To appropriately assess the value of medicines in the U.S., methods must reflect the decentralized and dynamic nature of the healthcare system where multiple payers and providers make decisions rather than a single authority. Traditional cost-effectiveness analysis (CEA), which is used in some countries to assess the value of new medicines and inform coverage decisions, has relied on simplifying assumptions about drug prices and has not incorporated market behavior. As such, conventional CEA is an inappropriate tool to inform U.S. decision-makers. When value assessments rely on cost-effectiveness estimates that do not use the right prices, decision-makers risk misallocating resources and thereby impacting patient health and costs.
A newer framework—Generalized Cost-Effectiveness Analysis (GCEA)—integrates several important advances in economic evaluation and explicitly recognizes the importance of accurately accounting for how individuals value health gains, outcome uncertainty and spillover benefits. It also acknowledges the importance of modeling price changes over time, emphasizing the impact of loss of exclusivity. However, further methodological development, empirical research and explicit guidance are needed in two areas:
- Modeling price changes in the period before loss of exclusivity
- Clarification of what price metric to use for different stakeholder decisions
These are the findings from new research by Johnson & Johnson, in collaboration with The Swedish Institute for Health Economics. The study titled “Tailoring Generalized Cost-Effectiveness Analysis (GCEA) to the U.S. Setting: The Importance of Using the Right Prices,” reviewed existing methodological literature and empirical studies to assess the current status of GCEA, focusing on the extent to which the market-oriented nature of pharmaceutical pricing in the U.S. is captured.
Traditional CEA has widely relied on two unrealistic simplifications about prices. First, CEAs typically assume that drug prices stay constant over time. This assumption is far from reality in the U.S. market where branded prices can fluctuate substantially even before generic/biosimilar entry. For example, manufacturers may adjust prices in reaction to changes in competition, changes in the structure of the purchaser market that impact negotiation leverage and in reaction to policies like the Inflation Reduction Act (IRA). Second, although multiple financial transactions occur along the complex pharmaceutical supply chain in the U.S., CEAs often use price metrics that diverge from the actual transaction price—which is the “opportunity cost” relevant to the decision-maker. Most analyses have relied on list prices even though they exclude rebates, fees and confidential discounts. Some CEAs have used net prices, which reflect what manufacturers receive, but this metric omits the amount that is retained by drug market intermediaries such as pharmacy benefit managers (PBMs), wholesalers, and pharmacies.
Recent estimates indicate that in 2023, manufacturers retained just under half (49.9%) of total brand-name drug spending. The remainder was split across the supply chain: 25.3% to PBMs, insurers, wholesalers and group purchasing organizations (GPOs); 11.8% to government-mandated rebates and fees; 9.6% to 340B provider markups and pharmacy margins and 3.4% to commercial cost-sharing assistance. Neither list or net price metrics reflect the actual cost of the drug from a societal perspective, or for that matter, from the perspective of other stakeholders like insurers or the health care system.
Analyses that numericize the value of one treatment versus another can only be informative to decision-makers if they use relevant price and relevant metric for the question at hand. As the conventional CEA framework does not capture the decentralized and dynamic nature of pharmaceutical pricing in the U.S., it should not be used.
This research was funded by Johnson & Johnson and conducted in collaboration with The Swedish Institute for Health Economics. For full details on the study design, methodology and limitations, see: Willis M, Nilsson A, Neslusan C. “Tailoring Generalized Cost-Effectiveness Analysis (GCEA) to the U.S. Setting: The Importance of Using the Right Prices.” Poster presented at The International Society for Pharmacoeconomics and Outcomes Research (ISPOR) 2025 Conference, Montreal, Quebec, Canada, May 13–16, 2025.
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