Health Economics provides consulting and research services to a variety of firms in the pharmaceutical, biotechnology, a
Defining and Measuring Value in Healthcare Darius Lakdawalla
Financial Disclosures • Darius Lakdawalla is the Chief Scientific Officer at Precision Health Economics, and an investor in its parent company, Precision Medicine Group. Precision Health Economics provides consulting and research services to a variety of firms in the pharmaceutical, biotechnology, and health insurance industries.
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Agenda
Defining Value
Economic Foundations of Value Assessment
Elements of Value
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Agenda
Defining Value
Economic Foundations of Value Assessment
Elements of Value
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Defining Value • Maximum willingness to pay for a good or service Willingness to Pay
OLD
NEW
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“Whose willingness to pay?” • Concept of value remains agnostic about perspective • Value can be measured from multiple perspectives: – – – – –
Patient Healthy consumer/taxpayer Employer Government Societal (sum of all perspectives) 6
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Agenda
Defining Value
Economic Foundations of Value Assessment
Elements of Value
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Microeconomic Foundations of Value Assessment
• Long-established groundwork for measuring “willingness to pay” for goods and services • Measure consumer well-being, or “utility” – –
Step 1: Estimate how much well-being rises with the arrival of a new technology Step 2: Estimate how much the consumer is willing to pay for this increase in well-being
Key Take-away: The economic science of value can serve as a rigorous foundation for value assessment in healthcare.
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Technical Foundations • Report’s technical appendix contains mathematics • Begins with expected utility of consumer: –
(1 – π)u(cw, hw) + πu(cs, hs + Δh(m))
• Derives value, V, as willingness to pay: –
u(cs, hs) = u(cs – p – V, hs + δ)
• Incorporates our “elements of value” into the single unified mathematical framework 9
Agenda
Defining Value
Economic Foundations of Value Assessment
Elements of Value
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Elements of Value Challenge: Map each element into an underlying economic framework for value assessment.
Scientific spillovers
Qualityadjusted life-years (QALYs) gained
Net costs
Productivity
Equity
Real optionvalue
Adherence -improving factors
VALUE
External costs of contagion
Value of hope
Insurance value
Traditionally included in value assessments.
Diagnostic information
Fear of contagion
Could be included in value assessments.
Not yet ready for value 11 assessments.
Developing Foundations for Value Assessment
Step 1
Theoretically model how each element of value influences well-being of patients, consumers, employers, and/or payers
Step 2
Empirically measure the effect of this element of value on stakeholder well-being
Step 3
Monetize the empirical effect on well-being
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Value of Health Improvement
Example
The quality-adjusted life-year (QALY) provides a mechanism for incorporating health improvement into the economic framework.
Step 1
Map health improvement into the established model of quality and quantity of life.
Step 2
Measure the gain in health improvement using QALYs.
Step 3
Measure the willingness to pay money for QALYs gained. 13
Novel Elements of Value
Scientific spillovers
Qualityadjusted life-years (QALYs) gained
Net costs
Productivit y
Equity
Real optionvalue
Adherence -improving factors
VALUE
External costs of contagion
Value of hope
Insurance value
Traditionally included in value assessments.
Diagnostic information
Fear of contagion
Could be included in value assessments.
Not yet ready for value assessments. 14
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Novel element: Insurance value Rationale
$ Healthcare In the form of insurance premia (or taxes) Used by the sick
Paid for by the healthy
Conventional Question: How much would sick people pay for technology to treat their illness?
Relevant Question: What additional premiums or taxes would healthy people pay for technology? 15
Novel element: Insurance value Analysis
To a healthy person, illness is a risk, not an existing condition
Stay Healthy Get Sick
The healthy value medical innovation because it protects them from risk of falling sick
Technology reduces physical risk of falling ill
Technology converts an uninsurable physical risk into an insurable financial risk
This represents the “insurance value” of medical technology that can be quantified using conventional models of risk-averse consumer behavior (Lakdawalla, Malani, and Reif 2017) 16
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Novel Elements of Value Insurance Value: Estimation Approach
Step 1
Build the theory of insurance value from conventional model of utility-maximization.
Step 2
Empirically measure the health gain in QALYs and the risk of illness.
Step 3
Estimate the monetary value of a QALY and the willingness to pay for $1 more insurance.
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Novel Elements of Value “Option-value” of Living to See Future Breakthroughs SURVIVAL 100%
Old drug New drug Old drug with innovation
0
New drug with innovation
Conventional survival benefit plus the option value benefit Conventional Survival Benefit
TIME
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Novel Elements of Value Option-value: Estimation Approach
Step 1
Build the theory of option-value from conventional model of utility-maximization.
Step 2
Empirically measure the health gain in QALYs and estimate the expected improvement in QALYs from future technologies.
Step 3
Estimate the monetary value of a QALY and recover the value of QALY’s gained due to future technologies.
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Other Novel Elements of Value
Scientific spillovers
Qualityadjusted life-years (QALYs) gained
Net costs
Productivity
Equity
Real optionvalue
Adherence -improving factors
VALUE
External costs of contagion
Value of hope
Insurance value
Traditionally included in value assessments.
Diagnostic information
Fear of contagion
Could be included in value assessments.
Not yet ready for value assessments. 20
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Key Takeaways Recommendation 3.1: Apply conventional cost-effectiveness analysis in public and private coverage and reimbursement decision making Following the Second Panel, we strongly endorse the use of the cost-per-QALY metric to support health care decision making particularly in relation to the payer coverage and reimbursement decisions of both public and private insurers in the U.S. Recommendation 3.2: Embrace potential QALY refinements In the spirit of the Second Panel’s impact inventory, we support future development of a more comprehensive CEA that embraces novel elements of value—including insurance value, real option value, scientific spillovers, etc.— that could ultimately provide for more efficient resource allocation within the health sector and for health versus non-health spending. We recognize, however, that the development and use of these potentially important QALY refinements is at an early stage—not yet ready for widespread application but warranting further scientific research and development. 21
Next Steps: Aggregation • We have outlined framework identifying elements of value to individuals • Next step is to determine how to aggregate individual preferences into decisions at the level of a group –
E.g., society, employer, or group of insureds
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