Health Economics for Builders and Backers

What’s New and What Matters this Month

This is our monthly briefing on some of the new developments in health economics that may be relevant for biopharmaceutical companies and investors. We highlight what’s new this month and break down what matters for company builders and backers.

Are other countries changing their prescription drug pricing policies in response to MFN?

Neil Grubert provides near real-time updates and informed commentary on his LinkedIn page about global drug pricing and access policy. This month he noted that “Japan will monitor MFN and could alter how it evaluates innovative drugs”, that TLV (the Swedish Dental and Pharmaceutical Benefits Agency) has delayed its drug pricing proposals partially due to the uncertainty created by MFN, and the higher cost-effectiveness threshold that will be used by NICE (the health technology assessment body in the United Kingdom) that was part of the US-UK drug pricing deal went into effect this month. China has recently proposed 14 measures related to drug pricing. Neil notes the China proposal includes a self-assessment system for novel therapeutics that “will allow companies to set their own prices based on factors such as clinical value, market supply and demand, competitive landscape, and social affordability” signaling more of a market-based approach to drug pricing and a potential strategic shift to incentivize innovation. The comment section on his post about the recently proposed drug pricing reforms in China is worth checking out.

For builders and backers: U.S. drug pricing policy and uncertainty are influencing the global market. Ex-U.S. policy changes should continue to be monitored as they may influence launch strategy and pricing acceptance.

Do the benchmarks used to judge whether biopharmaceutical innovations are cost-effective differ between the U.S. and MFN countries?

A Health Affairs Scholar article by Hanxuan Yu and co-authors examined nearly 7,000 cost-effectiveness analyses and found that the cost-effectiveness thresholds used to determine if the drug represents good value for money are “remarkably different” between the U.S. and the other high income countries in the Most Favored Nation (MFN) basket. Across all time periods examined, the vast majority of U.S. cost-effectiveness analyses used thresholds greater than 1 GDP per capita. That has not been the case in the MFN countries since 2010. Since 2010, the majority of cost-effectiveness analyses in MFN countries cited a threshold LESS than 1 GDP per capita.

For builders and backers: MFN countries have trended toward a lower cost-effectiveness threshold relative to GDP per capita which suggests increased price scrutiny and a lower willingness to pay over time. This translates into tougher reimbursement, downward pressure on drug prices, and an even greater importance for strong clinical and economic evidence.

Does the higher cost-effectiveness threshold now used by NICE as part of the US-UK drug pricing deal close this gap?

I previously wrote how NICE, the health technology assessment body for the National Health Service, was going to increase their cost-effectiveness threshold as part of the US-UK drug pricing deal. NICE has been using a threshold of £20,000-£30,000 for over twenty years, but as of this month, the threshold increased to £25,000-£35,000 per quality-adjusted life year gained. This signifies around a 17%-25% higher willingness to pay per unit of a health gain than their historical range. However, this is still less than 1 GDP per capita in the UK (estimated to be around £40,000 in 2025).

For builders and backers: Although a single or explicit threshold is not used for decision making in the U.S., cost-effectiveness analyses conducted for the U.S. setting often cite a threshold ranging from 1 to 3 times GDP per capita, which suggests a much higher societal willingness to pay for a health gain in the U.S. than the willingness to pay (historical or new) used by NICE. Applying MFN pricing in the U.S. could implicitly value drugs less than domestic health system preferences or historical norms.

How much of a drug’s economic value should be rewarded to the innovator?
An increasing body of literature is beginning to tackle this question. Two published this month include a study by Ochalek et al. that looked at what share of the economic value of branded pharmaceuticals was awarded to the innovator in the Thai healthcare system and then there was this publication by Anirban Basu that provides a framework and production function to estimate the tradeoffs between consumer and producer surplus appropriations. Earlier work by Woods et al. suggests that the share of value that is rewarded to the innovator should be around 20%. Lou Garrison and colleagues previously estimated that the inventors of the direct-acting antivirals for hepatitis C captured less than 10% of the health economic value created by these transformational products even before generics have entered the marketplace.
For builders and backers: Recent contributions highlight both the complexity and stakes of this question. Uncertainty is still high as to what the “optimal” reward is and how that might vary by disease, but this does signal continued scrutiny around value allocation to the innovator and further supports the need for companies to proactively articulate and defend the value of their products.

Why are branded prescription drugs so expensive?

This was one of the many questions Duane Schulthess and I got into on The Vital Health Podcast. We provided our unfiltered take on how drug pricing policy is shaping R&D decision making, the disconnect between the drug prices in the headlines and the value they provide, the limitations of QALY-based assessments, and new research on the incentives for oncology innovation.

For builders and backers: The drug pricing provisions within the Inflation Reduction Act and policy proposals like MFN are indicators that the U.S. is rethinking how it prices prescription drugs. This means they are questioning whether the market-based prices for prescription drugs are “worth it”. Economic models can be useful tools for biopharmaceutical executives to show the worth of their products and for investors to assess pricing acceptance in an environment with increasing price scrutiny. Companies that can articulate health and economic value have a strategic advantage.

Does cost-effectiveness analysis play a role in U.S. drug pricing?
In this month’s episode of Perspectives, I talk about why I think biopharma investors and innovators should pay attention to cost-effectiveness analysis even though the U.S. market does not formally use it to set prices. Cost-effectiveness analysis may not be (and should not be) a definitive pricing rule, but it shapes how drugs are valued which has implications for how innovation is subsequently rewarded. I get into the current debate over whether broader value elements (e.g., productivity, caregiver time, equity) should be included in the economic evaluation and discuss the limitations of conventional and novel cost-effectiveness frameworks. Rather than being used to set a price for a drug, these analyses can be a structured way to assess and communicate how an innovation creates value for patients, the health system, and society.

For builders and backers: Although cost-effectiveness analysis hasn’t been central to decision making in the U.S., that doesn’t mean it won’t become more relevant or hasn’t already become more relevant. Outside the U.S., cost-effectiveness analysis is deeply embedded. As international markets start influencing U.S. pricing and as MFN proposals influence global market access strategies, the methods those countries use suddenly matter a lot more.

What have payers been willing to pay for approved disease-modifying therapies for relapsing-remitting multiple sclerosis?

We released a report this month that analyzed how approved classes of disease-modifying therapies for relapsing-remitting multiple sclerosis are reimbursed. Rather than focusing on the list or net prices, we evaluate the total health system costs relative to the health outcomes achieved by these therapies. We then applied our framework to translate historical willingness-to-pay into value-anchored price estimates for potential future relapsing-remitting multiple sclerosis therapies. Our analysis suggests that payers reimbursed these therapies at total health system costs of around $230,000 to $590,000 per quality-adjusted life year gained, with the more recently launched anti-CD20 class toward the lower end of the range.

For builders and backers: Future therapies with strong clinical and economic value may still be able to achieve attractive pricing even in a competitive market. Our framework provides a differentiated look at economic value creation and pricing acceptance for potential new entrants.

What is the range of economically justified launch prices for a disease-modifying therapy in primary progressive multiple sclerosis, and how does clinical effectiveness influence the estimates?

We released another report this month that provided a health economic modeling framework to estimate value-informed launch prices for disease-modifying therapies in primary progressive multiple sclerosis. Our analysis showed how value-informed prices vary widely depending on treatment effectiveness and analytical framework. For a disease modifying therapy that slows progression by 25-30%, our framework suggests an economically defensible launch price between $50,000 and $130,000 per year.

For builders and backers: Understanding how clinical outcomes translate into value-based price estimates can help contextualize the potential economic value of pipeline therapies, guide evidence generation, and inform pricing acceptance in an environment of increasing pricing scrutiny.