There is a limit to what anything is worth. Letting each of many competing insurance plans decide what medicines they will and won’t cover and at what prices is how the U.S. Market decides how much to pay for medicines.
Countries that don’t have a market to negotiate the price of drugs rely on their governments to decide how much to pay. These governments in turn rely on a discipline known as Health Technology Assessment (HTA) and specifically a form of HTA known as Cost-Effectiveness Analysis (CEA) to calculate the value of medicines. In countries like Canada, the UK, and Australia, this analysis determines whether the healthcare system will pay the asking price for a drug. If not, patients may be denied access unless the drug company agrees to lower its price.
Here in the U.S., the thing that comes closest to an official CEA body is called ICER. And it makes similar mistakes in overlooking important factors while calculating what a drug is worth.
In the U.S., such math has historically been of academic interest but not actually used to set price limits. It’s not uncommon for ICER to say a drug isn’t worth covering but for U.S. Insurance plans to cover it anyway. This suggests the market values drugs more highly than CEA math does. So why does the math fail to explain why the market values what it values?
For one thing, conventional CEA ignores that drugs go generic over time, assuming the price will stay high forever. It also focuses on the benefit a patient gets from treatment but ignores the benefit that caregivers get from a patient getting better. And it often ignores productivity gains from a patient (and their caregiver) being able to get back to work, among other blindspots.
It’s possible to not ignore all that. The math can be expanded to account for a lot more of what society values about medicines. This is called Generalized Cost Effectiveness Analysis (GCEA). Things like genericization, caregiver spillover, and peace of mind are valuable benefits of many drugs that are not represented in conventional CEA calculations. As the graphic below depicts, each of these factors is just one petal on the GCEA value flower. Considering all of them together starts to give us an idea of the true value of a drug.
Watch
to understand the concept of GCEA and the value flower better. Also, revisit this article about the European Scorpion to better appreciate how conventional CEA can be used to mislead the U.S. Into giving up on funding valuable innovation.Companies that develop new medicines are starting to use GCEA to show that the U.S. Market is getting a good deal. Here’s an example of a company referencing GCEA in the press release announcing its drug’s approval. We need to see a lot more of that.
You might even ask why these drugs’ prices weren’t higher if they’re worth more than the market pays. The answer is that the U.S. Market is always negotiating a bargain for itself. For example, whenever there is more than one drug in a class, insurance plans can play them off one another to secure rebates/discounts. Yet, even in cases where a company has a unique drug, as in the case of Vertex’s Trikafta, the price is well below its upper price limit according to GCEA.
Academics who theorize that the drug industry engages in predatory pricing because it surely can should be inspired to do further work on why so many U.S. Prices of medicines turn out to be below their society value as calculated by GCEA. For more on exactly how to conduct a GCEA on a medicine, see this User Guide. (Fair warning, there’s a lot of math!)
In this 7-minute video, RA’s health economist, Richard Xie, walks you through the GCEA in greater detail.