The “New Drug Reimbursement” Game

Abstract

If a new drug’s incremental price-effectiveness ratio (IPER) is above the health shadow price, βc, the best alternative strategy to new drug reimbursement will result in more health benefits to the population, for the same financial cost. The historic decision threshold (k) in most countries is likely to be significantly higher that the health shadow price. If a regulator chooses to reject a new drug as a consequence of adopting the lower threshold, firms might make the following threat: At IPERs below k, it will not be financially viable to supply most new drugs to this country. The weight of this threat could be significant, particularly when the new drugs have substantial clinical benefit for some patient groups. How should a rational institution respond? In this chapter, this question is first analysed in a conventional decision theoretic (non-strategic) model as the optimal response by regulators to historic evidence of the price of new drugs. Then the question is analysed within a price-effectiveness analysis (PEA) framework. PEA uses an applied game theoretic model that assumes firms act strategically and that the health of the population, not the target patients, is the maximand. I conclude that the decision to reimburse a new drug is best analysed as a game with multiple players who act strategically and where the objective of the Institution is to maximise the population’s health. The second conclusion is that the population health-maximising response to the threat is to maintain a threshold price of β$$ \beta $$c.