Shining Steel or Bastard Science?Economics and Health Care Decisions

Karl Claxton

Department of Economics and Related Studiesand the Centre for Health Economics

University of York

Social choice in health

• Which health technologies, at what price and how much evidence? – Who will live a little longer– Who will die a little sooner

“wickedness or folly or more likely

both,” “ethically illiterate as well as

socially divisive”, responsible for the

“perversion of science as well as of

morality” and are “contrary to basic

morality and contrary to human rights”.

Economics and social choice

• Definition of social welfare – Society viewed as a collection of individuals – Only individual preferences count

• Criteria for improvement– Improve social welfare if gainers could compensate losers

• Means of measurement– Market prices represent social values (compensation required)– Non marketed goods can be valued ‘as if’ a market exists

• Make claims of what is efficient– Strength and legitimacy of the prescription rest on the strength and the

legitimacy of the assumptions

Some implications

• Heath care programmes should be judged in the same way as any other proposed change. The only question is do they represent a potential Pareto improvement not do they improve health outcomes. It is possible that a programme may increase the health of some but reduce the health of others. If those that gain health outcome can compensate those that lose health (measured by individual willingness to pay) then the programme may be a potential Pareto improvement even if the health outcomes overall are lower.” Mark Pauly.

But?• And he looked up and saw the rich putting their gifts into the

treasury and He saw a poor widow putting in two small copper coins [mites]. And he said, “Truly I say to you, this poor widow put in more than all of them: for they all out of their surplus put into the offering but she out of her poverty put in all that she had to live on.” Luke 21, v1-4, NAS.

Mark or Luke?

“Those that object to the market object to freedom itself” Friedman

“Perfectly disgusting….A state can be Pareto optimal with some people in extreme misery and others rolling in luxury, so long as the miserable cannot be made better off without cutting into the luxury of the rich. Pareto can, like Ceasar’s spirit, come hot from hell” Sen

If not the invisible fist?

• Specify explicit social welfare function– What and who counts?– What weights should be used?– How can any social welfare function claim legitimacy

• Who should decide?• What process should be used?

• Maybe Freidman’s got a point after all?– Paternalism at best– Lack of accountability and danger of dictatorship

Liberty or leviathan?

Legitimate institutions and process

• Accountable higher authority (principal)– Task of balancing competing claims, liberty and social justice– Devolves responsibility and resources to meet specific objectives

• Devolved authority (agent)– Asked to meet explicit (necessarily narrow) objectives– Given the resources to do the job

• Agent doesn’t meet all the objectives of the principal– Impossibility of expressing an explicit social welfare function – Observe the implications of some latent but legitimate welfare function

• Modest claims based on implied social values– Legitimacy of any claim rest on the legitimacy of institutional

arrangements

£20,000 per QALY

£40,000Price = P*

Cost-effectiveness Threshold £20,000 per QALY

QALYs gained

Cost

£60,000£30,000 per QALY

Price > P*

3

Which technologies, at what price?

£20,000

2

£10,000 per QALY

Price < P*

1

Net Health Benefit1 QALY

Net Health Benefit-1 QALY

Price

Quantity

P*

Q*

Price and value?

Value of the technology = P*.Q*

All value goes to the private sector No net health benefits to the NHS

£0

£20,000,000

£40,000,000

£60,000,000

£80,000,000

£100,000,000

£120,000,000

£140,000,000

£160,000,000

£180,000,000

£200,000,000

0 5 10 15 20 25 30 35 40

Years from launch (T)

Pre

sent

val

ue o

f in

nova

tion

at T

Will the NHS ever benefit?

Generic entry at year 15

p < p* Total value

Private share

NHS share

Have your cake but never eat it!?

-£150,000,000

-£100,000,000

-£50,000,000

£0

£50,000,000

£100,000,000

£150,000,000

£200,000,000

£250,000,000

£300,000,000

0 5 10 15 20 25 30 35 40

Years from Launch (T)

Pre

sent

val

ue o

f in

nova

tion

at T

Total value

Private share

NHS share

Accept p>p* during patentbecause p<p* when

generics enter

How should we share value?

• Should the private sector get all the value?– We don’t care who gets it– No subsidies or publicly funded research and development

• But it is legitimate to care– NHS should get some of the value– Some incentives for early uptake

• How to share?– Explicit rules that mirror other markets

• A free choice of price but with associated guidance• Preserve monopoly rights during patent period• Avoid games (commitment, hold up and politicisation)

Price

P1

Quantity

P2

P3

Q1 Q*Q2

S1 S2 S3

Price and guidance?

Choose Guidance Revenue Net Benefit

P1 S1 P1.Q1 0

P2 S1+S2 P2.Q2 A

P3 S1+S2+S3 P3.Q* A+B+CA

CB

A

Are other deals possible?• P<P* for Q* exists which is mutually beneficial• But how would negotiations turn out?

– Public sector accountable and transparent – Public, political and interest scrutiny– What is the credible threat?

• Clear predictable signals and explicit rules

Interested in the consumption value of health (v)?• V>λ, budget does not match individual preferences• Cost still fall on health not consumption• Same P, Q (guidance) menu available• Simply rescale any surplus

How much evidence?Why is evidence valuable?

What’s the best we can do now? Could we do better?

Maximum value of more evidence is 2 QALYs per patient

How things could turn out

Net Health Benefit Best we could do if we knewTreatment A Treatment B Best choice

Possibility 1 8 12 B 12

Possibility 2 16 8 A 16

Possibility 3 9 14 B 14

Possibility 4 12 10 A 12

Possibility 5 10 16 B 16

Average 11 12 14

Choose B Expect 12 QALYs, gain 1 QALY

But uncertain Wrong decision 2/5 times

If we knew Expect 14 QALYs

25,000

30,000

35,000

40,000

45,000

50,000

£10,000 £15,000 £20,000 £25,000 £30,000 £35,000 £40,000 £45,000 £50,000

Cost-effectiveness threshold (£ per QALY gained)

Po

pu

lati

on

Net

He

alth

Be

ne

fits

(Q

AL

Ys

)

Adopt the new technology?

Reject the technology Adopt new technology

Additional benefit

25,000

30,000

35,000

40,000

45,000

50,000

£10,000 £15,000 £20,000 £25,000 £30,000 £35,000 £40,000 £45,000 £50,000

Cost-effectiveness threshold (£ per QALY gained)

Po

pu

lati

on

Net

He

alth

Be

ne

fits

(Q

AL

Ys

)

Value of additional evidence

Additional benefit

Value of evidence

Reject the technology Adopt new technology

Coverage (guidance) with evidence?

• Questions to ask– Is additional evidence needed?– What type of evidence is needed?– Can this evidence be provided once approved?

• What type of research is possible?– Registry – no control group

• How and who should pay?– Sponsor

• Promises to provide the evidence?– Public sector

• Other more valuable priorities (without a sponsor)• Should account for research costs (price discount)• Price so additional research not needed

Coverage without evidence?

• Coverage with evidence not possible– Sponsor unwilling or unlikely to provide it– Type of research needed is not possible

• Early approval? – Net benefits of early access – Evidence base is least mature

• Impact on future research – Incentives for manufacturers– Ethics of experimental research

• Compare costs and benefits to all patients?– Net benefit of access to the technology – Value of the evidence forgone

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

£10,000 £15,000 £20,000 £25,000 £30,000 £35,000 £40,000 £45,000 £50,000

Cost-effectiveness threshold (£ per QALY gained)

Ad

dit

ion

al N

et H

ealt

h B

enef

its

(QA

LY

s)

Benefits of early access

Additional benefit

Adopt the technology Reject the technology

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

£10,000 £15,000 £20,000 £25,000 £30,000 £35,000 £40,000 £45,000 £50,000

Cost-effectiveness threshold (£ per QALY gained)

Ad

dit

ion

al N

et H

ealt

h B

enef

its

(QA

LY

s)

Value of evidence forgone

Evidence forgone Additional

benefit

Reject the technology Adopt the technology

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

£10,000 £15,000 £20,000 £25,000 £30,000 £35,000 £40,000 £45,000 £50,000

Cost-effectiveness threshold (£ per QALY gained)

Po

pu

lati

on

Net

Hea

lth

Ben

efit

s (Q

AL

Ys)

Reduce the price

Reject the technology Adopt the technology

Additional benefit Evidence

forgone

Role of cost-effectiveness analysis?

• Cost-effectiveness analysis (and NICE) has nothing what so ever to do with cost containment!!

• Expresses legitimate collective demand for health technologies

• Does not prescribe social welfare – Individual compensation– Simple sum of consumer and producer surplus

• Reflects values implied by legitimate social process – Accountability, debate and progressive change

The role of economists?

“If economists could manage to get themselves thought of as humble, competent people, on a level with dentists, that would be splendid!” Keynes

“Those that object to the market object to freedom itself” Friedman

Son, be a dentist (Orin, little shop of horrors)

• Observe implied social values– Capture more than can be imagined in all our philosophy– Critically reflect back the implications

• Bourgeois apologists?– Explicit social and scientific value judgments– Accountability, democratic debate and progressive social change

• Social legitimacy rests with the institutions and processes– Are they legitimate not are they ‘perfect’– Contribute to progressive change

• Not legitimate and progressive change is not possible? – You’ve no business being a dentist– By any means necessary