Comparative Effectiveness

Should cost-effectiveness analysis ignore the price of the drug?

Cost effectiveness analysis (CEA) aims to examine whether the benefits of a treatment outweigh the costs.  However, whenever one is conducting a CEA a key question is benefits to whom and costs to whom.  For instance, a modestly efficacious  drug may be cost effective from the patient’s perspective if all or most costs are covered by insurance.  From the payers, perspective, paying a lot of money for a not so useful drug is not very cost effective.

However, many individuals argue that cost effectiveness should be conducted form a societal perspective to measure the benefits and cost to all parties.  In this case, Garrison et al. (2010) argues that drug prices should not be included in the analysis.  Rather, only the cost of manufacturing the drug should be included. Their logic is as follows:

the estimate of drug cost in the reference case societal perspective should not be based on price or acquisition cost, but instead, should be based only on the marginal cost of producing and distributing the drug. There are two arguments for this position. The first is based on the classic observation from microeconomic theory that producer surplus, the cumulative difference between price and marginal cost, is a gain for society, not a loss [9,10]. The second is based on the recommendation that transfer payments be excluded from societal cost estimates of health-related interventions.

In short, total social welfare is the sum of consumer and producer surplus.  Thus, from a societal perspective, profits made by pharmaceutical firms are a good thing.  This perspective appears counterintuitive but does make economic sense.  The benefits and the costs–when evaluated from a societal perspective–should focus only on total social welfare and total societal costs, transfers between parties are not relevant to the social welfare calculation.

Although this logic makes some economic sense, in practice, there is no single despot that controls the entire health care system in each country and who has the luxury to look at society generally.  Thus, the societal perspective is attractive, but real world barriers to implementing societal CEA do exist.


  • Garrison, Louis P., Edward C. Mansley, Thomas A. Abbott, Brian W. Bresnahan, Joel W. Hay, and James Smeeding. “Good Research Practices for Measuring Drug Costs in Cost‐Effectiveness Analyses: A Societal Perspective: The ISPOR Drug Cost Task Force Report—Part II.” Value in Health 13, no. 1 (2010): 8-13.


  1. Actuaries would generally try to represent costs in ways that could be tied to audited financial statements–often through real-world data. Perhaps this is one of the differences between actuaries and economists, and it has many advantages to practical users of such information.

Leave a Reply

Your email address will not be published. Required fields are marked *