Optimal Cost-Effectiveness Threshold for Public Health Insurance

Javad Moradpour & Aidan Hollis

Abstract

Public health insurers typically use a cost-effectiveness threshold to determine which health products and services should be insured. We challenge the convention of a single threshold. For competitively provided products and services, prices are determined by cost; but for products with market power, patentees will increase the price to the threshold. As a result, a change in the threshold for patented products affects the prices of all, including inframarginal ones. The insurer can increase efficiency by reducing the threshold for patented products, even accounting for the effect on innovation. In a multi-country world, thresholds may however be too low.

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