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