VIEWS: 95 PAGES: 35 POSTED ON: 6/12/2011 Public Domain
AEM 4160: STRATEGIC PRICING PROF.: JURA LIAUKONYTE LECTURE 10 PRICING GARDASIL QALY The quality-adjusted life year (QALY) is a measure of disease burden, including both the quality and the quantity of life lived. It is used in assessing the value for money of a medical treatment. The QALY is based on the number of years of life that would be added by the treatment. Each year in perfect health is assigned the value of 1.0 down to a value of 0.0 for death. QALY Used in cost-utility analysis to calculate the ratio of cost to QALYs saved for a particular health care treatment. Helpful in allocating healthcare resources, Treatment with a lower cost to QALY saved ratio being preferred over an intervention with a higher ratio. Controversial: some people will not receive treatment because it is too costly Cost per QALY under $50,000 is acceptable Value of Statistical Life An economic value assigned to life in general, Marginal cost of death prevention in a certain class of circumstances. As such, it is a statistical term, the cost of reducing the (average) number of deaths by one. Value of a Statistical Life and Compensating Differences Qa , Qb =probability of fatal injury on job a, b respectively in a given year. Wa, Wb = earnings on job a, b in a given year. Assume Qa<Qb so that Wa<Wb. Compensating difference=Wb-Wa Value of a “statistical” life = (Wb-Wa)/(Qb-Qa) Example: If a person is faced with .001 higher risk of death per year and is paid $5000 per year extra for that risk, the value of a statistical life is 5000/.001 - $5,000,000. Viscusi. “The Value of a Statistical Life: A Critical Review of Market Estimates Throughout the World.” Journal of Risk and Uncertainty, v. 27 issue 1, 2003, p. 5. Value of Life and Compensating Differences Biases in estimates of statistical value of life Valuation is correct only for “marginal” worker. Estimate is too high for infra-marginal worker, and too low for workers that didn’t accept job with risk. ex post versus ex ante rewards for risk (compensating difference vs. law suits, insurance, etc.) Failure to control for other risks correlated with fatality risk Fatality risk measured with error Question Is Gardasil a Good Product? Pricing in the Biomedical Industry What factors should Merck consider when setting the price? Factors: Important or not important? Product cost R&D Investment? Other Vaccines? Public Relations? Value to the Customer/Benefit? Economic Modeling? Competition? Calculating cost per QALY Cost Per QALY = Cost of a quality life year STEP 1: Consider the costs per person: Cost per dose: ___________________ Cost per administration:_____________ Number of doses: _____________________ Total cost per patient: __________________ Step 2 Additional QALYs per person At age 50, further life expectancy without cervical cancer: ____________ QALY per year: __________________________________________ Total QALYs: ____________________________________________ At age 50, further life expectancy with cervical cancer: ______________ QALY per year: ___________________________________________ Total QALYs: _____________________________________ STEP 2 Reduction in QALYs with cervical cancer:_________________ Gardasil prevents:______________________________ Gardasil incremental QALYs: ________________ Chance of Getting cervical cancer without Gardasil: _______________ Incremental QALYs per person: ________________________________ Cost per QALY: Vaccination: _____________________________________ QALY: ____________________________________ Cost per QALY:___________________________ Step 2a This was a rough calculation because it left out an important piece of a puzzle: COST SAVINGS Fewer Pap tests Fewer LLETZ procedures Fewer cervical cancers to treat Step 2a Calculate COST savings Chance that a woman will have CIN 1: ______________ Chance that a woman will have CIN 2/3:______________ Chance that a woman will have cervical cancer: ___________ Cost to treat CIN 1: ________$55______________ Cost to treat CIN2/3: _____________________ Cost to treat cervical cancer: ________________ Saved Costs per person CIN 1: __________________________________ CIN 2/3: ________________________________ Cervical cancer: ___________________________ Gardasil will prevent (estimates): CIN 1: 50% CIN 2: 70% Cervical Cancer: 70% Calculate total savings: CIN 1: ____________________ CIN 2/3: ____________________ Cervical cancer: _________________ TOTAL SAVINGS: ______________________ Savings now or later? Vaccine given (average or target): __________ Cancer prevents: _______________ Difference: ___________________ Discount the cost savings at say, 8% = $16.50 In excel the command would be: =PV(0.08, 43, ,-450.2) Savings later So the total is” Cost per person: _______________ Savings per person: ___________ QALY per person: 0.038 COST per QALY:__________________ Do the risks of a PR backlash and the need to grow quickly outweigh the benefits of a higher price Potential entrant is coming Patent is not forever $360 Too low or too high? Suppose prices are set so that cost of QALY is $30,000 What is the maximum price that could be set? x = cost per person (x-16.50)/0.038 = 30,000 x =$1156.5 Or $1156.5/3 = $385 per dose ANSWERS TO BLANK SLIDES Calculating cost per QALY Cost Per QALY = Cost of a quality life year STEP 1: Consider the costs per person: Cost per dose: ____________$120_______ Cost per administration:______$20________ Number of doses: _________3____________ Total cost per patient: ________$420_______ Step 2 Additional QALYs per person At age 50, further life expectancy without cervical cancer: ____31.6 years___ QALY per year: ______________________________0.8______________ Total QALYs: _________________0.8*31.6=25.2____________________ At age 50, further life expectancy with cervical cancer: ______20 years_____ QALY per year: ______________________________0.8______________ Total QALYs: _________________0.8*20=16____________________ STEP 2 Reduction in QALYs with cervical cancer:___25.2-16=9.2___ Gardasil prevents:__________________70%____________ Gardasil incremental QALYs: _______.7*9.2=6.4_________ Chance of Getting cervical cancer without Gardasil: ___0.6%_ Incremental QALYs per person: ___________0.006*6.4=0.038_______ Cost per QALY: Vaccination: ___________________$420__________ QALY: ________________________0.038____________ Cost per QALY:_________________420/0.038=$11,053__________ Step 2a This was a rough calculation because it left out an important piece of a puzzle: COST SAVINGS Fewer Pap tests Fewer LLETZ procedures Fewer cervical cancers to treat Step 2a Calculate COST savings Chance that a woman will have CIN 1: _______10%__ Chance that a woman will have CIN 2/3:___2.8%___ Chance that a woman will have cervical cancer: __0.6%_____ Cost to treat CIN 1: ________$55______________ Cost to treat CIN2/3: _________$1400____________ Cost to treat cervical cancer: _______$100,000_________ Saved Costs per person CIN 1: ________10%*$55=$5.50____________ CIN 2/3: ______2.8% * $1400=$39.20_______ Cervical cancer: __0.6%*$100,000=$600_____ Gardasil will prevent (estimates): CIN 1: 50% CIN 2: 70% Cervical Cancer: 70% Calculate total savings: CIN 1: ________5.50*50%=$2.75____________ CIN 2/3: ______39.20*70%=$27.44__________ Cervical cancer: __600*70%=$420___________ TOTAL SAVINGS: _____$450.20______ Savings now or later? Vaccine given (average or target): ___Age 11____ Cancer prevents: _____Age 54_____ Difference: _____________43 years______ Discount the cost savings at say, 8% = $16.50 In excel the command would be: =PV(0.08, 43, ,-450.2) Savings later So the total is” Cost per person: ________$420_______ Savings per person: ______$16.50_____ QALY per person: 0.038 COST per QALY: $10,618.00 Do the risks of a PR backlash and the need to grow quickly outweigh the benefits of a higher price Potential entrant is coming Patent is not forever $360 Too low or too high? Suppose prices are set so that cost of QALY is $30,000 What is the maximum price that could be set? x = cost per person (x-16.50)/0.038 = 30,000 x =$1156.5 Or $1156.5/3 = $385 per dose ADVERTISING AND PRICING Stylized Facts About Advertising Volume of advertising expenditures is large. For the US, advertising consumes over 2% of GDP Underneath this national total is a wide variety in firm advertising behavior Car makers (e.g., GM) and household product firms (e.g., Proctor & Gamble) spend the most on advertising Basic patterns that emerge are: Correlation between advertising & market power Consistency of advertising behavior within industries—big advertisers remain big over time and across countries Advertising and Monopoly Power Assume a firm faces a downward-sloping demand inverse curve but one that shifts depending on the amount of advertising A that the firm does P=P(Q, A) •Recall, the Lerner Index, LI L = (p - MC)/p = 1/|EP| Where |EP| is the price elasticity of demand Advertising and Monopoly Power The elasticity of output demand with respect to advertising A is defined as Q / Q A Q EA A / A Q A • We can derive the following relationship: A EA = Advertising/sales ratio P * Q | Ed | Dorfman-Steiner Condition: For a profit- maximizing monopolist, the advertising-to- sales ratio is equal to the ratio of the elasticity of demand with respect to advertising relative to the elasticity of demand with respect to price.