Can the Real Opportunity Cost Stand Up: Displaced Services, the Straw Man Outside the Room

Simon Eckermann 0 1 Brita Pekarsky 0 1 0 B. Pekarsky University of South Australia , Adelaide, SA, Australia 1 S. Eckermann (&) University of Wollongong , Wollongong, NSW, Australia In current literature, displaced services have been suggested to provide a basis for determining a threshold value for the effects of a new technology as part of a reimbursement process when budgets are fixed. We critically examine the conditions under which displaced services would represent an economically meaningful threshold value. We first show that if we assume that the least cost-effective services are displaced to finance a new technology, then the incremental cost-effectiveness ratio (ICER) of the displaced services (d) only coincides with that related to the opportunity cost of adopting that new technology, the ICER of the most cost-effective service in expansion (n), under highly restrictive conditionsnamely, complete allocative efficiency in existing provision of health care interventions. More generally, reimbursement of new technology with a fixed budget comprises two actions; adoption and financing through displacement and the effect of reimbursement is the net effect of these two actions. In order for the reimbursement process to be a pathway to allocative efficiency within a fixed budget, the net effect of the strategy of reimbursement is compared with the most cost-effective alternative strategy for reimbursement: optimal reallocation, the health gain maximizing expansion of existing services financed by the health loss minimizing contraction. The shadow price of the health effects of a new technology, bc 1n d1 m1 1; accounts for both imperfect displacement (the ICER of the displaced service, d \ m, the ICER of the least cost-effective of the existing services in contraction) and the allocative inefficiency (n \ m) characteristic of health systems. 1 Introduction As late as 2005, prominent health economists noted that while there was some agreement that the cost-effectiveness threshold should ideally represent the opportunity cost, this was not a straightforward concept to apply to the decision to adopt new technologies [1]. Drummond et al. [1: 331] concluded that a way forward is to estimate societys WTP for a QALY empirically and that more attempts would be made to estimate this value in the near future. In 2006, Barrett et al. [2] used the example of the National Institute for Health and Care Excellence (NICE) approval of trastuzumab to illustrate that the health gains from a new technology were achieved at the cost of health effects displaced to finance that technology; the net gain to the population of trastuzumab was the gain to these patients less the loss to patients whose services were displaced to finance its additional costs. In 2007, UK health economists began to argue that the decision for reimbursement of new technologies by NICE should be informed by the incremental cost-effectiveness ratio (ICER) of displaced services, given the context of a fixed budget [37]. In 2013, a 2-year study funded by the Medical Research Council (UK) estimated the average incremental cost effectiveness of historically adopted services and characterized the result as: an empirically-based and explicit quantification of the scale of opportunity costs the NHS faces when considering whether the health benefits associated with new technologies are expected to offset the health that is likely to be forgone elsewhere in the NHS [8: xi]. The authors also noted that the social willingness to pay (WTP) for a quality-adjusted life-year (QALY) would not lead to maximization of health if budgets were fixed [8: 12]. The logic underlying a threshold being the ICER of displaced services, where these are the least cost-effective services, was argued by Griffin et al. [6: 24] in two parts, as follows: (A) Identifying the marginal programmes that would be displaced (i.e. the least cost-effective programme of those currently funded) and quantifying their cost and health outcomes determines the shadow price of the budget constraint. (B) The incremental cost per QALY gained (the incremental cost effectiveness ratio [ICER]) of new treatments are commonly compared to some stated threshold, k, which should, in principle, represent the inverse of the shadow price of the budget constraint. This argument is then combined to suggest that The new treatment should be reimbursed if the change in health offered by the new treatment option exceeds the health forgone due to displacement of the marginal programme(s) [6: 24]. In addition to suggesting the ICER of displaced services as the threshold, Griffin et al. [6] explicitly assert that the least cost effective of the currently funded programmes would be displacedthat is, displacement is assumed to be optimal. In relation to the UK health system, McCabe et al. [4: 737] presumably invokes this assumption implicitly without referring to displacement, in making assertions such as: From the beginning NICEs use of cost-effectiveness analysis has been perceived as a means of promoting the efficient use of available NHS resources. The cost-effectiveness threshold ought thus to be the cost per QALY of the least efficient funded treatment (i.e. the intervention with the highest cost per QALY). If the function of NICE is to substitute more efficient interventions for less efficient ones, it can do this through specifying a working cost-effectiveness threshold reflecting the Institutes estimate of the ICER of the least cost-effective activity undertaken by the NHS. More recently, displaced services have more generally been suggested by Sculpher and Claxton [7: 133] to represent the opportunity cost of new programmes or technology, in arguing that: the threshold should represent the health outcomes forgone due to the displacement of existing services to fund any additional cost of new programmes and technologies (i.e. it should reflect opportunity cost). Further, in 2013, a group of UK health economists published a report that subtly modified this position [8]: Given NICEs remit, it is the expected health effects (in terms of length and quality of life) of the average displacement within the current NHS (given existing budgets, productivity and the quality of local decisions) that is relevant to the estimate of the threshold. Strictly, the above positions represent four distinct definitions of the threshold value for health effects: 1. the least cost-effective current programme, assuming that this is the programme that is actually displaced to finance the additional costs of the new technology [3, 6]; 2. the least cost-effective programme, regardless of whether it is displaced [4]; 3. the ICER of the services actually displaced to finance that technology regardless of the ICER of that displaced service relative to other services [5, 7]; 4. the average ICER of National Health Service [NHS] services displaced historically [8]. The authors are consistent on the pos (...truncated)