Achieving dynamic efficiency in pharmaceutical innovation: Identifying the optimal share of value and payments required

It has been argued that cost‐effectiveness analysis of branded pharmaceuticals only considers static efficiency, neglects dynamic effects and undermines incentives for socially valuable innovation. We present a framework for designing pharmaceutical pricing policy to achieve dynamic efficiency. We develop a coherent framework that identifies the long‐term static and dynamic benefits and costs of offering manufacturers different levels of reward. The share of value that would maximise long‐term population health depends on how the quantity and quality of innovation responds to payment. Using evidence of the response of innovation to payment, the optimal share of value of new pharmaceuticals to offer to manufacturers is roughly 20% (range: 6%–51%). Reanalysis of a sample of NICE technology appraisals suggests that, in most cases, the share of value offered to manufacturers and the price premium paid by the English NHS were too high. In the UK, application of optimal shares would offer considerable benefits under both a public health objective and a broader view of social welfare. We illustrate how an optimal share of value can be delivered through a range of payment mechanisms including indirect price regulation via the use of different approval norms by an HTA body.