Pharm Med 2012; 26 (4): 217-222

LEADING ARTICLE 1178-2595/12/0004-0217/$49.95/0

Adis 2012 Springer International Publishing AG. All rights reserved.

Value-Based Pricing
Examples of Healthcare System Reforms from the UK and US
and Implications for Industry
David W. Miller
Global Market Access, Biogen Idec Ltd, Maidenhead, UK

Abstract Rising costs in healthcare mean that many countries can no longer absorb the increased expenses
associated with innovative yet expensive new medicines. Innovation and investment in research and de-
velopment (R&D) have become secondary factors to cash-strapped governments looking to control
spending on healthcare. To award a premium price, governments in these markets now require a demon-
stration of clinical, patient and economic value of comparable products. In accordance with this trend, both
the US and UK Governments have introduced reforms to measure and establish comparative value. The
differences in their healthcare systems represent an ideal comparison of the impact of reforms in a pre-
dominantly public funded system (UK) with a system largely supported by private health insurance con-
tributions (US). The extent to which these reforms affect national spending on healthcare will very likely
inform and influence countries looking to implement their own healthcare reforms.
Through its creation of the National Institute for Health and Clinical Excellence (NICE), the UK has
long been an advocate of understanding the cost effectiveness of available medicines. The UK has now
developed plans to link established value, as determined by NICE, to a list price under value-based pricing
(VBP). The US, on the other hand, has ensured that any comparisons of value are made on clinical qualities
and not on cost effectiveness. As part of its healthcare reforms, the Patient-Centered Outcomes Research
Institute (PCORI) has been created to fund and carry out comparative effectiveness research to determine
comparative value of therapeutic alternatives. Importantly, legislation prevents it from funding and carrying
out cost-effectiveness comparisons. Furthermore, public providers in the US, such as the Centers for
Medicare and Medicaid Services, are prohibited from basing coverage decisions solely on the PCORIs
research. This is in contrast to the UK where NICE appraisals are directly linked to product uptake and can
have significant effects on the success of the product. Either way, in both the US and UK, the dissemination
of data comparing therapeutic options, using direct or indirect comparisons, will enable both private and
public payers to make informed decisions on product value. Such VBP significantly steps away from the free
pricing environment that previously characterized these markets. These reforms will have implications for
the way the industry conducts R&D and will place varying levels of importance on different types of
evidence. Head-to-head comparisons and postmarket observational research will likely become critical
factors in achieving and maintaining premium prices in the UK and access in the US.

1. Healthcare Reforms Driven by Growth in Costs
Increased spending on pharmaceutical drugs and the un-
sustainable rising costs of healthcare in tough economic times
has prompted many governments to re-evaluate their current
and future options for healthcare provision. According to a
McKinsey Global Institute report in 2007, the US now spends
more on health than on food[1] and in 2009, healthcare spending
in the US accounted for 17.6% of gross domestic product
(GDP).[2] In contrast, UK spending on healthcare worked
out at 8% of GDP.[3] Despite this difference in expenditure,
both countries are exploring ways to extract better efficiencies
in delivering their healthcare. The two countries represent an
ideal comparison of a publicly funded national health system
with one that is largely funded by private health insurance
contributions. As such, their methods of extracting value
218
will be closely followed by countries on both sides of the
Atlantic.
One concept that has received significant attention in the
drive to derive better efficiencies is value-based pricing (VBP).
In its simplest form, VBP can be described as the price of
healthcare provision that reflects both medical and economic
benefit, and some countries are now implementing research
methods and reimbursement criteria that explicitly link prices
of pharmaceutical drugs to the value they offer.[4,5]
Whilst the UK has not yet officially implemented a VBP
system, it indirectly adopted a VBP approach when it created
the clinical- and cost-effectiveness body, the National Institute
for Health and Clinical Excellence (NICE), to appraise health-
care technologies, including drugs. Similarly, the US Govern-
ment has recently installed the Patient-Centered Outcomes
Research Institute (PCORI) to fund and carry out compara-
tive-effectiveness research (CER). In both cases, the concept of
a products value has been expanded to include real-world1
incremental benefits to patients and society compared with
existing treatment. Yet, the two countries have adopted con-
trasting approaches with regard to policy implementation and
price control within the healthcare sector.
2. Healthcare Reforms in the UK: Introducing
Value-Based Pricing (VBP)
In January 2011, the UK Government introduced the Health
and Social Care Bill[6] to Parliament with explicit reference to
the introduction of VBP to replace the current agreement be-
tween the Pharmaceutical Industry and the UK Government,
the Pharmaceutical Pricing and Reimbursement Scheme
(PPRS), when it expires in 2014. This legislation had roots in a
2007 report of the Office of Fair Trading (OFT) on the PPRS.[7]
The report suggested that a VBP system would ensure that
medicines in the UK were appropriately priced, and that this
price would be linked to patient benefits.
Although the PPRS allows manufacturers to freely price
their products, with controls on company profits, securing ac-
cess in the National Health Service (NHS) requires a favourable
appraisal by NICE. Using pharmacoeconomic models that
assess both costs and outcomes in the form of an incremental
cost-effectiveness ratio (ICER), NICE can determine that a
medicine is not cost effective at the current price.[8] Such a ne-
gative recommendation by NICE allows the NHS to deny ac-
cess to the drug (some 90% of the UK population are covered
1 Real-world benefits can be defined as the benefits to the patient as measured through postmarketing observational research studies in typical
patient-care settings.
Adis 2012 Springer International Publishing AG. All rights reserved.
Miller
by the NHS). Hence, whilst the value of a product is not directly
linked to price, it is invariably linked to access. The intention is
that VBP will build on this and create a process for industry and
the government to negotiate and agree on prices.
Under PPRS, and in the future under VBP, the NHS oper-
ates under finite budget constraints, and therefore an increase
in spending in one disease area must lead to a reduction in
spending in another.[9] Increases in cost must be justified by
increases in patient benefit, and this benefit should be greater
than any displaced medical benefit from the transition of funds
elsewhere in the healthcare system.[10-12] The independent think
tank, 2020Health, has produced the following definition of
VBP with the above conditions in mind:
The price that reflects the value to patients, carers, society
and the economy which delivers health benefits that exceed the
health predicted to be displaced both elsewhere in the NHS and
in the welfare economy, due to their additional cost.[13]
The ICER, which by its nature compares the changes in ben-
efits and costs of the new drug to existing treatment, and the
quality-adjusted life-year (QALY), which summarizes gains in
quality of life and mortality, will continue to be relevant in de-
termining value.[14] Hence, direct head-to-head, indirect and
mixed treatment comparisons will all continue to have a large
influence in achieving a positive appraisal. Using these metrics as a
proxy for value, the government will set out a range of maximum
threshold prices with highest priced thresholds for medicines that:
 tackle disease of high unmet need;
 demonstrate greater medical improvement and/or innovation;
 demonstrate wider social benefits.
In VBP, the value and price are established ex-ante (prior to
launch). Hence, the need for complex risk-sharing agreements,
patient access schemes, and exceptional agreements to facilitate
patient access following a NICE refusal,[15] will be removed.
Some treatments, however, will be unfeasible to demonstrate
comprehensive value within the same timeframes that it takes to
demonstrate safety and efficacy under EMA regulations.
Therefore, it is likely that a mixture of ex-ante and ex-post
(post-launch) approaches will need to be applied to allow a fair
price at launch with a review following launch to determine if
value is consistent with pre-launch data.
2.1 Uncertainties Remain Over Implementation of VBP in UK
A number of VBP issues have been identified that require
resolution prior to its introduction in 2014:[16,17]
Pharm Med 2012; 26 (4)
Value-Based Pricing in the UK and US
 Will prices go up or down? Theoretically, just as prices might
be negotiated downwards for drugs that fail to demonstrate
value, prices could potentially go up for drugs which exceed
expectations. Note, however, that the OFT report criticized
the PPRS, stating that the NHS was overpaying for drugs;
hence, it is more likely that VBP will be used as a tool to drive
down overall prices.
 How will wider social benefits and indirect benefits on
quality of life be measured? The metrics applied to calcu-
late patient outcomes and wider social benefit are still in
development[18]. The EQ-5D is a popular patient-reported
outcomes (PRO) tool for determining patient quality of life
but often fails to capture many important dimensions of
well-being (e.g. cognition, vision).[19]
 Will there be different prices for a single drug that treats
different diseases? Whilst most commentators see the benefits
and potential for such distinction, there is only speculation
regarding how this might be achieved and whether it is even
feasible. The Governments response in their consultation
paper suggested it was more likely that there will only be one
price for a drug with multiple indications.
 What scope is there to reward innovation? The operational
definition of what constitutes innovation has not been
revealed. Nor do we understand how innovation will be
valued and from whose perspective. For example, develop-
ments of new dosage forms that allow patients to transition
to oral treatments from injectable forms are highly valued by
patients. Will VBP recognize this type of innovation?
 Are UK initiated incentives provided through VBP significant
enough to drive changes in industry research and development
(R&D)? Although the UK accounts for only 4% of global phar-
maceutical sales, 25% of the global market includes considera-
tion of UK drug prices in setting national prices[7]. It is unclear
how such a VBP system will change global R&D investments.
3. Healthcare Reforms in the US: One Small Step
Towards VBP
The US healthcare market is quite different to the UK in that
a majority of healthcare is funded by private health insurance.
Pharmaceutical prices are set by the manufacturers and then
negotiated with individual health insurance companies as a
business-to-business transaction. Public healthcare is provided
under Medicare for the elderly and certain disabilities and un-
der Medicaid for the indigent. The pharmaceutical benefit in
Medicare is administered by private health insurers and the
federal government is prohibited by law from directly nego-
tiating pharmaceutical prices in the programme. Similarly,
Adis 2012 Springer International Publishing AG. All rights reserved.
219
Medicaid has no authority to negotiate prices, although it does
receive the best price that a manufacturer is providing to a
private insurance company. Recent healthcare reforms have
largely revolved around increasing the insurance access for US
citizens who, because of unemployment or other barriers, have
had difficulty securing coverage.
It is widely recognized that the US per capita spend on
healthcare is among the highest in the world but does not de-
liver the best health outcomes.[20,21] Increasing coverage under
the the Patient Protection and Affordable Care Act (PPACA),
2010[22] and the Health Care and Education Reconciliation Act
of 2010[23] without increasing spending, or reducing quality,
will require efficient allocation of resources.
3.1 Comparative-Effectiveness Research (CER)
will Determine Value But Not Price
Central to the notion of achieving better efficiencies is the
ability to make informed decisions about which medical inter-
ventions are the most effective. The need for comparative data
has fostered the use of CER to improve health outcomes,
quality of care and consumer choice.[4] Progress towards im-
plementing a system whereby treatments could be compared on
the basis of effectiveness in the real world came in 2009, when
the Obama administration released $US1.1 billion in funding
for CER as part of the American Recovery and Reinvestment
Act (ARRA).[24] The ARRA and the following PPACA estab-
lished a new non-profit body, the PCORI. The PCORI will
sponsor scientifically rigorous CER studies and its research will
assess evidence on how diseases and illness can be prevented,
treated and managed effectively.[22]
Because comparative research occurs in various forms, a
concise definition, which provides clarity on the scope and
objectives of CER, provides insight into how the PCORI plans
to compare medical treatments:
CER is the conduct and synthesis of research comparing the
benefits and harms of different interventions and strategies to
prevent, diagnose, treat and monitor health conditions in real
world settings. The purpose of this research is to improve
health outcomes by developing and disseminating evidence-
based information to patients, clinicians, and other decision-
makers, responding to their expressed needs, about which
interventions are most effective for which patients under
specific circumstances.[25]
To complement this vision, the PCORI have also published
preliminary guidance on the scope, methods and policy reach
for their ambitions to compare the following medical inter-
ventions in real-world settings:
Pharm Med 2012; 26 (4)
220
 Assessments will include health delivery systems, as well as
drugs, devices and procedures.
 Assessments will focus on patient-centred outcomes
involving real-world data.
 It is highly unlikely that metrics such as the QALY will be
used when comparing therapies within or across indications.
 Under the current legislation, CER analysis sponsored by
the PCORI will not include cost-effectiveness studies and
therefore the ICER will not be defined or considered.
3.2 Implementation of CER
Research conducted by the PCORI may not be construed as
guidelines or policy recommendations. Hence, public provi-
ders, such as the Centers for Medicare and Medicaid Services
(CMS), are prohibited from basing coverage decisions solely
on the PCORIs research. Responding to political pressure,
US policymakers have attempted to ensure that the PCORIs
sponsored research will not be used to ration healthcare spend-
ing and limit access to new therapies. This political sensitivity in
the US is in contrast with the UK. Although NICE has gained
significant expertise in conducting appraisals of new drugs, it
may have misread the public mood in setting cost-effectiveness
thresholds.[26] Despite its efforts to ration healthcare spending
in a fair and efficient manner, the decision to deny patient access to
clinically effective drugs for rare cancers has proved extremely
unpopular with UK patients and their support groups.[27]
Coinciding with CER is another initiative described as
value-based purchasing (not to be confused with value-based
pricing) in which CMS is encouraged to provide appropriate
incentives for all healthcare providers to deliver higher quality
care at lower total costs.[28] However, unless Medicare and
Medicaid are given increased scope to leverage their payer
1999 2003 2007
Introduction of OFT report Patient
NICE on PPRS
Medicare
Modernization
Act
Fig. 1. A timeline of events in the UK and US describing the recent evolution of value-based pricing. ARRA = American Recovery and Reinvestment Act;
CER = comparative-effectiveness research; HCER = Health Care and Education Reconciliation Act; NICE = National Institute for Health and Clinical Excellence;
NHS = National Health Service; OFT = Office of Fair Trading; PPACA = Patient Protection and Affordable Care Act; PCORI = Patient-Centered Outcomes
Research Institute; PPRS = Pharmaceutical Pricing and Reimbursement Scheme; VBP = value-based pricing.
Adis 2012 Springer International Publishing AG. All rights reserved.
Miller
power and negotiate prices with the aid of CER, the environ-
ment will remain a product of business-to-business negotiations
with private insurance companies. It will be important that
CER findings translate into changes in clinical practice. For
example, high rates of prescribing high-cost antihypertensive
and lipid-lowering treatments, when less expensive alternatives
have been shown to be more effective, illustrate the difficulties
of linking research to practice[29,30] (figure 1).
4. Implications for Pharma
The expectations for evidence to support pricing and re-
imbursement decisions are higher than ever under VBP and invest-
ment in evidence generation should meet this increased demand.
Trials which had historically been designed to demonstrate safety,
efficacy and quality will need to be tailored to demonstrate value
in time for 2014 and beyond. Conducting real-world and post-
market observational research will be an essential component of
the value story, and there is an important opportunity for the
industry to use this research effectively to demonstrate the benefit
of their products in development and on the market.
The high cost of NICE appraisals to companies should not
be underestimated. Data generation for appraisals is estimated
to cost an additional d4.5 million for each product, while the
submissions for appraisals cost an average of d350 000.[13]
There is a risk that these assessments will make the UK an
unattractive market for launching drugs. The volume of work
anticipated to flow through health technology assessment
bodies like NICE is expected to increase, as all new drugs will
need to be appraised for value and this could lead to delayed
entry into the UK market.[5]
The industry has largely ceded pricing control to authori-
ties whose demands for evidence is increasing. Commercial
2009 2010 2011 2014
Andrew Health and Anticipated
access Lansleys Social Care formal
schemes White Paper Bill introduction of
introduced to introducing VBP in the
the NHS VBP UK
CER PCORI
sponsored founded as
under ARRA part of the
PPACA and
HCER
Pharm Med 2012; 26 (4)
Value-Based Pricing in the UK and US
Table I. Comparisons of key differences between value-based pricing in the UK and the Patient-Centered Outcomes Research Institutes sponsored
comparative-effectiveness research in the US
UK: NICE
QALY and ICER will likely remain as key metrics for establishing value
and price
Value increasingly includes indirect costs (e.g. productivity lost)
Appraisal findings will be linked to reimbursement decisions and price
Lengthy appraisal times can delay market launch
Positive and negative appraisals can seriously impact product success
Early communication with bodies like NICE provide opportunities to
address any missing gaps in evidence of value
Scoring systems like PROs are well established as appropriate tools to
measure non-clinical value
CER = comparative-effectiveness research; ICER = incremental cost-effectiveness ratio; NICE = National Institute for Health and Clinical Excellence;
PCORI = Patient-Centered Outcomes Research Institute; PRO = patient-reported outcome; QALY = quality-adjusted life-year.
opportunities have become riskier, as prices required to provide
a return on investment have become harder to anticipate in
advance and more difficult to secure. Companies need to ensure
that they benchmark against the best available alternative if
they are looking to launch with a premium price. Under VBP,
drug prices will act as signals to the market to those disease
areas that authorities value the most, and it is anticipated that
this will include diseases of high unmet need. In these areas,
companies will have the most control over pricing with reduced
competition and increased product demand from payers.
Go/no-go decisions throughout clinical development will need
to be made with the foresight of whether value can be demon-
strated, and whether this is sufficient to achieve a target price.
There is a general acknowledgement that value relative to the
entire care pathway and wider social benefits may be included
in the price of new medicines. Although the absolute value that
could be awarded to a drug that facilitates a patient returning to
work is ambiguous, benefits could exist for both public and
private systems. Long-term sick leave costs the UK public
sector d4.5 billion a year,[31] and any innovations that alleviate
such a burden should be rewarded. Private health insurers
should also be receptive to the idea that a new drug delivering
faster recovery benefits downstream customers looking to re-
duce sick pay.
The impact of research findings from the PCORI for phar-
maceutical companies in the US is not clear. Although the
PCORIs sponsored CER findings will not directly impact list
prices, there is a risk that unfavourable results might exclude
products from a Medicare and Medicaid list of preferred
Adis 2012 Springer International Publishing AG. All rights reserved.
221
US: PCORI
PCORI sponsored analyses will not include cost-effectiveness metrics like QALY
and ICER to compare treatments
Indirect costs mean less to medical insurance firms that comprise the US
healthcare market
PCORIs research findings may not be construed as mandates or reimbursement
recommendations
Manufacturers are free to launch before any appraisals have been completed
Regardless of whether CER research is tied to policy, it should be assumed that
negative appraisals will affect product success
Market access is still dependent upon separate negotiations with multiple payers
and their definitions of value may vary
Close attention needs to be paid to the dominant methods of appraisals that will be
adopted by PCORI
medicines. Negotiators from the private insurance companies
may leverage available CER data to influence price agreements
when negotiating access. However, despite the increased fund-
ing for research, it is likely that changes in prescribing beha-
viour will lag behind the dissemination of results[4,32] (table I).
5. Conclusion
The UK and US healthcare reforms have established that
comparative value in a real-world setting is the best approach to
achieve efficient spending. Both countries have adopted dif-
ferent approaches, each with their own limitations. VBP might
be an ideal way to determine the most relevant price, but there is
much work ahead to establish how price will be determined in a
fair and equitable manner both prior to launch and after ap-
praising actual use in the real world. CER might be an effective
research initiative to compare products; however, it is uncertain
whether the consolidated approach of the PCORI and signif-
icant federal funding for CER will influence product negotia-
tions with private insurers in the US. At the prescriber level, it is
unlikely that CER research findings will translate into timely
changes in clinical practice and prescribing behaviour.
Companies looking to achieve access with premium prices
will need to assess the implications and tailor their approach to
match the needs of their customers and decision makers. En-
suring key stakeholders are well informed throughout devel-
opment of new products is a key market access requirement and
will continue to be so under these new systems. Thus, compa-
nies with R&D pipelines that produce medicines that deliver
Pharm Med 2012; 26 (4)
222
real-world value in the eyes of a multitude of diverse stake-
holders are likely to be the most successful.
Acknowledgements
No funding has been provided for the preparation of this paper. The
author has no conflicts of interest to declare that are directly relevant to the
content of this paper.
David Miller holds shares in Biogen Idec as part of his compensa-
tion for employment with that company. Prior to becoming employed
by Biogen Idec, he consulted for numerous companies on pricing and
reimbursement issues.
Nick Meadows, PhD, Kinapse Ltd, Wimbledon, UK, assisted in
the initial draft of the manuscript and received compensentation from
Kinapse.
The views expressed in this paper are the authors own.
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Correspondence: Dr David W. Miller, Ph.D., Senior Vice President, Biogen
Idec, Ltd., 70 Norden Road, Maidenhead, SL6 4AY, UK.
E-mail: david.w.miller@biogenidec.com
Pharm Med 2012; 26 (4)