Abstract
The headroom approach to medical device development relies on the estimation of a value-based price ceiling at different stages of the development cycle. Such price-ceilings delineate the commercial opportunities for new products in many healthcare systems. We apply a simple model to obtain critical business information as the product proceeds along a development pathway, and indicate some future directions for the development of the approach. Health economic modelling in the supply-side development cycle for new products. The headroom can be used: initially as a 'reality check' on the viability of the device in the healthcare market; to support product development decisions using a real options approach; and to contribute to a pricing policy which respects uncertainties in the reimbursement outlook. The headroom provides a unifying thread for business decisions along the development cycle for a new product. Over the course of the cycle attitudes to uncertainty will evolve, based on the timing and manner in which new information accrues. Within this framework the developmental value of new information can justify the costs of clinical trials and other evidence-gathering activities. Headroom can function as a simple shared tool to parties in commercial negotiations around individual products or groups of products. The development of similar approaches in other contexts holds promise for more rational planning of service provision.
Highlights
The optimal price will usually lie between U, the unit cost of production, and the headroom estimate, H, and a lower bound on the optimal price has been identified (= 0.23 × U + 0.77 × H)
We suggest some themes for further development of the approach
In this study, we have described the progress that has been made in using a simple method iteratively to improve decision making within manufacturing businesses
Summary
The headroom approach to medical device development relies on the estimation of a value-based price ceiling at different stages of the development cycle. It relies on the same principles as a full economic analysis of a medical intervention but will often be estimated early in the device’s development, when data are limited, and so will tend to focus on the more obvious benefits of the relevant therapeutic pathway. Depending on which experts you believe, the headroom estimate ranges from minus 3,000 GBP (assuming no health effects) to 0.5 × 30,000 minus 3,000 = 12,000 GBP, based on a Cost-per-QALY threshold of 30,000 GBP In this case, the best estimate of H is the average (−3,000 + 12,000)/2 = 4,500 GBP), which will not cover production costs and suggests abandoning development.
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