), cost-effectiveness analysis (44%), cost-utility analysis (2%), cost-benefit analysis (O%), and qualitative studies (26%) [20]. The Australian experience shows that the use of economic evaluation in the pricing and reimbursement of drugs can be operationalized if there is the political will. Experience from other jurisdictions, such as Ontario, is so far limited, although there are no signs that it contradicts this basic message. However, the broader impact of economic evaluation systems on health care efficiency is currently unclear. A number of problems have been identified. First, Drummond [21] pointed out the apparent contradiction that, while the economic evaluations are submitted to the committee deciding upon reimbursement, a price has to be assumed in the economic evaluation. The price assumed in the economic evaluation is therefore only a starting point for the price negotiations. On some occasions the company may be awarded a price close to that assumed in
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the economic evaluation; on other occasions it may be negotiated downwards. Since the submissions in Australia are commercial in confidence, it is not possible to say how often the price assumed in the evaluation is the same as the price finally granted. However, Mitchell [22] has reported data on the outcomes of first submissions to the PBAC. Whilst the pricing committee is not bound to accept the PBAC’s recommendations, the Committee decided to list around 80% of drug items at, or close to, the price assumed in the economic evaluation. Another problem with the use of economic evaluation was pointed out by Johanesson [23]. In a commentary on the Australian guidelines, he pointed out that the value of a new drug (e.g. an anti-hypertensive) may vary by indication and patient group. Therefore, it may not be sensible to make one pricing and reimbursement decision centrally for all possible uses of the drug concerned. Johanesson suggested that one way to get around the problem of variability in cost-effectiveness between different patient groups would be a system of selective reimbursement. However, he acknowledged that this could be perceived as unfair and difficult to administer. It could also, in some cases, create perverse incentives; namely patients deliberately letting their condition worsen in order to qualify for what they believe to be a superior medicine. In Australia there is a mechanism in place, known as the ‘Authority System’, to control the use of some listed drugs, either by indication or by patient group. For example, in order to use omeprazole for refractory ulcer, the physician has to send in the gastroscopy report, along with a request for authority to prescribe. However, this could be cumbersome to administer and may be easier to apply in some clinical indications than others. Also, it treats drug price as a constant. If the price of a given drug were to be lowered, it may become better value for money (relative to the alternatives) in a broader range of indications and/or patients.
4. Discussion The preceding review of the role of economic evaluation in drug pricing and reimbursement systems shows that there is considerable diversity in how it is used to develop health policy. On the one hand economic evaluation is a formal component of the Australian system. In two-stage administered systems and reference pricing systems essentially similar decisions are being made about whether medicines are therapeutically equivalent or not, and whether differences deserve a price premium or not. However, there is no formal role of economic evaluation, nor evidence of its extensive use. Therefore, what can be said about the appropriate role of economic evaluation in pricing and reimbursement decisions?. It is important to be clear on the following points. 4.1. Pricing and reimbursement
are linked decisions
Although in many countries the pricing and reimbursement decisions are made by different committees, the two decisions are conceptually linked. That is, whether
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a drug should be reimbursed (i.e. purchased by the government or other third party payer), or the extent to which it is reimbursed, is dependent on the price. In this sense drugs are no different from any commodity. Since, in economic evaluation, the value for money of an intervention is also dependent on its cost (price), this suggests that, in principle at least, economic evaluation is relevant to these decisions. 4.2. Pricing and reimbursement
systems need to be comprehensive
Experience with reference pricing in Germany and the Netherlands shows that, whatever system is adopted, it needs to be comprehensive. In particular, there needs to be an approach for pricing new, innovative pharmaceuticals. In both Germany and the Netherlands there were moves by manufacturers to increase the prices of these drugs as they were outside the reference price system. This suggests a particular role for economic evaluation in the pricing and reimbursement of new products, since it is the only method available to establish added value, when there are no close substitutes. Similarly, economic evaluation can play an important role in ‘free’ systems, where decision makers, be they formulary committees or individual prescribers, need information to make decisions in these more difficult cases. 4.3. Setting a price has two major implications Once a price is set it is possible to assess the value for money of an intervention to the health care system, compared with a relevant alternative (which is usually current care). However, the other major implication of setting a price is that it determines the level of income to the manufacturer from sales of the drug. (There is a direct relationship in the case of fully reimbursed products as the patient does not face a price, which otherwise might limit demand.) Therefore, the choice of price sets the balance between better value for money to the health care system and higher income to the manufacturer. (We return to this point later.) 4.4. Economic evaluation can assess value for money, but not necessarily establish the price Economic evaluation is the only method available to establish the additional value that a drug gives, when compared with an alternative. Therefore, it is central to the decisions made in drug pricing and reimbursement, such as whether two drugs are broadly equivalent, or whether a new drug should have a price premium over existing medications. Indeed, although economic evaluation has no formal role in two-stage administered systems or reference pricing systems, the same valuation process must be being applied informally in deciding which drugs should be listed and at what price. One explanation for the lack of formal application of economic evaluation could be that many decisions are fairly easy to make. That is, most comparisons are made
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between drugs having a similar clinical profile. Therefore, in many instances the decision may simply be to reimburse the drug at a price similar to existing drugs in the class. But even if drugs have a similar profile, economic evaluation could provide arguments to adjust the reimbursement level for a cluster of drugs away from the historical price level. The justification for doing this is likely to depend on the extent of new information about the drugs concerned and the existence of other new technologies for treating the disease in question. However, economic evaluation is likely to be most useful when the drugs (or interventions) being compared have clinical profiles that are very different in character. This is often the situation where the first drug in a new class is being evaluated, or where current therapy is either surgery or to do nothing. In such cases simple comparisons with other marketed drugs are not possible and the only approach would be to undertake a formal economic evaluation. Despite its potential, economic evaluation can only establish value for money, not establish a price. This is because, as mentioned above, the price sets the balance between the proportion of the total value going to society (in lower costs to the health care sector) and the proportion going to the manufacturer. At one extreme the total extra value created could be reflected in a higher drug price. At the other extreme no reward could be given to the manufacturer for the innovation concerned. At best economic evaluation can delineate a range of possible prices for a new drug. The final price can only be set after consideration of other factors. The key question is what the appropriate rule for drug pricing should be. 4.5. Rules are required for drug pricing
There are a number of considerations in drug pricing. In the past many of the factors considered have not necessarily been linked to the promotion of efficiency. Rather, they have focused on issues like the development of local industry and the provision of employment. However, from an economic viewpoint the aim of pricing rules is to promote efficiency, both within the health care system and within the pharmaceutical industry. There are a plethora of drug pricing schemes in operation. The majority focus on the pricing of individual products. A few, like the Pharmaceutical Price Regulation Scheme in the UK, impose global caps on company profits. The objectives of drug pricing schemes are not always explicitly stated, but a common consideration is to reward companies for innovation, whilst securing a reasonable price for the health care system. Much has been written on drug pricing [24-271. The basic options are: (i) no regulation (other than what is provided by the market); (ii) price-caps in various forms; (iii) cost-based rate of return regulation; and (iv) rate of return regulation within bands [28]. One key distinguishing feature of different schemes is whether manufacturers’ costs are taken into account or not; another key feature is whether differential prices reflect the differential value of products or not. Price caps have become a popular alternative to rate-of-return regulation for many public utilities as they avoid the adverse consequences of cost-based regula-
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tion on productive efficiency and the high administrative costs of rate-of-return regulation. Abbott [29] has recently studied the potential impact of price caps in the USA. He argues that, under conditions of rapidly changing demand (as found in pharmaceuticals), price caps could be manipulated. Using simulations, he shows that, in reaction to regulation, pharmaceutical firms would optionally set launch prices 50% higher than in an unregulated market and that it would be 7 years before consumers benefit, as the unregulated price rises above the price cap. The rule implied by the use of economic evaluation is that price should be set in relation to the additional value created by the product [30,31]. The costs of production (including the associated research) are largely irrelevant. In particular, from an economic perspective, it would not make sense for a company to waste resources in clinical research and development and then try to recoup these through being able to charge a high price for a product. Therefore, it is difficult to see how cost-based pricing schemes could lead to efficiency. Rather, the objective should be to increase efficiency in clinical research and development by encouraging companies to terminate the clinical development of a new product as soon as it becomes clear that the drug concerned will not add much value to existing therapy. However, the major difficulty in applying this rule is that the value of a product may vary through time and from one indication (for use) to another, whereas drug prices are often set at one point in time for all current and future indications for the product. The use of economic evaluation in pricing decisions could help minimize some of the problems identified by Abbott 1291. For example, one problem is in defining whether a change in packaging or form of the product (e.g. from tablets to liquid) constitutes a new ‘product’. Under a pricing and reimbursement system using economic evaluation, the only relevant issue is whether there is any added value. Another problem is that of determining the introductory prices. Again economic evaluation provides some basis for this, by estimating the comparative value of medicines relative to existing care. In an ideal world, economic evaluations would be performed for every indication for a given drug and a price set in relation to the value created. One approach might be to set prices so that the incremental cost per unit of health gain (e.g. a quality-adjusted life-year) is the same for all drugs. This way companies developing highly-valued products would receive the greatest rewards for their innovation. Also, evaluations and prices would be revised from time to time. This approach is outlined in Fig. 1. Imagine (Fig. l(a)) that a drug is originally reimbursed for three indications, for which equal quantities of the drug are sold (a total quantity of qJ. The additional value created is shown by the total area under the curve. Further, suppose that a price pO, is set according to a given rule. A number of rules are possible: one could set price to equate incremental cost per quality-adjusted life-year (QALY) with that from an average of other health care interventions. Another might set the price so that there are broadly equal shares in the residual value going to society and income going to the company. Then, suppose that, at a later date, a fourth indication is added. In Fig. l(b) the new indication has a high added value. In Fig. l(c) the added value is lower. The
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resulting new prices, according to the same rule, would be higher than pO (e.g. p,) in the first case, or lower (e.g. pJ in the second case. Since the quantity, q is the same in both cases, if the company adds a higher value indication, it receives more reward.
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.:
------I
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__)
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Fig. 1. Relationship between value, price and indications for use.
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The notion of reviewing the prices of marketed drugs is well-established in a number of countries. In France there is a review 3 years after the drug is first reimbursed, but the main consideration is the quantity of the drug sold, rather than the additional value created by the increased sales. In Sweden the initial pricing decision can be changed at any time and follow-up or verification is seen as an integral part of the system for pricing of pharmaceuticals. In Japan the price of a drug is reduced by a given percentage every year it is on the market. This creates perverse incentives to companies to develop new formulations or line extensions that offer little additional benefit, but enable the initial drug price to be re-established. In our view, any review of price should be based on the additional value created, thereby providing appropriate incentives to companies to seek new and cost-effective indications for their products. Despite the practical problems of the approach suggested here, in the resources required for economic evaluations and for review of marketed products, its major advantage is in the incentives it gives to manufacturers to improve the quality of economic data about their products and to search for new, high value indications. Significant company resources are invested in research after a drug is initially launched. How research priorities are currently determined is unclear. This approach would cause them to be determined by potential value for money.
5. Conclusions In principle, economic evaluation should have a central role in drug pricing and reimbursement decisions. Its main contribution is to provide a method to establish, in an explicit and transparent way, the additional value to society of a new pharmaceutical. However, the actual role of economic evaluation in drug pricing and reimbursement schemes is very variable, ranging from being a formal requirement in Australia to no involvement in reference pricing systems. There is also considerable confusion about the potential role of economic evaluation. It is most useful where the interventions being compared are very different in their clinical profile. Therefore, it would be particularly useful in making decisions about a new class of drug, or the first drug for a particular condition. However, economic evaluation can only help us to assess the value of a new drug, but not to establish a price. The price of a drug can only be set when a pricing rule is adopted. In essence, the rule needs to specify the proportion of the added value going to society (in a reduction in the cost of obtaining improved health) and that going to the company (in income to meet current commitments and to finance future research investments). The design of an efficient drug pricing and reimbursement scheme is not a simple matter, but consideration of the role of economic evaluation suggests that the major factor determining price should be the additional value obtained from a given drug in its various indications for use. Some comments have been made here about the theoretical and practical issues that would have to be resolved before such an
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efficiency, both in health
Acknowledgements We are grateful to Karen Bloor, Nick Freemantle, Henry Grabowski, Hugh Gravelle and Adrian Towse for comments on an earlier draft, to Susanne Wahling for providing data for Germany, and to Vanessa Windass for secretarial assistance. All remaining errors are our responsibility. References [l] Drummond, M.F., Stoddart, G.L. and Torrance, G.W., Methods for the Economic Evaluation of Health Care Programmes. Oxford University Press, Oxford, 1987. [2] Commonwealth of Australia, Guidelines for the pharmaceutical industry on preparation of submissions to the Pharmaceutical Benefits Advisory Committee: including economic analysis. Canberra, Department ‘of Health and Community Services, 1995. [3] Ontario Ministry of Health, Ontario guidelines for economic analysis of pharmaceutical products. Toronto, Ministry of Health, 1994. [4] Canadian Coordinating Office for Health Technology Assessment (CCOHTA). Guidelines for economic evaluation of pharmaceuticals: Canada. CCOHTA, Ottawa, 1994. [5] British Columbia Ministry of Health, Program established to evaluate cost-effectiveness of new prescription drugs. News Release, Victoria, BC, November 10, (1995) 321. [6] Drummond, M.F., Rutten, F.F.H., Brenna, A. et al. Economic evaluation of pharmaceuticals: a European perspective. PharmacoEconomics, 4(3) (1993) 173- 186. [7] Pelt, A., Castan, J.-P. New developments in pricing and drug reimbursement in France. PharmacoEconomics, 6 (Suppl. 1) (1994) 28-35. [8] US General Accounting Office. Prescription drugs; spending controls in four European Countries, GAO/HEHS-94-30, Washington, 1994. [9] Schmidt E., Development of reference prices in Germany, presentation for the Int. Conf. of Pricing and Reimbursement of Pharmaceuticals, 29-30 September 1992, London. [lo] McArthur D., Pharmaceutical pricing and reimbursement in the single European market: consensus or conflict? PJB Publications Ltd., (1992) 94. [11] Financial Survey on Care 1994 (in Dutch), SDU Publishing Company, The Hague, 1993. [12] Jonsson, B., Pricing and reimbursement of pharmaceuticals in Sweden. PharmacoEconomics, 6 (Suppl. 1) (1994) 51-60. [13] Haan, G., Rutten, F.F.H., No cure, no pay: an acceptable way of financing fertility treatments? Health Policy, 13 (1989) 239-249. [14] RFFS. Riksfijrsiikringsverkets fiireskrifter om faststlllande av pris pa llkemedel., (Regulations concerning the pricing of medicines issued by the Swedish National Board of Social Insurance) (1992) 20. [15] von Schulenburg, M., Economic evaluation in health care decision making in Germany. Social Science and Medicine, in press. [16] Drummond, M.F., Cooke, J., Walley, T., Economic evaluation in health care decision making: lessons from the UK. Social Science and Medicine, in press. [17] Department of Health, Improving prescribing. London, DH, 1991. [18] LePen, C., Economic evaluation in France. Social Science and Medicine, in press. [19] Multinational Oral Sumatriptan and Carfergot Comparative Study Group, A randomized doubleblind comparison of sumatriptan and carfergot in the acute treatment of migraine. European Neurology 31 (1991) 314-222.
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[20] Glasziou, P.P., Mitchell, AS., Use of pharmacoeconomic data by regulatory authorities. In: B. Spilker (ed), Quality of life and pharmacoeconomics in clinical trials. 2nd edn Lippincott-Raven Publishers, Philadelphia, 1996. [21] Drummond, M.F., The emerging government requirement for economic evaluation of pharmaceuticals. PharmacoEconomics, 6 (Suppl. 1) (1994) 42-50. [22] Mitchell, AS., Presentation at the APOR Annual Meeting, Philadelphia, May, 1996. [23] Johannesson, M., The Australian drug guidelines for subsidisation of pharmaceuticals: the road to cost-effective drug prescribing? PharmacoEconomics, 2 (1992) 355-362. [24] Grabowski, H., Health reform and pharmaceutical innovation. American Enterprise Institute, Washington. DC., 1994. [25] Reekie, W., Price and quality competition in the United States drug industry. Journal of Industrial Economics, 23(3) (1978) 223-237. [26] Scherer, F., Pricing, profits and technological progress in the pharmaceutical industry. Journal of Economic Perspectives, 763) (1993) 97-l 16. [27] Thomas, L.G., Price regulation, industry structure and innovation: an international comparison of pharmaceutical industries. PharmacoEconomics, (Suppl 1) (1992) 9- 12. [28] Cave, M., and Towse, A., Regulating prices paid by the NHS for medicines supplied by the UK-based pharmaceutical industry. London Office of Health Economics, 1996, in press. [29] Abbott, T.A.. Price regulation in the pharmaceutical industry: prescription of placebo? Journal of Health Economics 14 (1995) 551-565. [30] Arvidsson, G., A note on optimal allocation of resources for R and D. Swedish Journal of Economics 72 (1970) 171-195. 1311 Arrow, K.J. Economic welfare and the allocation of resources for intervention. In: National Bureau of Economic Research. The rate and direction of incentive activity. Princeton, 1962.
Health Policy 40 (1997) 199-215
The role of economic evaluation in the pricing and reimbursement of medicines Michael Drummond a,*, Bengt JGnsson b, Frans Rutten ’ ’ Centre for Health Economics, b Centre for Health Economics, ’ Institute for Medical Technology
University of York, Heslington, York YOI SDD, UK Stockholm School of Economies, Stockholm, Sweden Assessment, Erasmus University, Rotterdam. Netherlands
Received 24 December 1996; received in revised form 20 January 1997; accepted 20 January 1997
Abstract In most countries, governments or health insurershave taken initiatives to influencethe price and utilization of medicines.One stated objective of these schemesis to encourage efficiency, or cost-effectiveness.In principle, economicevaluation should to be relevant to decisionsabout the pricing and reimbursementof health technologies,sinceit offers a way of estimatingthe additional value to society of a new intervention (e.g. medicine)relative to current therapy. However, the application of economic evaluation in drug pricing and reimbursementschemesis variable. Therefore, this paper reviews the actual and potential role of economicevaluation in different drug pricing and reimbursementschemes,such as ‘free pricing’ systems(United Kingdom, United States), two-stage administeredsystems (France), referencepricing systems(Germany, Netherlands,Sweden)and economicevaluation systems(Australia, Canada).It is concludedthat, other than in the caseof Australia and Canada, the potential role of economicevaluation could be greatly developed,especiallyin the caseof new medicines,for which there is no closesubstitute.Commentsare alsogiven on the practical problems of using this approach. However, it is noted that economic evaluation alone cannot seta price for a medicine,sincea decisionhasto be madeabout the proportion of added value going to society and the proportion going to the pharmaceutical company as a reward for innovation. 0 1997Elsevier ScienceIreland Ltd. Keywords:
Cost-effectivenessanalysis;Pharmaceuticals;Referencepricing
* Corresponding
author. Tel.: + 44 1904 433709; fax: + 44 1904 433644, e-mail: [email protected]
016%8510/97/$17.00 0 1997 Elsevier Science Ireland Ltd. All rights reserved. PII SOl68-8510(97)00901-9
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1. Introduction The pricing and reimbursement of pharmaceuticals is a source of continuing policy debate. On the one hand, governments are worried about expenditure on health care and view the pharmaceuticals budget as one easily identifiable component that could threaten their goal of cost containment. On the other hand, the pharmaceutical industry argues that its investments in research and development should be adequately rewarded and that patients (and their physicians) should have adequate choice of therapies. In most countries, governments or health insurers have taken initiatives to influence the price and utilization of pharmaceuticals. Measures to influence utilization include the establishment of national formularies (or ‘positive lists’), the development of treatment guidelines, the encouragement of generic prescribing and the provision of information to prescribers on the costs or cost-effectiveness of therapeutic alternatives. Measures to inlluence price include the establishment of national price or profit control schemes and reference pricing. Under reference pricing, the government or health insurer sets the level of public payment for a given group or ‘cluster’ of drugs. Manufacturers are free to set the price of their product above the reference price, but the patient has to pay the difference. Also, in some jurisdictions, there are restrictions on the indications for which drugs are reimbursed, even though the licensed indications may be broader. For example, when simvastatin (a new drug to treat elevated cholesterol) was first launched in the Netherlands, its reimbursement was restricted to patients with high risk of a coronary heart disease event (i.e. those with pre-treatment cholesterol level of 6.5 mmol/l or above with at least two additional risk factors and those with pre-treatment cholesterol level of 8.0 mmol/l or above with at least one additiona risk factor). Of course, a prior question is that of whether any controls on the pricing and/or reimbursement of pharmaceuticals are justified. It is generally assumed that the market for pharmaceuticals is likely to be imperfect for two reasons. First, the consumer (the patient) does not normally pay the full cost of the medications concerned. Therefore, he or she does not have an incentive to seek out the option giving the best value for money. Secondly, the decision on the choice of drug is usually taken by the doctor, acting as the agent of the patient. Therefore, the decision maker does not incur any costs and may even be unduly influenced by promotional activities to recommend one product rather than another, although attempts are made in most jurisdictions to ensure that promotional activities are appropriate and do not offer inducements. Where there are good reasons to think that markets are not operating perfectly, economic evaluation has been proposed as a way of estimating the costs and consequences to society of various health care interventions [l]. The role of economic evaluation in the pricing and reimbursement of medicines has been debated more widely since the Australian government made the provision of economic data mandatory in January 1993. Since this time, submissions for
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inclusion of drugs on the Pharmaceutical Benefits Schedule (PBS), a national positive list of drugs reimbursed by the government, have had to include an economic evaluation of the drug concerned, compared with a relevant alternative, at a price determined by the applicant company [2]. Australia’s lead was followed by the Province of Ontario (in Canada) in 1994 [3], within the framework of Canadian guidelines also published in 1994 [4]. Recently another province, British Columbia, has announced its intention to request economic data prior to listing on the provincial formulary [5]. There are a number of possible objectives of pricing and reimbursement policies. One is merely cost containment. However, most governments claim that the encouragement of efficiency is one of the objectives, in the absence of a well functioning market for drugs. In principle, economic evaluation should be relevant to pricing and reimbursement decisions within an environment where value-for-money considerations are important. After all, it offers an approach to estimating the additional value of a drug relative to current therapy. Therefore, it provides an estimate of the maximum amount society should be willing to pay to adopt the new drug instead of the alternative. However, a number of practical difficulties exist. First, in some countries, the pricing and reimbursement decisions are made by different committees. Conversely, economic evaluation implicitly links them, since value-for-money of a drug can only be assessed if a price is assumed. Secondly, Drummond et al. [6] pointed to the wide range of approaches to the pricing and reimbursement of medicines currently in existence in Europe, and the corresponding uncertainties about the role of economic evaluation. Therefore, this paper seeks to clarify the role of economic evaluation in the pricing and reimbursement of medicines. In the next section, the main types of pricing and reimbursement systems are reviewed. Then the problems and prospects of using economic evaluation in each system are outlined. Finally, some conclusions are drawn.
2. Pricing and reimbursement
2.1. ‘Free pricing’
systems
systems
In some countries there is no centralized approach to pricing and reimbursement of drugs. Here the majority of medicines are automatically listed for reimbursement under the national or social health insurance scheme (or national health service) and pricing is at the discretion of the manufacturer. Examples of this approach are the systems operating in the UK and the USA. It would be wrong, of course, to suggest that the price and utilization of medicines is totally unregulated in such countries. Some have a list of drugs that are not reimbursed, such as the Selected List operating in the UK. In addition, a number of indirect controls may exist, such as drugs budgets for medical practi-
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tioners. In the UK there is also a profit control measure, the Pharmaceuticals Price Regulation Scheme. Indirectly, this imposes limits on prices since companies exceeding their profit target may be subject to ‘claw back’ of revenues by the government. Therefore, companies may prefer to limit price rises rather than pay monies to the Department of Health. Finally, in some settings, most notably the USA, market forces may go some way to controlling drug prices. 2.2. Two stage administered
systems
Under this system a new drug is first assessed in terms of its therapeutic equivalence to other existing medicines. This assessment may also determine what percentage of the drug price is reimbursed to the patient. Once the medicine has been classified in this way, the price of the product is set by negotiation between the manufacturer and the government. Different criteria are applied in the price negotiations in different countries. In some cases prices are set in comparison with similar products already marketed for the therapeutic indication concerned. In others, prices are set by reference to those of the same product in other countries. Pelt and Castan [7] have described the French system in detail. After receiving marketing authorization for its new drug, the manufacturer must complete a two-part dossier in order to negotiate a price. The first part goes to the Transparency Commission, which assesses whether the new medicine can be considered an innovation and the potential medical benefit in comparison with drugs already on the market. It then determines the reimbursement status and the reimbursement rate. New pharmaceuticals are now awarded reimbursement for a 3 year period only. After this, the Health and Social Security Ministry may decide not to renew reimbursement, in which case it must justify its decision in accordance with the recommendation by the Transparency Commission. After the Transparency Commission has given its opinion, the company must negotiate price with the Economic Committee. A number of factors are considered alongside the assessment of medical benefit given by the Transparency Commission. These include the daily treatment cost, the daily treatment cost of comparable drugs, the sales forecast, the total treatment cost and, for innovative drugs, the European price, if the drug has been introduced in other countries. The Committee also considers some characteristics of the company as well as the particular product. 2.3. Reference pricing systems Under this system drugs are grouped (or ‘clustered’) according to chemical, pharmacologic or therapeutic equivalence. Then a single reimbursement level (the ‘reference price’) is set for the whole cluster. This approach is similar to the two-stage administered system outlined above, but differs in that manufacturers can choose, if they so wish, to set the drug price higher than the reference price. In this case the patient pays the difference.
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Reference pricing has been gaining popularity with policy makers in a number of countries. The main reason for this is that it offers the possibility of limiting public reimbursement, whilst not restricting the choice of medicines available to patients and their physicians. Slightly different reference pricing schemes operate in different European countries. As a result of the growing interest in reference pricing systems, these are discussed in some detail below. 2.3.1. The German system The first reference price system was introduced in Germany, with the implementation of the Health Care Reform Act in 1989. Under the German system three classes of drugs are distinguished: drugs with the same active ingredients (class I), drugs with therapeutically comparable active ingredients (class II), and drugs with comparable pharmacotherapeutic effects (class III). A statistical methodology is used to calculate what is, in effect, an average price of the drugs within a cluster and this reference price varies with the strength and package size. The price is finalized after conferring with drug manufacturers and pharmacists and adjusted annually taking into account inflation and other factors [8]. Establishing reimbursement levels for the three classes of drugs took place in overlapping periods from 1989 onwards. By mid-1992 84 active ingredients were covered in class I, 89 in class II and only a few in class III [9]. In 1996 prescription drugs in these categories represented 61.4% of the total sales of pharmaceuticals in Germany. Drugs not covered by reference pricing are specified prescription drugs defined in the German Drug Act (e.g. vaccines), pharmacy-made drugs and patented prescription drugs with a new active ingredient representing a therapeutic improvement or having fewer side effects than existing drugs. The initial response of the pharmaceutical industry to the introduction of price-referencing was as follows. Prices of drugs in the system were lowered to, or near, the reference price (an average 1.6O/areduction in 1989), but prices of other drugs. not in the system, were raised. The reduction of brand name prices reduced the attractiveness of generics, resulting in lost sales volumes for generic firms [lo]. Multi-source drugs accounted for about 36% of prescriptions and 28% of turnover in 1994. 2.3.2. The Dutch system The leading principle of the Dutch system, which was introduced in July 1991, is the clustering of pharmaceuticals with similar therapeutic effectiveness (Class III in the German system). For each pharmaco-therapeutic area a cluster of pharmaceuticals is indicated and a reimbursement limit is established for each cluster. This limit is based on the average standard dose price within each cluster (e.g. all non-selective P-blockers are in one cluster).The criteria for clustering are: l pharmacologically comparable active ingredients l similar indication (e.g. hypertension) l no clinically relevant differences in desired or undesired effects l similar administration l indicated for similar age groups
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In principle all pharmaceutical products are assigned to a cluster, the most important exception being prescription drugs that cannot be clustered because there are no comparable pharmaceutical products on the market. The cost explosion in this category of drugs led to a ruling by the State Secretary of Health that, from July 1993, new drugs that cannot be clustered will be fully reimbursed only if they are used to treat conditions for which there are no therapeutic interventions. Drugs on the market before this date remain fully reimbursed. This fundamental reform in pharmaceutical policy was not introduced without problems. First, there were a number of examples of clustering of drugs where therapeutic equivalence was arguable. Second, the system has had the initial effect of lowering the prices of drugs that were clustered and reimbursed. In 1992 clustered drugs constituted 71% of total reimbursed sales. This effect (an average 5% in 1991-1993) was, however, fully offset by an increase in the price of those drugs which could not be clustered, which is why the reimbursement of those drugs was limited. Nevertheless, the Health Insurance Executive Board estimated the savings from reference pricing to be NLG 95 million in 1993. In addition to the reference price system there is an agreement between insurers, general practitioners and pharmacists that provides financial incentives for pharmacists to substitute expensive drugs, when lower priced alternatives are available. When a parallel-imported or generic formulation of the prescribed medication is dispensed, the pharmacist receives l/3 of the price difference between the dispensed medication and the domestic branded product. This incentive, and the reference pricing initiative, have led to a substitution of branded products by generic or parallel-imported drugs on a large scale. The market share of the latter products has increased from 18% by volume in 1990 to about 30% in 1993 [l 11. 2.3.3. The Swedish system
In Sweden a price reference system was introduced on 1 January 1993. It only includes products with the same ingredient, same form of administration and same strength. The method of clustering in this system is similar to that in Class I of the German system, but the reimbursement level is set at 10% above the price of the cheapest generic. Before the introduction of the reference price system, prices of drugs had to be approved by the Medical Products Agency. In 1996, 70 substances were included in the reference price system, and accounted for about 8% of total sales. Prices were reduced by manufacturers, in many cases before 1 January 1993, towards the reimbursement level. Hence, very few manufacturers decided to keep a higher price and thus force the patient to pay the difference above the reimbursement level. Jijnsson has summarised the effects of the reference price system on the market share of original and generic products, comparing the first 6 months of 1992 with the first 6 months of 1993 [12]. The total market for substances within the reference price system was reduced in value from SEK 650 million to SEK 474 million. The market share for original products was reduced from 65 to 51%, while the market share for generic products increased. The share of total sales associated with products within the reference price system decreased from 14 to 10%. The
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expected savings from introducing reference pricing was estimated to be SEK 400 million on an annual basis, representing around 5% of total drug expenditure. Therefore, it is possible to observe a number of patterns in the introduction of reference pricing in Germany, the Netherlands and Sweden. Prices of drugs within the reference pricing system are generally decreased to or near the level of reimbursement within a cluster, whilst companies attempt to make up for these losses by increasing the prices of those pharmaceutical products not covered by the price reference scheme. Therefore, although the introduction of reference pricing indeed has brought about some savings for government, these are still small in relation to total sales in the pharmaceutical market. 2.4. Economic evaluation systems
These systems are similar to the two-stage administered systems outlined in Section 2.2. However, the difference is that here the reimbursement decision is linked explicitly to the provision of economic data. Typically, guidelines are specified for the provision of such data, including the viewpoint (or perspective) to be adopted, the comparisons to be made, the form(s) of economic evaluation to be used and the sources of data. Apart from the use of this system in Australia and some provinces of Canada (discussed above), the nearest analogy in Europe would be the situation in the Netherlands, where the Health Insurance Executive Board stated that new expensive health care programmes would only be added to the health insurance ‘envelope’ if cost-effectiveness was demonstrated [ 131. Also, in Sweden, the regulations for the pricing of drugs within the reimbursement system [14] state that an economic evaluation (halsoekonomiskt vbrde) is one of the factors that should be taken into account when the National Social Insurance Board (NSIB) decides the price. This is interpreted by NSIB as a demand for an economic evaluation. However, there are no specified guidelines for such a study and no formal decision rules laid down. The economic evaluation is an input to the negotiation process. in economic evaluation systems the economic data are provided to the committee making the reimbursement decision. In Australia the price included in the economic evaluation is usually viewed as the maximum price that the company seeks, since it can be negotiated downwards in subsequent price negotiations with another committee. In Canada the price of the drug is set in national (Federal) negotiations before submissions are made to the various provincial formulary committees. At first sight these approaches may seem a little strange, in that the decision to offer public subsidy (i.e. buy for society) should be linked to the price and not made separately. However, in reality all the key actors are making the required link. For example, in Canada, a company making a price application to the Federal Pricing Committee knows that subsequently it will need to seek reimbursement from ten provincial formuiary committees. It might therefore moderate its price expectations. In Australia the committee making the reimbursement decision also makes a recommendation to the pricing committee. Therefore, the apparent detachment of pricing decision from reimbursement decision may not be as significant as it seems.
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3. The current role of economic evaluation 3.1. ‘Free pricing ’ systems
By definition, there is no centralized role for economic evaluation in free pricing and reimbursement systems. However, there is some use in decisions about the inclusion of medicines in local formularies or in treatment guidelines [6]. Two recent surveys of the use of economic evaluation in Germany [ 1.51 and the UK [16] indicated that such use is rather spasmodic, with only isolated examples being identified. If free pricing systems are to bring about efficiency there needs to be adequate competition in the market for pharmaceuticals. Therefore, the role of economic evaluation would be to provide information on the relative value for money of alternative products. In the UK the government has encouraged the pharmaceutical industry to undertake economic evaluations of its products [ 171. 3.2. Two stage administered
systems
There is little or no use of economic evaluation at Stage 1, where decisions are made about the equivalence of different medicines, although economic data have been discussed at the French Transparency Commission. Also, the decision about the level of reimbursement for a given medicine (e.g. 40, 70 or 100%) is driven more by the seriousness of the health condition concerned, rather than the added value provided by the medicine itsetf. There has been more use of economic data (although not necessarily full economic evaluations) at Stage 2, where prices are set. However, the price for a medicine tends to be determined largely by the banding agreed at Stage 1. There may be a greater role for economic evaluation when the medicine represents a new class of drugs, where there is no obvious comparison to be made with the price of existing medicines. To a limited extent there may also be a role for economic evaluation in pointing out the value of improvements in side-effect profile or route of administration, even where the new drug is ‘therapeutically equivalent’ to existing medicines in terms of efficacy. Pelt and Castan 173 estimate that, in France, at least one in three dossiers for new drugs (especially new chemical entities) in the last 5 years has included an economic study. However, they argue that it is difficult to know how these studies, when submitted, are taken into account in the price negotiation. One example of the influence of economic evaluation in France may be in the establishment of a premium price for sparfloxacine in treatment of pneumonia. In this case the economic dossier seemed to be influential in obtaining a price, which was about 30% higher than the comparators, although the product was not seen as a major innovation [18].
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systems
The decisions (e.g. about clustering or banding of drugs) under reference pricing are similar to those in two stage administered systems, the only difference being that the price set is essentially a reimbursement limit rather than a final market price for the medicine. There is, to date, no documented case of economic evaluation playing a role in reference pricing. This is understandable in the case of the systems operating in Germany (Class I) and Sweden, since the ‘clusters’ are based on pharmacologic substance. Therefore, one would not expect the medicines to be substantially different in their clinical effect (or value), other than possibly through the impact of different formulations (e.g. sustained release preparations). In Sweden only products with the same route of administration and the same strength are clustered. However, under the Dutch system and the German Class II and III systems, where clusters are determined by therapeutic equivalence rather than pharmacologic equivalence, one might expect more use of economic evaluation. For example, in a well-publicised decision, sumatriptan (a new drug for treatment of migraine) was clustered with ergotamine (a generic product), despite the manufacturer’s claim (supported by some evidence) that sumatriptan is more effective [19]. This required patients to pay an extra NLG 22 per tablet for sumatriptan, representing about 97% of the total price per tablet. The question of whether the value of the two medicines is equivalent or not can, in principle, be addressed by economic evaluation. Under reference pricing there are two potential audiences for such data: the authorities who make the clustering decision and the patients who would have to pay any price differential, 3.4. Economic evaluation systems
There is now considerable experience from Australia, where economic submissions have been mandatory since January 1993. By the end of the first 2 years there had been 133 submissions to the Pharmaceutical Benefits Advisory Committee (PBAC), with the distribution among forms of economic evaluation as follows: cost-minimization analysis (28O), cost-effectiveness analysis (44%), cost-utility analysis (2%), cost-benefit analysis (O%), and qualitative studies (26%) [20]. The Australian experience shows that the use of economic evaluation in the pricing and reimbursement of drugs can be operationalized if there is the political will. Experience from other jurisdictions, such as Ontario, is so far limited, although there are no signs that it contradicts this basic message. However, the broader impact of economic evaluation systems on health care efficiency is currently unclear. A number of problems have been identified. First, Drummond [21] pointed out the apparent contradiction that, while the economic evaluations are submitted to the committee deciding upon reimbursement, a price has to be assumed in the economic evaluation. The price assumed in the economic evaluation is therefore only a starting point for the price negotiations. On some occasions the company may be awarded a price close to that assumed in
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the economic evaluation; on other occasions it may be negotiated downwards. Since the submissions in Australia are commercial in confidence, it is not possible to say how often the price assumed in the evaluation is the same as the price finally granted. However, Mitchell [22] has reported data on the outcomes of first submissions to the PBAC. Whilst the pricing committee is not bound to accept the PBAC’s recommendations, the Committee decided to list around 80% of drug items at, or close to, the price assumed in the economic evaluation. Another problem with the use of economic evaluation was pointed out by Johanesson [23]. In a commentary on the Australian guidelines, he pointed out that the value of a new drug (e.g. an anti-hypertensive) may vary by indication and patient group. Therefore, it may not be sensible to make one pricing and reimbursement decision centrally for all possible uses of the drug concerned. Johanesson suggested that one way to get around the problem of variability in cost-effectiveness between different patient groups would be a system of selective reimbursement. However, he acknowledged that this could be perceived as unfair and difficult to administer. It could also, in some cases, create perverse incentives; namely patients deliberately letting their condition worsen in order to qualify for what they believe to be a superior medicine. In Australia there is a mechanism in place, known as the ‘Authority System’, to control the use of some listed drugs, either by indication or by patient group. For example, in order to use omeprazole for refractory ulcer, the physician has to send in the gastroscopy report, along with a request for authority to prescribe. However, this could be cumbersome to administer and may be easier to apply in some clinical indications than others. Also, it treats drug price as a constant. If the price of a given drug were to be lowered, it may become better value for money (relative to the alternatives) in a broader range of indications and/or patients.
4. Discussion The preceding review of the role of economic evaluation in drug pricing and reimbursement systems shows that there is considerable diversity in how it is used to develop health policy. On the one hand economic evaluation is a formal component of the Australian system. In two-stage administered systems and reference pricing systems essentially similar decisions are being made about whether medicines are therapeutically equivalent or not, and whether differences deserve a price premium or not. However, there is no formal role of economic evaluation, nor evidence of its extensive use. Therefore, what can be said about the appropriate role of economic evaluation in pricing and reimbursement decisions?. It is important to be clear on the following points. 4.1. Pricing and reimbursement
are linked decisions
Although in many countries the pricing and reimbursement decisions are made by different committees, the two decisions are conceptually linked. That is, whether
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a drug should be reimbursed (i.e. purchased by the government or other third party payer), or the extent to which it is reimbursed, is dependent on the price. In this sense drugs are no different from any commodity. Since, in economic evaluation, the value for money of an intervention is also dependent on its cost (price), this suggests that, in principle at least, economic evaluation is relevant to these decisions. 4.2. Pricing and reimbursement
systems need to be comprehensive
Experience with reference pricing in Germany and the Netherlands shows that, whatever system is adopted, it needs to be comprehensive. In particular, there needs to be an approach for pricing new, innovative pharmaceuticals. In both Germany and the Netherlands there were moves by manufacturers to increase the prices of these drugs as they were outside the reference price system. This suggests a particular role for economic evaluation in the pricing and reimbursement of new products, since it is the only method available to establish added value, when there are no close substitutes. Similarly, economic evaluation can play an important role in ‘free’ systems, where decision makers, be they formulary committees or individual prescribers, need information to make decisions in these more difficult cases. 4.3. Setting a price has two major implications Once a price is set it is possible to assess the value for money of an intervention to the health care system, compared with a relevant alternative (which is usually current care). However, the other major implication of setting a price is that it determines the level of income to the manufacturer from sales of the drug. (There is a direct relationship in the case of fully reimbursed products as the patient does not face a price, which otherwise might limit demand.) Therefore, the choice of price sets the balance between better value for money to the health care system and higher income to the manufacturer. (We return to this point later.) 4.4. Economic evaluation can assess value for money, but not necessarily establish the price Economic evaluation is the only method available to establish the additional value that a drug gives, when compared with an alternative. Therefore, it is central to the decisions made in drug pricing and reimbursement, such as whether two drugs are broadly equivalent, or whether a new drug should have a price premium over existing medications. Indeed, although economic evaluation has no formal role in two-stage administered systems or reference pricing systems, the same valuation process must be being applied informally in deciding which drugs should be listed and at what price. One explanation for the lack of formal application of economic evaluation could be that many decisions are fairly easy to make. That is, most comparisons are made
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between drugs having a similar clinical profile. Therefore, in many instances the decision may simply be to reimburse the drug at a price similar to existing drugs in the class. But even if drugs have a similar profile, economic evaluation could provide arguments to adjust the reimbursement level for a cluster of drugs away from the historical price level. The justification for doing this is likely to depend on the extent of new information about the drugs concerned and the existence of other new technologies for treating the disease in question. However, economic evaluation is likely to be most useful when the drugs (or interventions) being compared have clinical profiles that are very different in character. This is often the situation where the first drug in a new class is being evaluated, or where current therapy is either surgery or to do nothing. In such cases simple comparisons with other marketed drugs are not possible and the only approach would be to undertake a formal economic evaluation. Despite its potential, economic evaluation can only establish value for money, not establish a price. This is because, as mentioned above, the price sets the balance between the proportion of the total value going to society (in lower costs to the health care sector) and the proportion going to the manufacturer. At one extreme the total extra value created could be reflected in a higher drug price. At the other extreme no reward could be given to the manufacturer for the innovation concerned. At best economic evaluation can delineate a range of possible prices for a new drug. The final price can only be set after consideration of other factors. The key question is what the appropriate rule for drug pricing should be. 4.5. Rules are required for drug pricing
There are a number of considerations in drug pricing. In the past many of the factors considered have not necessarily been linked to the promotion of efficiency. Rather, they have focused on issues like the development of local industry and the provision of employment. However, from an economic viewpoint the aim of pricing rules is to promote efficiency, both within the health care system and within the pharmaceutical industry. There are a plethora of drug pricing schemes in operation. The majority focus on the pricing of individual products. A few, like the Pharmaceutical Price Regulation Scheme in the UK, impose global caps on company profits. The objectives of drug pricing schemes are not always explicitly stated, but a common consideration is to reward companies for innovation, whilst securing a reasonable price for the health care system. Much has been written on drug pricing [24-271. The basic options are: (i) no regulation (other than what is provided by the market); (ii) price-caps in various forms; (iii) cost-based rate of return regulation; and (iv) rate of return regulation within bands [28]. One key distinguishing feature of different schemes is whether manufacturers’ costs are taken into account or not; another key feature is whether differential prices reflect the differential value of products or not. Price caps have become a popular alternative to rate-of-return regulation for many public utilities as they avoid the adverse consequences of cost-based regula-
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tion on productive efficiency and the high administrative costs of rate-of-return regulation. Abbott [29] has recently studied the potential impact of price caps in the USA. He argues that, under conditions of rapidly changing demand (as found in pharmaceuticals), price caps could be manipulated. Using simulations, he shows that, in reaction to regulation, pharmaceutical firms would optionally set launch prices 50% higher than in an unregulated market and that it would be 7 years before consumers benefit, as the unregulated price rises above the price cap. The rule implied by the use of economic evaluation is that price should be set in relation to the additional value created by the product [30,31]. The costs of production (including the associated research) are largely irrelevant. In particular, from an economic perspective, it would not make sense for a company to waste resources in clinical research and development and then try to recoup these through being able to charge a high price for a product. Therefore, it is difficult to see how cost-based pricing schemes could lead to efficiency. Rather, the objective should be to increase efficiency in clinical research and development by encouraging companies to terminate the clinical development of a new product as soon as it becomes clear that the drug concerned will not add much value to existing therapy. However, the major difficulty in applying this rule is that the value of a product may vary through time and from one indication (for use) to another, whereas drug prices are often set at one point in time for all current and future indications for the product. The use of economic evaluation in pricing decisions could help minimize some of the problems identified by Abbott 1291. For example, one problem is in defining whether a change in packaging or form of the product (e.g. from tablets to liquid) constitutes a new ‘product’. Under a pricing and reimbursement system using economic evaluation, the only relevant issue is whether there is any added value. Another problem is that of determining the introductory prices. Again economic evaluation provides some basis for this, by estimating the comparative value of medicines relative to existing care. In an ideal world, economic evaluations would be performed for every indication for a given drug and a price set in relation to the value created. One approach might be to set prices so that the incremental cost per unit of health gain (e.g. a quality-adjusted life-year) is the same for all drugs. This way companies developing highly-valued products would receive the greatest rewards for their innovation. Also, evaluations and prices would be revised from time to time. This approach is outlined in Fig. 1. Imagine (Fig. l(a)) that a drug is originally reimbursed for three indications, for which equal quantities of the drug are sold (a total quantity of qJ. The additional value created is shown by the total area under the curve. Further, suppose that a price pO, is set according to a given rule. A number of rules are possible: one could set price to equate incremental cost per quality-adjusted life-year (QALY) with that from an average of other health care interventions. Another might set the price so that there are broadly equal shares in the residual value going to society and income going to the company. Then, suppose that, at a later date, a fourth indication is added. In Fig. l(b) the new indication has a high added value. In Fig. l(c) the added value is lower. The
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resulting new prices, according to the same rule, would be higher than pO (e.g. p,) in the first case, or lower (e.g. pJ in the second case. Since the quantity, q is the same in both cases, if the company adds a higher value indication, it receives more reward.
(a)
t Value
El
PO
RESIDUAL VALPE TO SOCIETY
(b) HIGH VALUE INDICATION ADDED
1 4
t Value
d2
P, -- ---..
PO -.
T-F-.--y,;,T-m-w;;< -I -..-.
-------,. j
.:
------I
.... .y$;...-> T - - - y .Y:T , /
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__)
(c) 1
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LOW VALUE INDICATION ADDED Quantity
+
Fig. 1. Relationship between value, price and indications for use.
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The notion of reviewing the prices of marketed drugs is well-established in a number of countries. In France there is a review 3 years after the drug is first reimbursed, but the main consideration is the quantity of the drug sold, rather than the additional value created by the increased sales. In Sweden the initial pricing decision can be changed at any time and follow-up or verification is seen as an integral part of the system for pricing of pharmaceuticals. In Japan the price of a drug is reduced by a given percentage every year it is on the market. This creates perverse incentives to companies to develop new formulations or line extensions that offer little additional benefit, but enable the initial drug price to be re-established. In our view, any review of price should be based on the additional value created, thereby providing appropriate incentives to companies to seek new and cost-effective indications for their products. Despite the practical problems of the approach suggested here, in the resources required for economic evaluations and for review of marketed products, its major advantage is in the incentives it gives to manufacturers to improve the quality of economic data about their products and to search for new, high value indications. Significant company resources are invested in research after a drug is initially launched. How research priorities are currently determined is unclear. This approach would cause them to be determined by potential value for money.
5. Conclusions In principle, economic evaluation should have a central role in drug pricing and reimbursement decisions. Its main contribution is to provide a method to establish, in an explicit and transparent way, the additional value to society of a new pharmaceutical. However, the actual role of economic evaluation in drug pricing and reimbursement schemes is very variable, ranging from being a formal requirement in Australia to no involvement in reference pricing systems. There is also considerable confusion about the potential role of economic evaluation. It is most useful where the interventions being compared are very different in their clinical profile. Therefore, it would be particularly useful in making decisions about a new class of drug, or the first drug for a particular condition. However, economic evaluation can only help us to assess the value of a new drug, but not to establish a price. The price of a drug can only be set when a pricing rule is adopted. In essence, the rule needs to specify the proportion of the added value going to society (in a reduction in the cost of obtaining improved health) and that going to the company (in income to meet current commitments and to finance future research investments). The design of an efficient drug pricing and reimbursement scheme is not a simple matter, but consideration of the role of economic evaluation suggests that the major factor determining price should be the additional value obtained from a given drug in its various indications for use. Some comments have been made here about the theoretical and practical issues that would have to be resolved before such an
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approach could be operationalized, thereby encouraging care provision and in drug development.
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efficiency, both in health
Acknowledgements We are grateful to Karen Bloor, Nick Freemantle, Henry Grabowski, Hugh Gravelle and Adrian Towse for comments on an earlier draft, to Susanne Wahling for providing data for Germany, and to Vanessa Windass for secretarial assistance. All remaining errors are our responsibility. References [l] Drummond, M.F., Stoddart, G.L. and Torrance, G.W., Methods for the Economic Evaluation of Health Care Programmes. Oxford University Press, Oxford, 1987. [2] Commonwealth of Australia, Guidelines for the pharmaceutical industry on preparation of submissions to the Pharmaceutical Benefits Advisory Committee: including economic analysis. Canberra, Department ‘of Health and Community Services, 1995. [3] Ontario Ministry of Health, Ontario guidelines for economic analysis of pharmaceutical products. Toronto, Ministry of Health, 1994. [4] Canadian Coordinating Office for Health Technology Assessment (CCOHTA). Guidelines for economic evaluation of pharmaceuticals: Canada. CCOHTA, Ottawa, 1994. [5] British Columbia Ministry of Health, Program established to evaluate cost-effectiveness of new prescription drugs. News Release, Victoria, BC, November 10, (1995) 321. [6] Drummond, M.F., Rutten, F.F.H., Brenna, A. et al. Economic evaluation of pharmaceuticals: a European perspective. PharmacoEconomics, 4(3) (1993) 173- 186. [7] Pelt, A., Castan, J.-P. New developments in pricing and drug reimbursement in France. PharmacoEconomics, 6 (Suppl. 1) (1994) 28-35. [8] US General Accounting Office. Prescription drugs; spending controls in four European Countries, GAO/HEHS-94-30, Washington, 1994. [9] Schmidt E., Development of reference prices in Germany, presentation for the Int. Conf. of Pricing and Reimbursement of Pharmaceuticals, 29-30 September 1992, London. [lo] McArthur D., Pharmaceutical pricing and reimbursement in the single European market: consensus or conflict? PJB Publications Ltd., (1992) 94. [11] Financial Survey on Care 1994 (in Dutch), SDU Publishing Company, The Hague, 1993. [12] Jonsson, B., Pricing and reimbursement of pharmaceuticals in Sweden. PharmacoEconomics, 6 (Suppl. 1) (1994) 51-60. [13] Haan, G., Rutten, F.F.H., No cure, no pay: an acceptable way of financing fertility treatments? Health Policy, 13 (1989) 239-249. [14] RFFS. Riksfijrsiikringsverkets fiireskrifter om faststlllande av pris pa llkemedel., (Regulations concerning the pricing of medicines issued by the Swedish National Board of Social Insurance) (1992) 20. [15] von Schulenburg, M., Economic evaluation in health care decision making in Germany. Social Science and Medicine, in press. [16] Drummond, M.F., Cooke, J., Walley, T., Economic evaluation in health care decision making: lessons from the UK. Social Science and Medicine, in press. [17] Department of Health, Improving prescribing. London, DH, 1991. [18] LePen, C., Economic evaluation in France. Social Science and Medicine, in press. [19] Multinational Oral Sumatriptan and Carfergot Comparative Study Group, A randomized doubleblind comparison of sumatriptan and carfergot in the acute treatment of migraine. European Neurology 31 (1991) 314-222.
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[20] Glasziou, P.P., Mitchell, AS., Use of pharmacoeconomic data by regulatory authorities. In: B. Spilker (ed), Quality of life and pharmacoeconomics in clinical trials. 2nd edn Lippincott-Raven Publishers, Philadelphia, 1996. [21] Drummond, M.F., The emerging government requirement for economic evaluation of pharmaceuticals. PharmacoEconomics, 6 (Suppl. 1) (1994) 42-50. [22] Mitchell, AS., Presentation at the APOR Annual Meeting, Philadelphia, May, 1996. [23] Johannesson, M., The Australian drug guidelines for subsidisation of pharmaceuticals: the road to cost-effective drug prescribing? PharmacoEconomics, 2 (1992) 355-362. [24] Grabowski, H., Health reform and pharmaceutical innovation. American Enterprise Institute, Washington. DC., 1994. [25] Reekie, W., Price and quality competition in the United States drug industry. Journal of Industrial Economics, 23(3) (1978) 223-237. [26] Scherer, F., Pricing, profits and technological progress in the pharmaceutical industry. Journal of Economic Perspectives, 763) (1993) 97-l 16. [27] Thomas, L.G., Price regulation, industry structure and innovation: an international comparison of pharmaceutical industries. PharmacoEconomics, (Suppl 1) (1992) 9- 12. [28] Cave, M., and Towse, A., Regulating prices paid by the NHS for medicines supplied by the UK-based pharmaceutical industry. London Office of Health Economics, 1996, in press. [29] Abbott, T.A.. Price regulation in the pharmaceutical industry: prescription of placebo? Journal of Health Economics 14 (1995) 551-565. [30] Arvidsson, G., A note on optimal allocation of resources for R and D. Swedish Journal of Economics 72 (1970) 171-195. 1311 Arrow, K.J. Economic welfare and the allocation of resources for intervention. In: National Bureau of Economic Research. The rate and direction of incentive activity. Princeton, 1962.