Achieving dynamic efficiency in pharmaceutical innovation: identifying the optimal share of value, the payments required and evaluating pricing policies

<p dir="ltr">It has been argued that cost-effectiveness analyses and the decisions they inform, made by health technology assessment (HTA) bodies, only consider static efficiency, neglect dynamic effects and undermine incentives for socially valuable innovation. Instead, maximising welfare requires paying manufacturers for their products such that they receive the full share of the value of innovation. Such a view reflects a principle of welfare economics in a first best world.</p><p dir="ltr">This paper relaxes some of the assumptions required for a first best world and estimates the optimal share to give to the manufacturer in order to maximise health or a broader view of welfare. This draws on a growing body of evidence of how the quality and quality of pharmaceutical innovation responds to payment, while carefully distinguishing the consumption value of health and the health opportunity costs associated with health care expenditure. The result is that roughly a quarter of the long-term value of an innovation should be given to the manufacturer to maximise the contributions to health from both static and dynamic effects. Adopting a broader view of other welfare arguments, including producer surplus, does not materially change these conclusions. The policy implications of this result are discussed in terms of payment and pricing policies that could be used to deliver this share, and a retrospective analysis is conducted on a sample of technology appraisals to illustrate the difference between payments under observed and optimal shares.</p>