Evidence submitted by Michael Lee (NICE
13)
EXECUTIVE SUMMARY
1. The submission is directed towards the
first three items of the Committee's Investigation, namely:
— why NICE's decisions are increasingly
being challenged;
— whether public confidence in the
Institute is waning, and if so why; and
— NICE's evaluation process, and whether
any particular groups are disadvantaged by the process.
2. Cost benefit, based on Quality Adjusted
Life Years (qualys), is now the standard method of appraising
therapies adopted by NICE. Cost benefit in health originated mainly
from issues relating to economic market theory and pharmaceutical
products, where prices were fixed well above marginal cost. The
technique attempted to demonstrate that even so, the benefits
that flowed from improved health far outweighed the costs. The
discipline was developed academically with the introduction of
the concept of a qaly to measure benefits on a single standard
across many different health applications.
3. The value of qualys in assessing product
issues is open to question. In terms of simple economics, a qaly
does not satisfactorily emulate prices. The absence of any point
elasticity in qalys, defining the rate at which supply and demand
change in response to price level changes, severely constrains
its value as a price surrogate in a distributive system. More
problematically, a qaly fails to relate to patient care. The obvious
impact on care of the elderly and chronically sick, suggests questionable
medicine. The qaly system finally implies one model of health
provision and funding. Qalys relate to a centralised top-down
target setting structure of the health service where the lines
of practice and development are determined by a central authority.
The contrast is a patient-centred service where the variety of
needs and demands presented by patient is decided individually
by the doctor within the context of the doctor-patient relationship.
Patient satisfaction, under this approach, becomes the key to
evaluation.
4. In the context of pricing NHS supplies,
a variation on the marginal cost model of the industry may be
derived from consideration of uncertainty, coupled with modern
theory of the firm, which now are generally accepted as the dynamics
producing profits in a competitive market system. The unknown
may be equated with uncertainty, and so integrate research and
technological progress into the dynamic market model. The approach
would describe the workings of industry more effectively, and
so may provide a more satisfactory backdrop for a regulatory framework.
RECOMMENDATIONS
5. In regard to NICE, the scope for evaluation
of benefit needs to be widen and based upon patient satisfaction
rather than the single narrow standardised concept of the qualy.
6. In terms of the relationship of NICE
to the PPRS, the concept of an alternative model of the industry
beyond that of marginal cost pricing, shaped on uncertainty, the
unknown and the theory of the firm may prove more fruitful.
QUALIFICATIONS AND
EXPERIENCE
7. I am a consultant economist, B.Sc(Econ)
graduate of the London School of Economics, and professionally
qualified as Fellow of the Institute of Management Consultancy.
My practice is incorporated as Lee Donaldson Associates Ltd (LDA),
consultant economists.
8. In April 1962, I was appointed as a founding
director of the Office of Health Economics, with responsibility
for research especially the cost benefit studies: I remained a
member of the OHE Editorial committee until 1992. I subsequently
joined Professor Nathaniel Lichfield's planning consultancy, which
explored aspects of cost benefit in planning; and later, was appointed
economic adviser in the Engineering Industry Training Board, with
responsibility for research, especially into effectiveness of
the Board's work.
9. I established my practice in 1971, and
retired from active involvement in the late 1980s. Professional
studies included report for the then PEP (subsequently Policy
Studies Institute) on private health, commissioned by the Health
Department. I subsequently acted as the Department's consultant
on the private sector until 1984, submitting evidence to the Royal
Commission on the National Health Service. In 1981, I was appointed
as specialist consultant adviser to the Secretary of State for
Health as part in the Department's investigation into NHS funding.
10. I have retained a close links with the
NHS since retirement through establishing and largely funding
an arts in health charity Poems in the Waiting Room (PitWR). The
registered charity supplies short collections of poems for patients
while waiting to see their doctor. The current mailing totals
some 750 NHS clinics, mainly in general practice. Bizarrely, to
meet the Culture Department stipulations, LDA undertook a cost
benefit analysis of PitWR in 2006. Regular contact with NHS doctors,
staff and patients provides a valuable NHS overview. A Bristol
doctor wrote that "PitWR is the one thing in the NHS no one
complains about..."
COST BENEFIT
11. The discipline cost benefit was introduced
into the NHS by the OHE in 1962. Its foundation was prompted by
political development in the United States affecting international
pharmaceutical firms. The US Senate Anti-Trust and Monopoly Subcommittee,
chaired by Senator Estes Kefauver (1903-63) held hearings on the
pharmaceutical industry between 1959 and 1963. The Senator had
a distinguished record on promotion of industrial competition.
He focussed on the paradox that the industry, as a advocate of
the free market, did not act according to the core market proposition
that prices should equal marginal costs, which, in a theoretical
situation of perfect competition, produces the greatest social
benefit.
12. The American industry responded by adopting
cost benefit studies, which then were attracting growing interest
in economics, and which purported to guide situations lacking
price discipline, especially in the public sector. They demonstrated
that the benefits flowing from the introduction of new drugs,
in lives saved and income produced, far outweighed sums in pricing
pharmaceuticals in excess of marginal costs. Further, the revenue
flows produce by the enhanced price levels sustained the continued
benefit of the industry's research.
13. US companies operating in the UK, especially
those who developed the then new range of broad spectrum antibiotics,
feared the Kefauver argument might bear adversely on their NHS
markets. The OHE was established by the Association of the British
Pharmaceutical Industry (ABPI) in April 1962 to undertake cost
benefit studies, published as OHE pamphlets. The OHE produced
studies of tuberculosis, childhood diseases, pneumonia, poliomyelitis,
diabetes and the like: it also considered NHS structures, reviewing
the hospital system and general practice.
14. In the mid 1960s, the Health Department
promoted the Department of Health Economics at York University.
The Department was to develop a rigorous academic structure of
health service cost benefit and to develop the subject within
the context of public service cost benefit, which then was seen
as an integrated feature of the National Plan.
QUALITY ADJUSTED
LIFE YEARS
(QALYS)
15. The central outcome of York's research
has been the concept of quality adjusted life years (qalys). The
qualy rapidly became favoured by public sector and spending control
bodies (HM Treasury 2003 The Green Book: appraisal and evaluation
in central government. Annex Two). The qaly was seen as coping
with questions that health impacts are rarely a question simply
of lives lost or saved, but need to take account of life changes,
especially changes in the quality of life. The qaly weights life
expectancy for health-related quality of life over time.
16. The objective is to create a matrix
of information that may act in lieu of the market where relative
prices determine distribution of expenditure and effort. The cost
of any therapeutic process is compared to the assumed marginal
value of qalys generated. Cost benefit requires a single standard
unit to enable comparison to be between widely diverse procedures
and morbidities The process lies at the heart of the National
Institute of Clinical Excellence (NICE)'s work.
PRICE THEORY,
PATIENT CARE
AND CENTRALISED
FUNDING
17. Although appealing in theory, cost benefit
and the qaly as a substitute price system is open to question;
there are three areas of criticism.
18. In simple terms of economics, a qaly
does not satisfactorily emulate prices. The absence of any point
elasticity in qalys, defining the rate at which supply and demand
change in response to price level changes, severely constrains
its value as a price surrogate in a distributive system. The lack
of transactions involving a transfer of resources from consumer
to supplier deprives the qaly of all incentive power. An absence
of relative or opportunity costs or choice deprives the qaly system
of the competitive element that fuels effective markets. A price
is the market tool bringing supply and demand into balance and
clearance. A qaly is a complex bureaucratic tool which in no way
automatically adjusts either supply or demand; it induces no response
but only a central control decision to approve or to refuse supply.
19. More problematically, a qaly fails to
relate to individual patient care. The obvious impact on care
of the elderly and chronically sick, suggests questionable medicine.
Happily, doctors provide care from the given the resources available
and their professional assessment of its effectiveness. The broad
pattern of expenditure on health reflects medical science and
the profession's response to patients' needs. Qalys act only on
the margin, to constrain the rate of change. Argument that the
entire NHS budget should be reappraised, subject to qaly analysis
and redeployment accordingly has found little or no response.
(see for example Williams Alan 2004 What could be nicer than NICE?
Office of Health Economics) Medical ethics override the qaly concept.
20. The qaly system finally implies one
model of health provision and funding. Qalys relate to a centralised
top-down target setting structure of the health service where
the lines of development and practice are predetermined by a central
authority. Patient care needs to be rationed; qalys provide the
key to care and seeks to ensure it goes, like the ministration
of the stockman, to those who might produce the greatest economic
returns. The contrast to central control is a patient-centred
service where the variety of needs and demands presented by patient
is decided individual by the doctor within the context of the
doctor-patient relationship. Patient satisfaction, under this
approach, becomes the key to evaluation.
COST BENEFIT
AND RESEARCH
AND NEW
MEDICINES
21. The public response to NICE decisions
substantiates these criticisms of cost benefit and qualys. Recent
cases concern breast cancer or Alzheimer disease. With breast
cancer, the value arises not from the reduced one or two percent
risk in terms of lives saved, but from the reduction in widespread
anxiety and uncertainty for 100% of sufferers. With Alzheimer,
the treatment brings relief and short extension of a diminishing
life, but the major benefit flows to loving kin and carers. Neither
factor features in qaly cost benefit. The public are little persuaded
either by the concept of qalys or cost benefit analysis as part
of the NHS control machinery.
22. The diversity of therapeutic benefit
underlie the weakness of cost benefit which technically requires
reduction to a single feature. The broad range of health care,
either therapeutic or prophylactic bears on features such as fears
and uncertainties, pain and forbearance, with patients' needs
varying regarding not simply age and life expectancy, but in terms
of family responsibility, employment duties and prospects and
a host of personal social factors. This diversity of impact was
a major source of early disillusion in the value of cost benefit
in a health context.
23. Recent NICE history suggests a treadmill
has been created. NICE cost benefit produces answers with qalys
and their value for money. The range of matters excluded causes
adverse reaction by patients affected. Their endeavours to obtain
the treatment by popular publicity and lobbying achieves reversal
of the decision. A qaly based cost benefit becomes rapidly indefensible
regarding patients' needs or satisfaction. Further new treatments
will seek approval for use in the NHS. The treadmill of NICE decision,
public outcry and reversal will turn again. Over time, this routine
will produce general anxiety about the NHS and its reliability
to provide effective health care.
MARGINAL COSTS
AND PHARMACEUTICAL
PRICES
24. The main issues referred to NICE concern
pharmaceutical products, where the NICE analysis provides a backdrop
to the ABPI/Health Department Pharmaceutical Products Regulation
Scheme (PPRS). The paradox identified by Kefauver, that theoretical
greatest benefit flows when prices match marginal costs, underlies
much of the argument. Marginal costing, although a strict economic
concept has a basic appeal to common sense that prices should
just be the cost of making a product. Under marginal cost price
competition, profits, excess or otherwise, would not exist.
25. The presence of uncertainty and the
theory of the firm are two market features that now shape current
discussion of markets and profit. The conventional explanation
for the presence of profit, standard in current text books is
the impact of uncertainty. (The seminal thesis is by Knight (1885-1962)
especially Risk, Uncertainty and Profit (Boston 1921)).
The concept of uncertainty introduces the flux of time into the
static marginal cost price model. Sources of uncertainty include
market changes such as swings in consumer taste, difficulties
in commodity supply, change in accessibility, variations in regulations
and the like. Response to major changes by suppliers opens prospect
for substantial profit or loss.
26. The Knightian concept of uncertainty,
as a major variation of the marginal cost price model, needs to
be distinguished from risk. Risk is characterised by probability,
which opens the feasibility of treating it as an insurable cost.
True uncertainty is radically distinguished from the calculable
risk; with uncertainty, there is no valid basis of any kind whatsoever
for classifying instances. It may be defined as an event whose
amplitude or periodicity is incalculable.
27. Associated with the concept of uncertainty,
which modifies the classical model of perfect competition, is
the presence of the firm. Under marginal cost pricing, the functioning
of the market is seen as organic, as a naturally self-adjusting
system without conscious organisation. Theoretical discussion,
especially since the late 1980s has stressed theories of the firm
as a major feature of markets, especially regarding transaction
costs and bureaucracy. (The seminal work in the theory of the
firm is by Coase (1910-94). His study The Nature of the Firm.
Economica. November 1937). Briefly, the Coasian firm is seen as
the surrender by individual workers of entrepreneurial rights
of direct market access in exchange for a contract of employment;
the market is replaced by the firm, the organism by organisation.
The motive or driving force is the operation of risk (which is
insurable but not always acceptable), and, by extension, uncertainty.
The firm's scale provides a degree of security.
28. The Coasian firm can be developed from
a simple passive or negative response to uncertainty towards a
proactive organisation, actively extending the area of certainty
and creating a structure capable of coping with major market changes.
Profits ensure the continued life of the organisation, forming
a core over and above immediate daily market pressures.
29. This model can be extended further to
cover the research based corporation. Research concerns proactive
extension of knowledge into the unknown. The unknown may be equated
directly with uncertainty, with identical impact on profits or
loses for those who successfully deal or fail to respond.
30. Take for example, a new and fanciful
pharmaceutical product. Call it Flutac. It is the specific remedy
for all forms of influenza, including avian flu. Taken thrice
within twenty-four hours, the pill reduces temperature, alleviates
headaches, relieves aches and pains and, eliminates entirely the
attacking virus, while providing immunity for twelve months against
any form of flu virus. It is of course simple to demonstrate substantial
cost benefit and a multitude of qalys from a treatment priced
at say £30.00; annual world-wide sales would produce upwards
of some £10 billion gross revenue. Work on this product is
encouraging. To date, a pill can be provided which satisfies the
first three items. The ingredient for the fourth and last item,
the elimination of the virus, is at present unknown.
31. Flutac would generate substantial profit,
excessive or otherwise. These would emerge irrespective of any
statutory rights are regulatory system, which only modify the
extent and rate of profitability. As the knowledge embodied in
the product is disseminated widely and competition develops, these
profits would be eroded by competitive market forces and fall
eventually to marginal cost. This is the typical research product
market cycle.
32. Therefore the unknown can be equated
with uncertainty in a dynamic market model to explain the existence
of profit, modifying the static marginal cost model. Coupled with
the Coasian firm, as the vehicle to safeguard against risk and
uncertainty, the research corporation is organised to explore
the unknown. Under this model, technical change and research are
no longer exogenous, but an integral part of the market, and its
driving force.
33. In discussions of uncertainty, there
is an implicit assumption that the news is always bad, although
there is never wholly an ill-wind. Discovery of the unknown through
systematic research is generally seen, in contrast, as a desired
objective, although it would be a wholly beneficent breeze that
blows no ill. The unveiling of the unknown by the research based
pharmaceutical firm is a proactive approach to uncertainty, where
the conditions and consequences of uncertainty are sought, rather
than avoided or averted.
34. The postulated model of the research
firm links directly with the concept of product competition and
product differentiation (originating mainly from RH Chamberlain
(1899-1967) The Theory of Monopolistic Competition. Harvard
1933), which has a well established place in the discussion and
management of market structures. The ideas of product differentiation
have proved valuable in exploring issues of pharmaceutical profits
and pricing.
35. The model derived from the Knightian
concepts of uncertainty as the core of profitability in a market
economy is similar to pharmaceutical firms unveiling the unknown.
The model provides a more integrated backdrop to development of
the PPRS than the NICE approach of treating discoveries as exogenous
and acceptable in terms externalities in cost benefit measured
by qalys. In regard to regulation and public sector needs, the
model coupling the unknown with the uncertain, giving rise to
profit may provide a more effective framework for regulatory systems
bearing on the industry.
Michael Lee
16 March 2007
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