Economic Evaluation and Cost-Effectiveness Thresholds Signals to Firms and Implications for R&D Investment and Innovation

In this article we describe how reimbursement cost-effectiveness thresholds, per unit of health benefit, whether set explicitly or observed implicitly via historical reimbursement decisions, serve as a signal to firms about the commercial viability of their R&D projects (including candidate products for in-licensing). Traditional finance methods for R&D project valuations, such as net present value analyses (NPV), incorporate information from these payer reimbursement signals to help determine which R&D projects should be continued and which should be terminated (in the case of the latter because they yield an NPV < 0). Because the influence these signals have for firm R&D investment decisions is so significant, we argue that it is important for reimbursement thresholds to reflect the economic value of the unit of health benefit being considered for reimbursement. Thresholds set too low (below the economic value of the health benefit) will result in R&D investment levels that are too low relative to the economic value of R&D (on the margin). Similarly, thresholds set too high (above the economic value of the health benefit) will result in inefficiently high levels of R&D spending. The US in particular, which represents approximately half of the global pharmaceutical market (based on sales), and which seems poised to begin undertaking cost effectiveness in a systematic way, needs to exert caution in setting policies that explicitly or implicitly establish cost-effectiveness reimbursement thresholds for healthcare products and technologies, such as pharmaceuticals.