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AEM 4160: Strategic Pricing Prof.: Jura Liaukonyte Lecture 10 Pricing Gardasil

AEM 4160: Strategic Pricing Prof.: Jura Liaukonyte Lecture 10 Pricing Gardasil. QALY. The quality-adjusted life year (QALY) is a measure of disease burden, including both the quality and the quantity of life lived. It is used in assessing the value for money of a medical treatment.

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AEM 4160: Strategic Pricing Prof.: Jura Liaukonyte Lecture 10 Pricing Gardasil

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  1. AEM 4160: Strategic PricingProf.: Jura LiaukonyteLecture 10 Pricing Gardasil

  2. QALY • The quality-adjusted life year (QALY) is a measure of disease burden, including both the quality and the quantity of life lived. • It is used in assessing the value for money of a medical treatment. • The QALY is based on the number of years of life that would be added by the treatment. • Each year in perfect health is assigned the value of 1.0 down to a value of 0.0 for death.

  3. QALY • Used in cost-utility analysis to calculate the ratio of cost to QALYs saved for a particular health care treatment. • Helpful in allocating healthcare resources, • Treatment with a lower cost to QALY saved ratio being preferred over an intervention with a higher ratio. • Controversial: some people will not receive treatment because it is too costly • Cost per QALY under $50,000 is acceptable

  4. Value of Statistical Life • An economic value assigned to life in general, • Marginal cost of death prevention in a certain class of circumstances. • As such, it is a statistical term, the cost of reducing the (average) number of deaths by one.

  5. Value of a Statistical Life and Compensating Differences • Qa , Qb =probability of fatal injury on job a, b respectively in a given year. • Wa, Wb = earnings on job a, b in a given year. • Assume Qa<Qb so that Wa<Wb. • Compensating difference=Wb-Wa • Value of a “statistical” life = (Wb-Wa)/(Qb-Qa) • Example: If a person is faced with .001 higher risk of death per year and is paid $5000 per year extra for that risk, the value of a statistical life is 5000/.001 - $5,000,000.

  6. Viscusi. “The Value of a Statistical Life: A Critical Review of Market Estimates Throughout the World.” Journal of Risk and Uncertainty, v. 27 issue 1, 2003, p. 5.

  7. Value of Life and Compensating Differences • Biases in estimates of statistical value of life • Valuation is correct only for “marginal” worker. Estimate is too high for infra-marginal worker, and too low for workers that didn’t accept job with risk. • ex post versus ex ante rewards for risk (compensating difference vs. law suits, insurance, etc.) • Failure to control for other risks correlated with fatality risk • Fatality risk measured with error

  8. Question • Is Gardasil a Good Product?

  9. Pricing in the Biomedical Industry • What factors should Merck consider when setting the price?

  10. Factors: • Important or not important? • Product cost • R&D Investment? • Other Vaccines? • Public Relations? • Value to the Customer/Benefit? • Economic Modeling? • Competition?

  11. Calculating cost per QALY • Cost Per QALY = Cost of a quality life year • STEP 1: Consider the costs per person: • Cost per dose: ___________________ • Cost per administration:_____________ • Number of doses: _____________________ • Total cost per patient: __________________

  12. Step 2 • Additional QALYs per person At age 50, further life expectancy without cervical cancer: ____________ QALY per year: __________________________________________ Total QALYs: ____________________________________________ At age 50, further life expectancy with cervical cancer: ______________ QALY per year: ___________________________________________ Total QALYs: _____________________________________

  13. STEP 2 • Reduction in QALYs with cervical cancer:_________________ • Gardasil prevents:______________________________ • Gardasil incremental QALYs: ________________ • Chance of Getting cervical cancer without Gardasil: _______________ • Incremental QALYs per person: ________________________________ • Cost per QALY: • Vaccination: _____________________________________ • QALY: ____________________________________ • Cost per QALY:___________________________

  14. Step 2a • This was a rough calculation because it left out an important piece of a puzzle: • COST SAVINGS • Fewer Pap tests • Fewer LLETZ procedures • Fewer cervical cancers to treat

  15. Step 2a • Calculate COST savings • Chance that a woman will have CIN 1: ______________ • Chance that a woman will have CIN 2/3:______________ • Chance that a woman will have cervical cancer: ___________ • Cost to treat CIN 1: ________$55______________ • Cost to treat CIN2/3: _____________________ • Cost to treat cervical cancer: ________________

  16. Saved Costs per person • CIN 1: __________________________________ • CIN 2/3: ________________________________ • Cervical cancer: ___________________________ • Gardasil will prevent (estimates): • CIN 1: 50% • CIN 2: 70% • Cervical Cancer: 70%

  17. Calculate total savings: • CIN 1: ____________________ • CIN 2/3: ____________________ • Cervical cancer: _________________ • TOTAL SAVINGS: ______________________

  18. Savings now or later? • Vaccine given (average or target): __________ • Cancer prevents: _______________ • Difference: ___________________ • Discount the cost savings at say, 8% = $16.50 • In excel the command would be: =PV(0.08, 43, ,-450.2)

  19. Savings later • So the total is” • Cost per person: _______________ • Savings per person: ___________ • QALY per person: 0.038 • COST per QALY:__________________ • Do the risks of a PR backlash and the need to grow quickly outweigh the benefits of a higher price • Potential entrant is coming • Patent is not forever

  20. $360 Too low or too high? • Suppose prices are set so that cost of QALY is $30,000 • What is the maximum price that could be set? • x = cost per person • (x-16.50)/0.038 = 30,000 • x =$1156.5 • Or $1156.5/3 = $385 per dose

  21. ANSWERS TO BLANK SLIDES

  22. Calculating cost per QALY • Cost Per QALY = Cost of a quality life year • STEP 1: Consider the costs per person: • Cost per dose: ____________$120_______ • Cost per administration:______$20________ • Number of doses: _________3____________ • Total cost per patient: ________$420_______

  23. Step 2 • Additional QALYs per person At age 50, further life expectancy without cervical cancer: ____31.6 years___ QALY per year: ______________________________0.8______________ Total QALYs: _________________0.8*31.6=25.2____________________ At age 50, further life expectancy with cervical cancer: ______20 years_____ QALY per year: ______________________________0.8______________ Total QALYs: _________________0.8*20=16____________________

  24. STEP 2 • Reduction in QALYs with cervical cancer:___25.2-16=9.2___ • Gardasil prevents:__________________70%____________ • Gardasil incremental QALYs: _______.7*9.2=6.4_________ • Chance of Getting cervical cancer without Gardasil: ___0.6%_ • Incremental QALYs per person: ___________0.006*6.4=0.038_______ • Cost per QALY: • Vaccination: ___________________$420__________ • QALY: ________________________0.038____________ • Cost per QALY:_________________420/0.038=$11,053__________

  25. Step 2a • This was a rough calculation because it left out an important piece of a puzzle: • COST SAVINGS • Fewer Pap tests • Fewer LLETZ procedures • Fewer cervical cancers to treat

  26. Step 2a • Calculate COST savings • Chance that a woman will have CIN 1: _______10%__ • Chance that a woman will have CIN 2/3:___2.8%___ • Chance that a woman will have cervical cancer: __0.6%_____ • Cost to treat CIN 1: ________$55______________ • Cost to treat CIN2/3: _________$1400____________ • Cost to treat cervical cancer: _______$100,000_________

  27. Saved Costs per person • CIN 1: ________10%*$55=$5.50____________ • CIN 2/3: ______2.8% * $1400=$39.20_______ • Cervical cancer: __0.6%*$100,000=$600_____ • Gardasil will prevent (estimates): • CIN 1: 50% • CIN 2: 70% • Cervical Cancer: 70%

  28. Calculate total savings: • CIN 1: ________5.50*50%=$2.75____________ • CIN 2/3: ______39.20*70%=$27.44__________ • Cervical cancer: __600*70%=$420___________ • TOTAL SAVINGS: _____$450.20______

  29. Savings now or later? • Vaccine given (average or target): ___Age 11____ • Cancer prevents: _____Age 54_____ • Difference: _____________43 years______ • Discount the cost savings at say, 8% = $16.50 • In excel the command would be: =PV(0.08, 43, ,-450.2)

  30. Savings later • So the total is” • Cost per person: ________$420_______ • Savings per person: ______$16.50_____ • QALY per person: 0.038 • COST per QALY: $10,618.00 • Do the risks of a PR backlash and the need to grow quickly outweigh the benefits of a higher price • Potential entrant is coming • Patent is not forever

  31. $360 Too low or too high? • Suppose prices are set so that cost of QALY is $30,000 • What is the maximum price that could be set? • x = cost per person • (x-16.50)/0.038 = 30,000 • x =$1156.5 • Or $1156.5/3 = $385 per dose

  32. Advertising And PRICING

  33. Stylized Facts About Advertising • Volume of advertising expenditures is large. For the US, advertising consumes over 2% of GDP • Underneath this national total is a wide variety in firm advertising behavior • Car makers (e.g., GM) and household product firms (e.g., Proctor & Gamble) spend the most on advertising • Basic patterns that emerge are: • Correlation between advertising & market power • Consistency of advertising behavior within industries—big advertisers remain big over time and across countries

  34. Advertising and Monopoly Power • Assume a firm faces a downward-sloping demandinverse curve but one that shifts depending on the amount of advertising A that the firm does P=P(Q, A) • Recall, the Lerner Index, LI L = (p - MC)/p = 1/|EP| Where |EP| is the price elasticity of demand

  35. Advertising and Monopoly Power • The elasticity of output demand with respect to advertising A is defined as • We can derive the following relationship: = Advertising/sales ratio Dorfman-Steiner Condition:For a profit-maximizing monopolist, the advertising-to-sales ratio is equal to the ratio of the elasticity of demand with respect to advertising relative to the elasticity of demand with respect to price.

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