What is cost effectiveness?

Cost effectiveness is a way to estimate the value a drug brings to society. It is commonly required in health technology assessment submissions outside the US (especially in Europe) in order to obtain approval for reimbursement from national payers.

Cost effectiveness models are typically developed by HEOR teams at pharmaceutical companies in accordance with guidances set forth by HTA bodies and health economic expert bodies such as the International Society for Pharmacoeconomics and Outcomes Research (ISPOR). These models estimate incremental cost effectiveness ratios (ICERs) for a drug compared to standard of care in various populations of interest and at various prices.

Drug cost effectiveness models are usually Markov models developed in Microsoft Excel and incorporating data from pivotal clinical trials (including data on quality of life and mortality) and real world data on costs and other inputs (such as baseline risk data). The structure and inputs in cost effectiveness models depends on the therapeutic area and endpoints of interest.

Ultimately, cost effectiveness models will output an ICER value, which is the difference between the cost of the drug compared to standard of care divided by the quality adjusted life year (QALY) improvement associated with the drug. People will often assess the ICER for a given drug at a given price against a willingness-to-pay threshold within the country of interest. Some HTA bodies such as NICE in the UK use this approach as well, while other HTA bodies use various other criteria for determining what constitutes a cost effective treatment.

The Institute for Clinical and Economic Review (also abbreviated ICER) in the United States is a non-profit organization that conducts cost-effectiveness assessments of various drugs. It is not a governmental organization and is not used in an official capacity by payers in the US, although assessments may come up in formulary negotiations should a payer feel the ICER report suggests low value at a given price.

Decision Modelling for Health Economic Evaluation is a highly regarded textbook about cost effectiveness modelling.