Over 20 years ago The New England Journal of Medicine proposed that all articles published on new therapies should close with a cost/benefit analysis comparing its performance and costs against the best selling alternative therapy. This initiative was squashed by the pharmaceutical industry that also used lobbying to prevent the Federal Drug Administration from requiring performance tests of a new drug against the best-selling alternative rather than no treatment at all (a placebo pill). Today, it looks like the industry is finally caving to pressure to require such testing, and requiring that this testing must form the basis for comparative performance and quality claims in the marketing of the new drug. The following information is the result of a test of Preventinfect, a drug developed to help prevent infections in ER patients that need heart surgery costing hundreds of thousands or cancer patients whose immune systems have been severely weakened by chemotherapy. The numbers have been inflated and simplified for demonstration and computation ease purposes. The effects of the use of Preventinfect were compared against using the next best alternative and also against using no drug to reduce infection (the placebo treatment). In this exercise you will make a Preventinfect pricing decision based on the added-value (in this case cost savings) Preventinfect creates over the next best alternative. It is about the pricing of an innovation that is a much better way of controlling infections, compared to no drug treatment and the next best drug treatment. The two drugs tested have no significant side-effects. Preventinfect Metrics Probability of getting an infection without any treatment (p.) Probability of getting an infection with current best treatment (Pob.) Probability of getting an infection with Preventinfect treatment (DRI) 0.4 0.2 0.1 $15,000 Average cost of treatment of infection without any treatment ($L) Average cost of treatment of infection with current best treatment (SI) $12,000 Average cost of treatment of infection with PreventInfect treatment ($IPI) $5,000 Cost of current best treatment ($Price) Cost of Preventinfect treatment (SPrice $1,200 $2,000 1. What is Preventinfect's quality added compared to no preventive treatment? It is its overall cost saving as well as dramatically reducing illness and severity of illness. Let's look at the cost savings (average cost per patient without any treatment - average cost per patient using Preventinfect). The average cost per patient across all patients who receive no preventive treatment is average cost of treating the infection ($I.) times its infection probability (p.). This is the expected cost per patient when they are not given PreventInfect. The average cost using PreventInfect is the average cost of treating the infection when Preventinfect is used ($L) times Preventinfect's infection probability (D) plus, of course, the price of a Preventinfect treatment (SPrice) Converting this into equation format: Saving/patient Cost not using Preventinfect Cost using Preventinfecti = ($1.* po = ($15,000*0.4) ($IPI* Del -($5,000* 0.1+ + $Price) $2,000) = $6,000 - $2,500 $3,500 cost saving per patient. Given to 1,000 patients a cost saving of $3,500,000