Incremental cost effectiveness ratio
Sector Deep DivesThe extra cost of a new treatment over its comparator, divided by the extra quality adjusted life years it delivers.
Also written: ICER
Both halves are incremental, and that is the whole design. The ratio compares the new treatment with whatever the system uses today, so a medicine competing against a cheap generic faces a far harder test than the identical medicine competing against nothing.
The result is compared with a published threshold. Below it, the treatment is normally recommended for funding. Above it, it is refused at the price requested, and the manufacturer either discounts until the ratio falls below the line or forgoes the market.
Notice what that sequence does to commercial logic. The price is an output of the assessment rather than an input the company chooses, so pricing power in this system is the strength of the evidence rather than the strength of the brand. It also means the comparator choice is worth fighting about, because it sets the denominator before any negotiation starts.
The lever companies use is a confidential discount rather than a lower list price, because a published cut becomes a reference point for every other national negotiation. That is why the ratio that clears the threshold and the price on the published list are frequently not the same price at all.
Worked example
A new treatment costs 30,000 more per patient than the standard of care and delivers 0.5 extra quality adjusted life years. The ratio is 60,000 per quality adjusted life year. Illustrative figures.
If the threshold sits below that, the treatment is refused at the price asked. A confidential discount cutting the incremental cost by a third takes it to 20,000 and the ratio to 40,000, which may clear the threshold, and the published list price never moves.