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.

#HEJC for 01/10/2012

This month’s (inaugural) meeting will take place Monday 1st October, at 8pm London time. That’ll be 3pm in New York City and 3am on Tuesday in Hong Kong. Join the Facebook event here. For more information about the Health Economics Twitter Journal Club and how to take part, click here.

The paper for discussion this month is published as an Early View article in Health Economics and the authors are Warren G. Linley and Dyfrig A. Hughes of Bangor University. The title of the paper is:

“Societal views on NICE, Cancer Drugs Fund and value-based pricing criteria for prioritising medicines: a cross-sectional survey of 4118 adults in Great Britain”

Following the meeting, a transcript of the discussion can be downloaded here.

Links to the article


RePEc: tbc

Other: tbc

Summary of the paper

There is a lack of evidence regarding societal preferences over England’s Cancer Drugs Fund, and the criteria used by NICE in accepting higher incremental cost-effectiveness ratios for some drugs. The authors conduct a choice-based experiment, via web-based surveys, of 4118 UK adults in order to explore societal preferences for resource allocation criteria and a future value-based pricing system. Respondents were asked to allocated fixed funds across different disease areas and patient groups, reflecting nine prioritisation criteria. The researchers found that respondents supported the proposed criteria of value-based pricing, which included prioritisation of severe diseases, unmet needs and innovation. Respondents were found not to support the prioritisation of children or disadvantages populations; the use of an end-of-life premium; the Cancer Drugs Fund; or the special funding status of treatments for rare diseases.

Discussion points

  • Does the sample used, and the method adopted, represent true social preferences?
  • To what extent do these questionnaires, and their responses, inform a QALY framework?
  • Would a discrete choice experiment have been more appropriate?
  • Should the authors have applied population weightings to their sample?
  • Do the questions used in this study sufficiently isolate prioritisation preferences, or are they muddied by preferences for population health maximisation?
  • If this study demonstrates the unrepresentativeness of NICE’s Citizen Council, what is an alternative means of incorporating dynamic social values?

Missed the meeting? Add your thoughts on the paper in the comments below.

Health and Social Care Bill 2011

Many have spoken out in opposition to the bill. Some have spoken out in support. As health economists most of us have done little of either. I recently wrote to health economists asking them to answer a simple question:

“With regard to the future of the Health and Social Care Bill 2011, what do you believe to be the best course of action and why?”

Here are the responses*.

Christopher McCabe, Professor of Health Economics, University of Alberta

I believe that the most appropriate action with regard to the Health and Social Care Bill would be to stop its current procession through Parliament.

The bill’s immediate impact will be to fragment care, when all the evidence points to co-ordinated care being both more effective and more efficient. In addition, the bill allows both primary care and hospitals to develop their private sector practice without regard to the impact on the health of those who cannot afford private health care.

The democratic accountability for the expenditure of over £100 billon will be significantly diluted through the changes to the responsibilities of the Secretary of State, whilst the ability of the public to hold third and private sector providers to account through freedom of information will be substantially reduced.

The costs of implementing the reforms are likely to be equal to the cost savings that have been cited as a justification for them and there is no evidence to support the government’s proposition that the new structures will improve the quality of care.

The bill is now too complex to amend with a view to overcoming these substantial problems. Therefore it should be abandoned.

Cam Donaldson, Yunus Chair in Social Business & Health, Glasgow Caledonian University

My feelings on this are many and complex, but here are some ‘starters for ten’:

  • Those who say there was no mandate for such reforms must have missed Tory policy documents in the run up to the last General Election.
  • Those who complained during the ‘pause’ have made things worse, as it is now no longer clear who holds the purse strings. Not a good situation in the midst of a health care credit crunch.
  • The previous system was unsustainable due to its emphasis on the most expensive part of the health care system (the ‘black hole’ of the acute sector). The creation of Foundation Trusts and associated incentives (such as PbR and the need to pay off PFI-funded projects) had created too much power on the supply side, backed by encouragement of funds to flow in that direction.
  • That’s why I like a model based on GP fundholding. PCTs could not stop flows of funds into the acute sector, and, by my experience, even ‘cosied up’ to FTs under the previous arrangements. The evidence is not great, I admit, but what there is showed that fundholding has potential to create countervailing power on the demand side of this imbalanced market – a market that became even more imbalanced than it had been under Thatcher or Ken Clarke. These guys (GP practices and consortia) might be smaller than PCTs, but the countervailing power might come from something to do with their professional status.
  • I agree with people’s worries about the explicit push to more commercial interests becoming involved. This is the bit I’d want junked, revised or whatever.
  • Is going back an option? Given my third bullet point above, I’d say not. So, when people slag off the Bill, I’d like to know what THEIR alternative is. That’s what’s frustrating about Twitter!!!

Stephen Wright, Executive Director, European Centre for Health Assets and Architecture

The Health Bill raises a number of questions:

  1. The compatibility of integration of care with competitive provision
  2. GP conflicts of interest as providers and commissioners (let alone as rationers)
  3. Whether the NHS will be converted into an insurer rather than a provider, by stealth
  4. Centralising administration (Commissioning Board) – in the name of localisation
  5. Whether administration costs will rise with the partial privatisation
  6. Reorganising a system while simultaneously expecting it to achieve unprecedented economies
  7. The legitimacy of reorganising the architecture of care provision before the Bill has even been enacted
  8. Whether the proposed failure regime can achieve its goals (to bring in commercial capital)
  9. The lack of clarity of the mechanisms for planning long-term investment in assets
  10. The inadequate nature of the tariff (PbR) and associated payments streams, including Market Forces Factor and Service Increment for Teaching and Research, both of which need serious reform.

These questions of health economics principles (principal-agent; the health production function; factor pricing; capital investment decision-making; etc.) are so profound that the Bill is destined to create system failure.

David Cohen, Professor of Health Economics, University of Glamorgan

I am very much against the bill for 3 principle reasons:

  1. There are many criteria on which inescapable resource allocation decisions can be made – one being efficiency (maximise health gain from available resource). In recent years, largely due to the influence of NICE, the efficiency/cost-effectiveness criterion has played a much larger role in these decisions thus reducing the role of other less defensible criteria such as the political power of consultants or the ability to gain public sympathy by shroud waving. These 2 – as well as prioritisation according to drug company influence – are certain to increase if the bill is passed.
  2. There is no evidence that increased competition by private providers will improve efficiency.
  3. “Evidence” used to defend greater use of market principles in the NHS on the basis of what patients want is dubious. Who would say no if asked “are you in favour of more choice?”. I can see no evidence that ‘more choice’ is a burning issue for patients. Free market health care has advantages including consumer choice. Socialised health care has advantages including greater equity. Attempting to get both from the same health care system won’t work.

Peter West, Health Economist

The key point is that changes should be piloted for some time, in say one geographical area and across a range of institutions and services. PCTs were, let’s be frank, not very effective purchasers because purchasing is difficult and they never had the skills and resources. Will something clinically led be better? Very hard to say. Indeed, it is hard to know if it really will be clinically led.Will competition damage networking and the moving of the patient to the best place rather than the place that wants to keep the most income from that patient? Possibly. But in practice NHS hospitals already compete and, in addition, once a patient has received their initial urgent care, hospitals develop strong ownership. Competition is always weakened in the NHS anyway because the obvious place for assessment is local OPD and once assessed as needing continuing care, the patient has a relationship with a doctor and hospital and is likely to continue their care there unless some problem came up in the assessment phase.For those less familiar with the NHS, some examples of competition and collaboration. I do not pretend that similar stuff could be found everywhere but I think issues like these are widespread:
I have worked in a merged teaching hospital where rivalry between the two sites was fierce, dating back to a historic schism around 200 years ago. The new combined medical director regularly received hate mail from some colleagues on his former site. Could market competition be any stronger? I have also heard of hospitals holding on to patients after the King’s Cross fire instead of sending them to a Burns Unit, because the receiving hospital in Central London wanted to build up its plastics service. And it had of course already stabilised the patients and started their care. Similarly, I have seen local doctors in a far flung part of the NHS raising money for cancer equipment so that they could have a go locally at treatments which are acknowledged to be best carried out in a major cancer centre. So collaboration is far from perfect, but it could still get worse with more competition.Of course it will frustrate some that we cannot move directly to a new system but without evidence, collected with significant research resources, we would be lurching in the dark yet again!

Gillian Mann, Health Economist, Liverpool School of Tropical Medicine

I believe the primary function of a public health service should be to provide universal coverage of appropriate promotive, preventive, curative, and rehabilitative services at an affordable cost. These should be delivered equitably such that those with the greatest need should have the greatest utilisation. I believe that the most efficient means of ensuring equitable cost-effective services is to have treatment and care guidelines written from a strong evidence base taking into account the views of medical professionals, patients and other stakeholders. In a publicly funded system this must be based on cost-effectiveness, so that the maximum health benefit is gained from the public purse.

I do not believe that putting increasing decision making power in to the hands of GPs can achieve this. They do not, and should not, have the time nor the resources to weigh up all new evidence across a range of care needs.

I believe the argument for patient choice is misguided; effective choice relies on evidence, not media reports. As a patient, I expect medical professionals to make evidence-based decisions – an individual cannot. Patient choice will lead to inequitable service provision, since the most informed patients, who are more able to negotiate with their GPs, are unlikely to be those with greatest need, who in all societies tend to be poorer with access to fewer resources.

As both a patient and an economist I believe the proposals are regressive; I would not like to see them implemented.

Let us know what you think in the comments below, and be sure to vote in the poll.

*if you missed the deadline for submissions, but believe your views to be of interest to readers, you can contribute by clicking here.