A new conceptual model of the cost-effectiveness threshold

Abstract:
Introduction: Conventional approaches to estimating cost-effectiveness thresholds do not take into account the allocation of any welfare gain from new technologies between patients (‘consumer surplus’) and manufacturers (‘producer surplus’). Existing approaches also do not consider alternative policy objectives regarding this allocation and the implications of strategic behaviour by manufacturers (‘pricing to the threshold’). This paper proposes a new conceptual model that incorporate these considerations.

Methods: A new conceptual model of the threshold was developed that incorporates strategic behaviour by manufacturers. The model accounts for the cost of developing technologies and the implications of patents and other barriers to entry (which allow for super-normal profits). The ‘optimal threshold’ is derived for each of several policy objectives regarding the distribution of welfare between patients and manufacturers.

Results: Where the policy objective is to maximize consumer surplus, the optimal threshold is lower than that implied by a conventional ‘supply-side’ approach. Where the objective is to maximize producer surplus, the optimal threshold is infinitely high, but consumer surplus is negative. Where the objective is to ensure both consumer and producer surplus are positive, the optimal threshold lies above the consumer surplus-maximizing threshold but below a conventional ‘supply-side’ threshold.

Conclusions: If policy makers desire that patients share some of the welfare gain from new technologies, the threshold should be lower than implied by existing theoretical approaches. Thresholds currently used in practice are also too high, resulting in negative consumer surplus. This work has implications for policy making and future empirical research into the threshold.