Aem 4160 strategic pricing prof jura liaukonyte lecture 10 pricing gardasil
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AEM 4160: Strategic Pricing Prof.: Jura Liaukonyte Lecture 10 Pricing Gardasil PowerPoint PPT Presentation


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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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AEM 4160: Strategic PricingProf.: Jura LiaukonyteLecture 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.

  • 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.


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


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.


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.


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.


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


Question

  • Is Gardasil a Good Product?


Pricing in the Biomedical Industry

  • What factors should Merck consider when setting the price?


Factors:

  • Important or not important?

    • Product cost

    • R&D Investment?

    • Other Vaccines?

    • Public Relations?

    • Value to the Customer/Benefit?

    • Economic Modeling?

    • Competition?


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: __________________


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: _____________________________________


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:___________________________


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


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: ________________


Saved Costs per person

  • CIN 1: __________________________________

  • CIN 2/3: ________________________________

  • Cervical cancer: ___________________________

  • Gardasil will prevent (estimates):

    • CIN 1: 50%

    • CIN 2: 70%

    • Cervical Cancer: 70%


Calculate total savings:

  • CIN 1: ____________________

  • CIN 2/3: ____________________

  • Cervical cancer: _________________

    • TOTAL SAVINGS: ______________________


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)


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


$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


  • ANSWERS TO BLANK SLIDES


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_______


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____________________


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__________


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


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_________


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%


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______


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)


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


$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


Advertising And PRICING


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


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


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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