The Price of Substitute Technologies

Only a small share of new drugs is truly innovative; 85% to 90% of all new health technologies have little or no advantage over existing therapeutic alternatives. Health economic evaluations can be used to induce acceptable prices for new technologies through threshold pricing.

This work discusses a cost-effectiveness threshold (λ) to be applied to the price regulation of substitute technologies.

Considering that substitute technologies add only small marginal benefits in terms of innovation or ethical considerations to the system, it does not make sense to allow a loss of efficiency to list them. It has been postulated that the threshold calculated from opportunity costs (κ) represents its maximum possible value and that there must be a threshold (β) that maximizes consumer surplus. For a substitute technology to be listed, the cost of treatment associated with it must be lower than the cost of treatment of the incumbent technology added to the difference in effectiveness priced at the threshold.

There is no reason for us to believe that the oligopolistic pharmaceutical market is currently charging prices at the cost of production. That way, the cost-effectiveness ratio of the incumbent technology, when lower than κ, is shown through a deductive process to be a plausible estimate for λ that fulfills the objective of maximizing consumer benefit, granting producers a part of the combined surplus to stimulate research and development; that is, it would be between β and κ.

In conclusion, the price of substitute technologies should be limited by the cost-effectiveness ratio of the incumbent technology.