In an old episode of the Simpsons, Homer walks into a car lot and announces how much money he has to spend. After, a highly gratified dealer quickly inverts a 6 into a 9, a deal is made and off Homer goes to face further mishaps. This scene clearly illustrates how a consumer will always overpay when they give a little too much information away to a seller. Unfortunately, this scenario mirrors the situation facing provincial drug formularies across Canada.
Similar to most publicly funded drug programs, the Ontario Public Drugs Programs, which covers the costs of medications for senior citizens and people on social assistance, uses cost effectiveness as one of the criterion they use in deciding which medications to cover. Cost effectiveness is simply a technical term for value for money. It requires weighing up the benefits to patients of new medications versus the impact on health care costs.
In many studies, benefits are measured by quality adjusted life years (QALYs). QALYs are a measure of incorporating both the effect of treatment on both how long a patient will live (life expectancy) and on their quality of life. One QALY represents one year in perfect health. Thus, life years are weighted by their quality relative to perfect health – hence, quality adjusted life years. New treatments are assessed in terms of their additional costs as well as the additional QALYs they generate – the cost effectiveness ratio. Evidence suggests that drug formulary committees value a QALY between $40,000 and $60,000.
As part of the 2006 Transparent Drug System for Patients Act, the Ontario Ministry of Health can negotiate product listing agreements with drug manufacturers with the aim of increasing access to drugs for Ontarians. Frequently these negotiations revolve around price. This will in all likelihood ensure that new products will be priced to meet the de facto threshold. What appears to be good financial management may have some unexpected repercussions.
Consider the scenario of going to your local grocery store. You want to purchase eggs, milk and bread – scrambled eggs is on the menu tonight. You have $10 dollars. Let’s assume eggs typically cost $2, milk, $3 and bread $3.50. You should always have enough to purchase what you want. However prices fluctuate; eggs can cost between $1.50 and $3, milk between $2 and $4 and bread between $2.50 and $5. You are willing to pay the higher prices but assume that on any given day that not all of them will priced at the maximum.
Now consider the scenario where the grocer knows how much you are willing to pay for each item. Why wouldn’t they charge the highest value? If they did you could not afford all items. The solution: you would need to lower the maximum you would be willing to pay – maybe to $2.50 for eggs, $3.50 for milk and $4 for bread. This is how the market works – it requires the balancing the interests of the consumer with the profits of the producer.
Alas, purchasing of drugs falls under the same rules. Many of the drugs that are currently paid for have a cost effectiveness ratio significantly less than $50,000. Similarly to announcing your maximum price, bread, eggs or milk, replacing these with drugs priced at the maximum willingness to pay can only lead to the need for an increased budget. The only solution? Reduce how much you are willing to pay. Therefore, as increasing number of agreements about price between manufacturers and drug plans around price are made; it is probably time to consider devaluing a QALY.