Economically Justifiable Price

Economically Justifiable Price: Solving a Cost-Effectiveness Model for the Maximum Price

The economically justifiable price (EJP) turns a cost-effectiveness question around. Instead of asking whether a medicine at a given price is good value, it asks how high the price could go before the incremental cost-effectiveness ratio crosses the payer's threshold. The term appears in a consultancy glossary and in published modelling studies; NICE's manual does not use it, and the Institute for Clinical and Economic Review calls the same quantity a threshold price. This page covers the formula, how the analysis is run and read, its uses and blind spots, a worked example for a fictional Drug X and common misreadings.

Why the price at the threshold matters

Claxton and colleagues, setting out value-based pricing for NHS drugs in the BMJ, judge the value of a drug by whether the health it adds exceeds the health forgone as other NHS treatments are displaced by its extra cost. At the price where the incremental cost-effectiveness ratio equals the cost-effectiveness threshold, the health gained is just offset by the health displaced, the net health benefit to the NHS is zero, and all the benefit of the innovation goes to the manufacturer as revenue. The EJP is that price. The York Health Economics Consortium glossary makes the same point and adds that the EJP is a benchmark, not the pricing decision itself.

The same quantity appears under several names. Academic papers speak of the threshold price or value-based price, found by threshold analysis on price. The Institute also publishes a health benefit price benchmark: net prices, after rebates and other concessions, that would reach USD 100,000 to USD 150,000 per QALY and per equal value life year gained. Headroom analysis asks the same question earlier, during development. Danzon, Towse and Mestre-Ferrandiz show why the answer differs between countries: if each payer sets its threshold from its own willingness to pay for health and manufacturers price to it, value-based prices are expected to differ with per capita income.

The algebra: solving the ICER for price

The EJP comes from splitting the incremental cost into the cost of the new medicine and everything else. Setting the ICER equal to the threshold and solving for the unit price gives the formula below.

$$ \text{EJP} = \frac{\lambda , \Delta E - \Delta C_{\text{other}}}{U} $$

where $\lambda$ is the threshold (cost per QALY), $\Delta E$ is the incremental QALYs per patient, $\Delta C_{\text{other}}$ is the incremental cost per patient excluding the new medicine's acquisition cost (administration, monitoring, adverse events, displaced comparator costs and other savings, net), and $U$ is the discounted number of units (doses, packs or courses) per patient. The numerator, $\lambda \Delta E - \Delta C_{\text{other}}$, is the per-patient EJP: the most the payer could spend on the medicine for each patient. The same price sets the incremental net benefit to zero, so the two approaches agree whenever the QALY gain is positive.

When $\Delta C_{\text{other}}$ equals or exceeds $\lambda \Delta E$, the EJP is zero or negative. Mladsi and colleagues call this the zero-price conundrum and trace it mainly to costs beyond the new drug's control: background disease costs, partner drugs in a combination and future treatments that patients may become eligible for. The Institute's 2023 framework notes the same rare case, in which no non-negative threshold price exists.

Running an EJP analysis

An EJP analysis is a cost-effectiveness model run with price as the unknown. Zeevat and colleagues, estimating the EJP of a hypothetical RSV vaccine, describe it as a threshold analysis at each willingness-to-pay threshold. The usual sequence is:

1. Specify the decision. Population, comparator, perspective and time horizon.
2. Cost everything except the price. Every cost other than the medicine's own acquisition cost goes into $\Delta C_{\text{other}}$, and units of the medicine are counted and discounted. NICE's manual (PMG36, section 4.5.1) discounts costs and health effects at 3.5% a year, so later doses count for less.
3. Choose thresholds and check them at source. NICE's manual, updated in March 2026, now uses GBP 25,000 to GBP 35,000 per QALY: below GBP 25,000 the decision normally rests on the cost-effectiveness estimate, across the range the committee refers explicitly to uncertainty, uncaptured benefits and health inequalities, and above GBP 35,000 it needs an increasingly stronger case (sections 6.3.4 to 6.3.8). For highly specialised technologies the corresponding figure is GBP 100,000 per QALY.
4. Solve. A model in which price enters cost linearly can be solved directly with the formula above; otherwise the price is iterated until the ICER equals the threshold.
5. Test it. One-way and scenario analyses show which inputs move the EJP; probabilistic analysis gives the estimate NICE prefers.

Reading the outputs: thresholds, drivers and uncertainty

An EJP is reported as a set of prices, one for each threshold and scenario, per unit and per patient. Because the per-patient EJP is $\lambda \Delta E - \Delta C_{\text{other}}$, it rises one-for-one with the threshold times the QALY gain, so any input that changes the QALY gain moves the EJP directly. A tornado diagram of the EJP, which PMG36 (section 4.7.17) suggests for showing the parameters to which a decision is most sensitive, ranks those drivers. Scenario analyses then give a range of prices rather than a point.

PMG36 (section 4.7.12) prefers a cost-effectiveness estimate from probabilistic analysis unless the model is linear. Because net benefit is linear in price, the probabilistic EJP is the price at which expected incremental net benefit is zero: $\lambda$ times the mean QALY gain, minus the mean other cost, divided by the mean discounted units. In a non-linear model this differs from the EJP at mean inputs. A stricter reading asks for the price at which the probability of cost-effectiveness reaches a chosen level, found by repeating the probabilistic sensitivity analysis at several prices. Severity matters too: NICE can weight QALYs by 1.2 or 1.7 for severe conditions (PMG36, sections 6.2.16 to 6.2.18), which raises the EJP.

How the EJP is used in pricing, launch and negotiation

Early in development, an EJP gives a reality check on whether the expected clinical profile could support a viable price. Girling and colleagues describe the related headroom as a value-based price ceiling that can be re-estimated at each stage of the development cycle, and a systematic review by Boudewijns and colleagues found that 33% of headroom studies assumed perfect effectiveness, which gives an upper bound on the price. Closer to launch, each market has its own EJP because thresholds differ. External reference pricing ties the price paid in one country to prices elsewhere; Voehler and colleagues found it associated with a 73% reduction in the likelihood of a drug launching within 9 months of regulatory approval, compared with settings without it. In negotiation, the EJP tells both sides which price the evidence supports. NICE's reference case uses the prices actually paid in the NHS, including patient access schemes and commercial access agreements (PMG36, section 4.4.4), so it is the net price, not the list price, that must meet the EJP.

What the EJP leaves out: budget impact, comparator prices and reference pricing

The EJP answers a value-for-money question only. Budget impact is separate: under PMG36 (section 5.10.5), when net budget impact for a medicine is expected to exceed GBP 40 million a year in any of its first 3 financial years, NHS England offers commercial discussions before seeking a variation to the funding requirement. The comparator's own price also sets the anchor. Walton and colleagues show that when standard care is itself not cost-effective, a superior therapy can command a lower value-based price than current treatments, and a hypothetical gene therapy is valued at over GBP 4 million against current enzyme replacement therapy but GBP 629,392 against best supportive care. A medicine with several indications at a single price is harder again: Goldhaber-Fiebert and Cipriano show that when one price must cover every indication and the payer decides on all of them together, the price becomes a weighted average of indication-specific threshold prices. Reference pricing links markets, so a low price accepted in one country can lower prices elsewhere.

Worked example: an EJP for Drug X (illustrative)

Drug X is a fictional add-on medicine for a chronic condition, priced per 28-day pack. All numbers are illustrative. The model gives, per patient and discounted at 3.5%:

• incremental QALYs $\Delta E = 0.80$
• other incremental costs $\Delta C_{\text{other}} = 1500$ (GBP 4,000 extra monitoring and administration less GBP 2,500 of avoided hospital care)
• discounted packs $U = 25$

At GBP 25,000 per QALY the per-patient EJP is $\lambda \Delta E - \Delta C_{\text{other}} = 25000 \times 0.80 - 1500 = 18500$, so the EJP per pack is $\text{EJP} = 18500 / 25 = 740$. At GBP 35,000 the same steps give $\lambda \Delta E - \Delta C_{\text{other}} = 35000 \times 0.80 - 1500 = 26500$ per patient and $\text{EJP} = 26500 / 25 = 1060$ per pack. As a check, at GBP 740 per pack $\Delta C = 740 \times 25 + 1500 = 20000$ and $\text{ICER} = 20000 / 0.80 = 25000$.

Each 0.1 QALY moves the EJP by GBP 100 per pack at the lower threshold and GBP 140 at the upper. If probabilistic analysis gave a mean QALY gain of 0.76 and mean other cost of GBP 1,700, the probabilistic EJP would be $(25000 \times 0.76 - 1700) / 25 = 692$. With a 1.2 severity weight it would rise to $(25000 \times 1.2 \times 0.80 - 1500) / 25 = 900$. If the discounted pack count rose to 30 with the same QALY gain and other costs, the EJP per pack would fall to $\text{EJP} = 18500 / 30 = 616.67$, because the same value is spread over more units.

Budget impact is a separate check. With 5,000 patients treated in year 3, 13 packs a year at GBP 740 and GBP 750 of other net costs per patient-year, net budget impact is $(13 \times 740 + 750) \times 5000 = 51850000$, or about GBP 51.9 million. Priced at its EJP of GBP 740, Drug X would sit exactly at GBP 25,000 per QALY yet still exceed the GBP 40 million level that triggers commercial discussions.

Common misreadings of the economically justifiable price

Most errors come from treating one number as more than it is. The points below follow from the formula.

• The EJP is a ceiling, not a target. At the EJP the payer gains no net health; the York glossary and Claxton and colleagues both make this point, and NICE does not use a precise maximum acceptable ICER (PMG36, section 6.3.1).
• It is a range. Threshold, QALY gain, perspective and scenario each change it; Zeevat and colleagues report EJPs at two thresholds in each of two countries.
• Per pack and per patient differ. Longer treatment with no extra benefit lowers the EJP per pack.
• The comparator matters. A costly or cost-ineffective comparator inflates or distorts the EJP.
• A zero or negative EJP is possible. It signals costs the medicine cannot offset, not a modelling error.
• Meeting the EJP does not guarantee reimbursement. Uncertainty, budget impact and other factors still weigh in the decision.

Sources

• Boudewijns EA, Otten TM, Gobianidze M, Ramaekers BL, van Schayck OCP, Joore MA. Headroom analysis for early economic evaluation: a systematic review. Applied Health Economics and Health Policy. 2023;21(2):195-204. https://doi.org/10.1007/s40258-022-00774-5
• Claxton K, Briggs A, Buxton MJ, Culyer AJ, McCabe C, Walker S, Sculpher MJ. Value based pricing for NHS drugs: an opportunity not to be missed? BMJ. 2008;336(7638):251-254. https://doi.org/10.1136/bmj.39434.500185.25
• Danzon P, Towse A, Mestre-Ferrandiz J. Value-based differential pricing: efficient prices for drugs in a global context. Health Economics. 2015;24(3):294-301. https://doi.org/10.1002/hec.3021
• Girling A, Lilford R, Cole A, Young T. Headroom approach to device development: current and future directions. International Journal of Technology Assessment in Health Care. 2015;31(5):331-338. https://doi.org/10.1017/S0266462315000501
• Goldhaber-Fiebert JD, Cipriano LE. Pricing treatments cost-effectively when they have multiple indications: not just a simple threshold analysis. Medical Decision Making. 2023;43(7-8):914-929. https://doi.org/10.1177/0272989X231197772
• Institute for Clinical and Economic Review. 2023 Value Assessment Framework. Boston: ICER; 2023 (updated 25 September 2023), sections 3.10 and 3.13. https://icer.org/wp-content/uploads/2023/09/ICER_2023_VAF_For-Publication_092523.pdf
• Mladsi D, Barnett CL, Mader G, Russell-Smith TA, Unuigbe A, Bell T. The zero-price conundrum: exploration of scenarios where a clinically effective new drug might not be cost-effective at zero price. Value in Health. 2023;26(3):384-391. https://doi.org/10.1016/j.jval.2023.01.004
• National Institute for Health and Care Excellence. NICE technology appraisal and highly specialised technologies guidance: the manual (PMG36). London: NICE; 2022, updated March 2026. Sections 4.4.4, 4.5.1, 4.7.12, 4.7.17, 5.10.5, 6.2.16 to 6.2.18 and 6.3.1 to 6.3.8. https://www.nice.org.uk/process/pmg36
• Voehler D, Koethe BC, Synnott PG, Ollendorf DA. The impact of external reference pricing on pharmaceutical costs and market dynamics. Health Policy Open. 2023;4:100093. https://doi.org/10.1016/j.hpopen.2023.100093
• Walton M, Deng NJ, Corbett M, Umemneku-Chikere C, Nevitt SJ, Fulbright H, Tan CY, Lachmann R, Churchill R, Hodgson R. Re-anchoring the value of innovative therapies in NICE decision making when comparators are cost ineffective: a case study of late-onset Pompe disease. PharmacoEconomics. 2026;44(2):105-113. https://doi.org/10.1007/s40273-025-01559-z
• York Health Economics Consortium. Economically justifiable price [glossary entry]. York: YHEC; 2016, updated October 2025. https://yhec.co.uk/glossary/economically-justifiable-price/
• Zeevat F, Luttjeboer J, Paulissen JHJ, van der Schans J, Beutels P, Boersma C, Postma MJ. Exploratory analysis of the economically justifiable price of a hypothetical RSV vaccine for older adults in the Netherlands and the United Kingdom. Journal of Infectious Diseases. 2022;226(Suppl 1):S102-S109. https://doi.org/10.1093/infdis/jiab118