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

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  • Simon Eckermann
  • Brita Pekarsky

Abstract

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 conditions—namely, 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, $$ \beta_{c}=\left( {\frac{1}{n} + \frac{1}{d} - \frac{1}{m}} \right)^{ - 1} , $$ β c = 1 n + 1 d - 1 m - 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. Copyright Springer International Publishing Switzerland 2014

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  • Simon Eckermann & Brita Pekarsky, 2014. "Can the Real Opportunity Cost Stand Up: Displaced Services, the Straw Man Outside the Room," PharmacoEconomics, Springer, vol. 32(4), pages 319-325, April.
  • Handle: RePEc:spr:pharme:v:32:y:2014:i:4:p:319-325
    DOI: 10.1007/s40273-014-0140-3
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    References listed on IDEAS

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    1. Drummond, Michael F. & Sculpher, Mark J. & Torrance, George W. & O'Brien, Bernie J. & Stoddart, Greg L., 2005. "Methods for the Economic Evaluation of Health Care Programmes," OUP Catalogue, Oxford University Press, edition 3, number 9780198529453.
    2. McCabe, C & Claxton, K & Culyer, AJ, 2008. "The NICE Cost-Effectiveness Threshold: What it is and What that Means," MPRA Paper 26466, University Library of Munich, Germany.
    3. Karl Claxton & Steve Martin & Marta Soares & Nigel Rice & Eldon Spackman & Sebastian Hinde & Nancy Devlin & Peter C Smith & Mark Sculpher, 2013. "Methods for the estimation of the NICE cost effectiveness threshold," Working Papers 081cherp, Centre for Health Economics, University of York.
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    Cited by:

    1. Christopher McCabe & Mike Paulden & James O'Mahony & Richard Edlin & Anthony Culyer, 2014. "Life at a premium: considering an end-of-life premium in Value Based Reimbursement," Working Papers 1407, Academic Unit of Health Economics, Leeds Institute of Health Sciences, University of Leeds.
    2. Javad Moradpour & Aidan Hollis, 2021. "The economic theory of cost‐effectiveness thresholds in health: Domestic and international implications," Health Economics, John Wiley & Sons, Ltd., vol. 30(5), pages 1139-1151, May.
    3. Culyer, Anthony J., 2016. "Cost-effectiveness thresholds in health care: a bookshelf guide to their meaning and use," Health Economics, Policy and Law, Cambridge University Press, vol. 11(4), pages 415-432, October.
    4. Ottersen, Trygve & Førde, Reidun & Kakad, Meetali & Kjellevold, Alice & Melberg, Hans Olav & Moen, Atle & Ringard, Ånen & Norheim, Ole Frithjof, 2016. "A new proposal for priority setting in Norway: Open and fair," Health Policy, Elsevier, vol. 120(3), pages 246-251.
    5. Susan Griffin & Francesco Fusco & Bhash Naidoo & Matthew Taylor & Simon Walker, 2020. "Does Health Technology Assessment guidance give adequate consideration to decisions about less costly and less effective alternatives?," Working Papers 175cherp, Centre for Health Economics, University of York.
    6. Hauck, K. & Morton, A. & Chalkidou, K. & Chi, Y-Ling & Culyer, A. & Levin, C. & Meacock, R. & Over, M. & Thomas, R. & Vassall, A. & Verguet, S. & Smith, P.C., 2019. "How can we evaluate the cost-effectiveness of health system strengthening? A typology and illustrations," Social Science & Medicine, Elsevier, vol. 220(C), pages 141-149.
    7. Frank G. Sandmann & Julie V. Robotham & Sarah R. Deeny & W. John Edmunds & Mark Jit, 2018. "Estimating the opportunity costs of bed‐days," Health Economics, John Wiley & Sons, Ltd., vol. 27(3), pages 592-605, March.
    8. Nikki McCaffrey & Meera Agar & Janeane Harlum & Jonathon Karnon & David Currow & Simon Eckermann, 2015. "Better Informing Decision Making with Multiple Outcomes Cost-Effectiveness Analysis under Uncertainty in Cost-Disutility Space," PLOS ONE, Public Library of Science, vol. 10(3), pages 1-19, March.

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