The Health Shadow Price, β c

Abstract

This chapter introduces five concepts central to this book. The opportunity cost of a strategy in an institutional setting is identified when the decision maker values all states of the world that could emerge under different allocations of resources, not just the alternative options available to her or him. Price-effectiveness analysis is a method of assessing the decision to reimburse a new drug by testing the relationship between the incremental price-effectiveness ratio (IPER) of the new drug and the population’s health. The strategy of reimbursement comprises the actions of adoption and financing. The health shadow price, β c is the IPER of the health effects gained by the target patients as a consequence of the strategy of reimbursing (adopting and financing) the new drug with clinical innovation and additional financial cost such that the funder is indifferent between the strategy of reimbursement and the best alternative strategy available to the funder using the same financial resources. The economic value of clinical innovation (EVCI) is the gross clinical benefit of the new drug, constrained twice: by the clinical opportunity cost (the best alternative therapy to the new drug) and the economic opportunity cost (the best alternative use of resources). The health shadow price β c and EVCI are derived for the case of an economically efficient fixed budget with no failure in the market for health inputs.