What is the cost-effectiveness of a drug?

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cost-effectiveness of a drug

Manufacturers regularly offer new drugs to the pharmaceutical market. This makes it increasingly difficult for payers and medical professionals to make the best choice among all available medications. Which drug to choose – the more expensive one with fewer side effects, or the cheaper one with health risks? Officials and insurance companies are also finding it increasingly difficult to determine which drug should be included on the list of drugs covered by insurance benefits.

A cost-benefit analysis can help answer these questions. This technology also allows you to set a fair price for a drug. Read more about it in this article.

What is a drug’s cost-effectiveness?

Drug cost-effectiveness compares the health effects and economic benefits of different drugs and medical protocols designed to treat the same disease. Cost-effectiveness analysis (CEA) and modern digital technology like https://digitalho.com/cost-effectiveness-modelling/ are used to determine a drug’s cost-effectiveness by calculating the cost per unit of outcome (e.g., extending life by a year or preventing death) for different treatment options. 

Based on CEA data, manufacturers can determine the price-quality ratio of a new product compared to existing products on the market, the health benefits a patient will receive when using the new product, and calculate the optimal cost of the drug. The main data source for evaluating a drug’s effectiveness is clinical trial data, which can later be supplemented with real data. Such studies are used by the manufacturer to form the value of the product, which is later used for marketing purposes and in negotiations with officials.

The Drug Pricing Problem and CEA

In a market economy, the price of most products is governed by the law of supply and demand. However, for prescription drugs, this law does not work very well. First of all, because it is difficult for payers to independently compare several drugs (especially expensive ones to treat serious diseases) and evaluate their effectiveness. On the other hand, the health insurance system compensates the patient for the cost of treatment, which makes it difficult to determine the market price, and provides a tool for manufacturers to maintain the inflated cost of drugs.

The data obtained through cost-effectiveness analysis provide payers and decision makers with reliable information about the value of different treatments. This allows patients to decide which treatment option would be optimal in terms of efficacy and cost. As for policymakers, CEA helps them decide which drugs should be included in an insurance policy so that the public doesn’t overpay for treatment and payers get better health care.

CEA-based pricing

Cost-effectiveness analysis helps answer the question of what a drug should be fairly priced, that is, set the value based on its value. Why is this important?

If the cost is inflated, patients will spend money, some of which they could have spent on other procedures or medical care. If the price is less, manufacturers may withdraw from the market. As a result, patients will be forced to use less expensive and less effective drugs, negatively affecting their health. Not only that, it could cause the development of new medicines that are needed to be developed to be halted.

Thus, pricing based on cost-benefit analysis is not capable of setting the lowest prices. It will, however, allow society to spend its monetary resources in a way optimal for health.

 

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