Current Rationing Policy
Rationing healthcare is a good thing for this reason: if not rationed, then the opportunity cost cuts in, and so proposed new treatments may displace other, more valuable, care. Explicit rationing of new treatments is the antidote to implicit rationing, say by diluting nurse time or lengthening emergency waiting times. In order to operate a rationing system, a measure of value is needed to place alongside net cost. The measure of value usually used in health economics is a Disability- or Quality-Adjusted Life Year (DALY or QALY). The National Institute for Health and Care Excellence (NICE) appraisal committees use the (net) cost per QALY as their metric of value to the NHS. The indicative NICE threshold is £20k-£30k per QALY. That is the Department of Health and Social Care’s best estimate of the threshold beyond which more valuable care would be displaced. This is a coherent and workable theory that has endured for over 20 years. In this article I argue that this perspective, focussed only on health and social care is too narrow. Instead, I believe that the threshold should not only take account of the opportunity cost to the NHS, but should also include effects that play out in the broader economy through the effect of the QALY threshold on the life sciences sector.
Changing the Threshold
It could be argued that NICE sends the correct signal to industry on the grounds that the cost/value cut-off incentivises industry to make medicines that have enough value to justify their costs. But this argument does not work for a number of reasons.
The Case for a Higher Threshold
- The QALY calculation omits the fact that high prices may last only until the patent expires, after which competitive pressures often reduce real costs. Patents, after all, are a form of subsidy to promote innovation. Therefore, it could be argued that setting the threshold at the opportunity cost purely for the health service partially vitiates patent protection. Such a low monetary value may be insufficient to cover the cost and compensate for the risk of bringing new products to market.
- Industry is multi-national. If we set the price too low, we find that we are subsidised by countries that are prepared to pay higher prices. This cross-subsidy, where one country can have its industry subsidised by higher prices paid for its products in other countries, is time limited. This is exactly what is happening now in the controversy stoked by US President Trump.
- The cost of taking a pharmaceutical product to market is enormous. Some people think that drug company profits are excessive, but they discount the risk premium. The typical net profits of ‘Big Pharma’ have been reported as around 15%.[1] These figures turn largely on a few block-buster products. We need to keep them coming. Big Pharma is valuable to the economy, and a source of innovation, which Joseph Schumpter showed is the power-house of economic growth.
Closing Argument
So what does all this mean for policy. One possibility would be to inflate the NICE £20k willingness-to-pay threshold for one QALY to a higher figure. The Treasury could help set the threshold because they know how many tax credits are at risk from not doing so. There again, this country got into terrible shape in the 1960s and 70s by keeping dormant industries alive. But these were loss-making industries that had no innovative competitive advantage. Such is not (yet?) the case for pharmaceuticals.
Richard Lilford, ARC WM Director
Reference:
- Ledley FD, McCoy SS, Vaughan G, Cleary EG. Profitability of Large Pharmaceutical Companies Compared With Other Large Public Companies. JAMA. 2020; 323(9): 834-43.