The ‘value’ in value based pricing

The use of labour market outcomes in the Value Based Pricing scheme is inconsistent with the concept of value

This year, the Department of Health in the UK will begin using a new system of ‘value based pricing’ (VBP) to set prices for medicines and other health technologies. Decisions regarding the adoption of new medical technologies relies, in a large part, upon formal assessments of cost-effectiveness; these assessments are most often carried out by the National Institute of Health and Care Excellence (NICE). The aim of the new VBP system is to better capture the benefits of a certain treatment, particularly benefits accruing both directly to other non-treated individuals such as carers and indirectly to society as a whole. In the latter case, these indirect benefits are referred to as wider societal benefits (WSB), and are to be measured in terms of market based activity—specifically, the difference between productivity and consumption. However, I believe that the proposed methodology is inconsistent with the concept of ‘value’.

The concept of value is hard to specify, but whenever we talk of something being ‘good’, ‘better’, or ‘best’, or conversely ‘bad’, ‘worse’, or ‘worst’, then we are talking in terms of value. The health technology assessments (HTAs) conducted in the UK, generally define that what is best is the state of affairs with the greatest amount of goodness, and hence value, overall, subject to a budget constraint. But how do we measure value in these HTAs? The standard measure used in HTAs currently, is the quality adjusted life year (QALY); a medicine that leads to the largest number of QALYs overall within our budget constraint, i.e. a cost-effective medicine, is good. And, in this sense we can say one treatment is better than another in terms of its cost-effectiveness. At this point it becomes important to think about different types of value.

An important contrast is made between intrinsic value and instrumental value. Something with intrinsic value is good in and of itself whereas things of instrumental value are good because they causally lead to intrinsically good things. Consider money, it is good only because it leads to things that are themselves good, such as good housing or an HDTV, which themselves may be good because of what they lead to, such as a safe and clean environment and relaxing weekends watching sport, for example. As a third category, there is also constitutive value; while instrumental values causally lead to intrinsic values, constitutive value constitutes intrinsic value without causing it. For example, giving you money may lead to your pleasure, and this pleasure constitutes your happiness without necessarily causing it. In these distinctions, QALYs arguably have constitutive value in that they constitute well-being and longevity.

One further distinction is the difference between value monism and pluralism. A monist believes that there is only one kind of value to which all other values are reducible. Economists arguably fall into this camp since they often use utility as the encompassing super-value. This position has some attractive features, such as being able to explain rational choice through, for example, diminishing marginal value. The opposing school of thought is value pluralism that posits that different kinds of value (e.g. happiness and liberty) are distinct and hence incommensurable. Thus, the QALY may be constitutive of the singular super-value, which we can refer to as utility without loss of generality, or be a measure of just one kind of value, such as quality of life.

In a monist perspective, we could consider the aim of VBP to estimate the effect of healthcare expenditure for each specific technology on overall utility. The new VBP system aims to capture not only the utility accruing directly to the recipients of a medical technology (which QALYs are constitutive of) but also the utility generated by the increased level of resources in the economy caused by their increase in productivity (i.e. the instrumental value of productivity). In this sense, the VBP system aims to estimate a multiplier effect of healthcare expenditure for each technology. But, the VBP methodology would appear inconsistent with this position. Firstly, the WSBs of a treatment are determined by productivity minus consumption, but consumption generates utility. All rational decisions regarding consumption boil down to utility, in a monist sense. Secondly, the changes to societal welfare caused by increased productivity are estimated by calculating the effect of changes in individual QALYs on productivity. There is no reason to suspect the effect of productivity on QALYs is at all similar.

We could adopt a pluralist position in which QALYs constitute only one kind of value and productivity is instrumental for another kind of value. But if these types of value are distinct then they are incommensurable and cannot be combined. Furthermore, linking productivity to other types of value, such as liberty or happiness is certainly fraught with difficulty and not discussed as such in the VBP literature. We could argue that just because two things are incommensurable does not mean they are incomparable—to take a particularly contrived example, we may prefer to reimburse a medicine that treats a disease that afflicts only charity workers rather than a sales person specific disease out of a particular notion of value (I have no qualms to bear against people who work in sales). In this way we could create an ordinal scale, but this would preclude the calculation of thresholds and cost-effectiveness ratios, the very existence of which HTA relies upon.

I believe VBP to be a good idea in order to more accurately capture the effects of healthcare expenditure but the V in VBP is particularly nebulous. At the very least, however, VBP is a step in the right direction and will lead to wider discussions about the often under-considered normative side of economics.


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