Are Cost-Effectiveness Thresholds Fit for Purpose for Real-World Decision Making on Access to and Pricing of Pharmaceuticals? A New OHE Paper on Current Methods and Practices, and a Novel Approach for Optimal Thresholds

Article by: Kyann Zhang, Mikel Berdud, Martina Garau

OHE has published a white paper analysing the relative merits and shortfalls of current approaches to defining, estimating, and applying cost-effectiveness thresholds (CETs) in Health Technology Assessments (HTA).

HTAs guide funding and reimbursement decisions in healthcare, with the objective of getting the most health benefit from the (limited) resources. Many countries conduct HTAs using cost-effectiveness analysis (CEA), which measures the additional cost incurred by a new intervention to gain one additional quality-adjusted life-year (QALY), relative to standard care. This may then be compared against a pre-chosen value – the CET – the maximum expenditure deemed appropriate for this gain. A threshold that is too high or too low will lead to inefficient resource allocation.

The main approaches for setting a CET are a demand-side approach, based on the willingness-to-pay principle and assumption of flexible healthcare budgets, and a supply-side approach based on the opportunity cost principle and assumption of fixed budgets. Applying current CET estimates, based on these approaches, on HTA decision making has been subject to ongoing debate due to limitations of underlying data and assumptions which do not always match reality.

Countries using CETs do so either explicitly – by specifying the threshold in formal HTA guidelines (e.g. the National Institute for Health and Care Excellence (NICE) in the UK) – or implicitly – where a threshold is informally accepted by decision makers (e.g. Canada - before the Patented Medicines Prices Review Board (PMPRB) reforms – and Australia). Although the UK and, more recently, Canada, have endorsed the concept of opportunity cost thresholds, the CET values applied in practice are higher than the empirical estimates based on that concept. The consequences of this discrepancy depend on the extent to which the estimated CETs reflect actual opportunity costs.

As HTA systems review their methods and CETs are used as a tool for price regulation, there is need for debate on how best to identify a threshold to support health system goals, given limited resources, and to meet patients’ needs. In Canada, the PMPRB is establishing a new nationwide system, where the maximum (rebated) price of patented medicines with yearly sales or annual treatment costs exceeding a certain amount will be set using market size and the pharmacoeconomic factors of treatment cost, incremental cost and incremental QALYs, valued using a CET of CAD60,000 per QALY gained.

The use of QALY-based CEAs has also been questioned due to shortcomings in its ability to reflect the full value of health interventions. Today’s HTA methods need to be reviewed to ensure they are fit for purpose for future value assessment of new technologies such as curative therapies or other major innovations that may result in high values for patients and society.

The main recommendations are:

  • Health agencies currently considering the application of an explicit CET should do so in stages (e.g. start with a threshold based on past decisions) to avoid major shocks to the system and improve its predictability. A soft approach should involve introducing the threshold as a range, rather than a single value.
  • Systems already applying an explicit threshold should explore the relationship between supply-side and demand-side estimates, and how the two can converge in the long-run. There is also need to recognise data barriers underlying current supply-side estimates, and to be receptive to new approaches.

One new approach will be presented in a forthcoming OHE research paper where Berdud, Ferraro and Towse (2020) propose a supply and demand model to identify the optimal threshold, based on the framework by Pandey et al. (2018), which has been discussed by the PMPRB Working Group. Novel elements of the model include the incorporation of bargaining and Research & Development (R&D) costs to link pharmaceutical pricing and social surplus (the sum of health gains and industry profits) to optimal CETs.

The model interprets cost-reducing policy tools and competition among medicines still on patent as an increase in bargaining power of the payer. Consequently, the set price leads to an Incremental Cost-Effectiveness Ratio lower than the supply-side CET, and a share of the developers’ profits is captured by the health system. Thus, the maximum acceptable CET can exceed the supply-side threshold value increasing patient access, while net health benefits are still generated.

The model also indicates that, at some CET values, developers do not recover R&D costs. While developers may supply medicines at a loss in the short-term, they may reduce R&D investment in the long-term. To avoid this, the CET should be set at a level that allows for positive returns after R&D costs.

The key conclusion from both the white paper and the research paper is that using a single, rigid CET for price regulation and resource allocation decisions might reduce access to future valuable interventions. The model shows that a flexible approach can maximise patients’ health benefits while providing incentives for continuing intervention improvements. Similarly, the white paper concludes that multiple thresholds reflecting value from different perspectives may be needed. More research is required to understand how new spending is accommodated within the system, and whether society is willing to trade off health gains for other benefits valued by patients and society.  


Cubi-Molla, P., Errea, M., Zhang, K. and Garau, M., 2020. Are cost-effectiveness thresholds fit for purpose for real-world decision making? OHE Consulting Report. London: Office of Health Economics. Available at:

Berdud M., Ferraro J., Towse A. A theory on ICER pricing and optimal level of cost-effectiveness threshold: a bargaining approach. OHE Consulting Report, London: Office of Health Economics. (forthcoming)


Related research

Hernandez-Villafuerte, K., Zamora, B., Parkin, D., Devlin, N. and Towse, A., 2019. Exploring variations in the opportunity cost cost-effectiveness threshold by clinical area: Results from a feasibility study in England. OHE Research Paper 18/07. Available at

Hernandez-Villafuerte, K., Zamora, B. and Towse, A., 2018. Issues Surrounding the Estimation of the Opportunity Cost of Adopting a New Health Care Technology: Areas for Further Research. OHE Research Paper 18/07. Available at

Berdud, M., Wallin-Bernhardsson, N., Zamora, B., Lindgren, P., and Towse, A (2019). The Case of Risperidone: Assessing the Life-cycle Value of Second-Generation Antipsychotics in Sweden and the UK. OHE Research Paper. Available at

Pandey, H., 2018. Theoretical models of the cost-effectiveness threshold, value assessment, and health care system sustainability. Institute of Health Economics. Available at

Posted in Drug Development/R&D, Health Technology Assessment, Value-Based Pricing | Tagged Consulting Reports