Cost Implications of ValueBased Pricing for Compa

Authors: Gregory S Zaric

Publish Date: 2016/02/22

Volume: 34, Issue: 7, Pages: 635-644

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Abstract

Many interpretations of personalized medicine also referred to as precision medicine include discussions of companion diagnostic tests that allow drugs to be targeted to those individuals who are most likely to benefit or that allow treatment to be designed in a way such that individuals who are unlikely to benefit do not receive treatment Many authors have commented on the clinical and competitive implications of companion diagnostics but there has been relatively little formal analysis of the cost implications of companion diagnostics although cost reduction is often cited as a significant benefit of precision medicine We investigate the potential impact on costs of precision medicine implemented through the use of companion diagnostics We develop a framework in which the costs of companion diagnostic tests are determined by considerations of profit maximization and cost effectiveness We analyze four scenarios that are defined by the incremental costeffectiveness ratio of the new drug in the absence of a companion diagnostic test We find that in most scenarios precision medicine strategies based on companion diagnostics should be expected to lead to increases in costs in the short term and that costs would fall only in a limited number of situationsFigure 2 shows the northeast quadrant of the CEplane for the comparison of the new drug versus the status quo If the drug was free then there would be total incremental health benefits textTH textAll and incremental nondrug costs C textAlltextN represented by point A in the CEplane Let C textAlltextD be the total expected drug cost when the Treat All strategy is used thus yielding a total incremental cost in the Treat All strategy of textTC textAll = C textAlltextN + C textAlltextD For the Treat All strategy to be cost effective the drug cost must be such that the incremental cost of the Treat All strategy relative to the Status Quo is less than the payer’s WTP for the benefits obtained by the Treat All strategy The dashed line from the origin to point C has a slope equal to the payer’s maximum WTP for benefits Thus the cost at point C represents the maximum WTP for benefits of textTH textAll By the definition of this scenario Treat All is cost effective the drug manufacturer has chosen C textAlltextD such that the total cost textTC textAll sits at some point B along the vertical line between points A and C The analysis of Scenario 1 depends on whether the untargeted group would receive positive or negative health benefits as described in subcases 1a and 1b belowTargeting strategy when the untargeted group accrues positive health benefits a Result of switching to the Targeting strategy when the cost of the test is not included b Result of switching to the Targeting strategy for relatively low test cost c Result of switching to the Targeting strategy for moderate test cost d Result of switching to the Targeting strategy for relatively high test cost WTP willingness to pay ICER incremental costeffectiveness ratio TC All total incremental cost of the Treat All strategy TC Tar total incremental cost of the Targeting strategy C TarN total incremental nondrug costs in the Targeting strategy C TarD total cost of the new drug in the Targeting strategy TH All total incremental health benefits in the Treat All strategy TH Tar total incremental health benefits in the Treat All strategyLet C textTartextT be the expected testing cost per person when the Targeting strategy is used The cost C textTartextT includes people in both the targeted and untargeted groups since all members of the population would need to be screened in order to implement the Targeting strategy When the cost of the test is included the resulting total incremental cost is textTC textTar = C textTartextN + C textTartextD + C textTartextT There are two important thresholds for total cost shown by points H and G in Fig 4a Below we discuss three cases defined by the value of textTC textTar relative to these two thresholdsThe first possibility is that the test manufacturer chooses a relatively low test price Fig 4b which results in the Targeting strategy sitting at point F1 where F1 is on the line segment between E and H with textTC textTar textTC textAll Since a line from the origin to F1 has a lower slope than one from the origin to B the Targeting strategy is more cost effective than the Treat All However Treat All is still a policy option so we consider the incremental cost effectiveness of switching from Targeting to Treat All In this instance the slope of the line segment from F1 to B is greater than the WTP threshold Thus Treat All is not cost effective relative to Targeting The Targeting strategy results in a reduction in total healthcare costs ie since textTC textTar textTC textAll and a reduction in total health benefits ie caused by the loss of benefits of the new drug that would have been experienced by the untargeted groupThe second possibility is that the test manufacturer chooses a slightly higher price resulting in the Targeting strategy sitting at point F2 on the line segment between H and G Fig 4c The total incremental cost textTC textTar is still less than the total cost at point G The slope from the origin to F2 is less than the slope from the origin to B so Targeting would be considered cost effective However as in the previous case Treat All is still a policy option so we consider the incremental cost effectiveness of switching from Targeting to Treat All In this instance the slope of the line segment from F2 to B is less than the WTP threshold Thus Treat All is cost effective relative to Targeting The total incremental costs remain at textTC textAll despite the availability of a test to target individuals In this instance Targeting does not change total healthcare costs This subcase arises only if the test manufacturer chooses a relatively high price for the test thereby pricing itself out of the market However since the result of choosing a high price is that the Targeting strategy is not adopted and the test manufacturer does not sell any tests we would not expect a profitmaximizing test manufacturer to pursue this option

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