Headroom in the Device Development Cycle
Investment (Development) Decisions
Continuing investment is justified if Development Costs are estimated to be less than the
Headroom estimate of post-market trading revenues. I.e. if
D < M × 0.8 × (H − U)
D = future development costs
M = size of market
H = Headroom estimate of the Maximum Reimbursable Price
U = Estimated cost of production per unit
0.8 adjusts for NHS marketing failure (See Pricing Model)
In conditions of uncertainty, the investment decision should take account of the option value of
decision gates to later in the cycle. Option values are sensitive to:
1. Current estimate of post-market revenues ignoring later decisions
2. Plausible range for future revenues
3. Skewness – i.e. whether current estimate is more likely to be:
too big(negative skewness) or too small (positive skewness).
A. Girling, A. Chapman, R. Lilford & T. Young (2012) Business Decisions for New Medical Devices: The Headroom
Approach, MATCH workbook, ISBN 978-0-9563412-1-1
A.J. Girling, A. Chapman, T.P. Young & R.J. Lilford. Using health economics in the product development cycle for
medical devices. In Draft
A.J. Girling, R.J. Lilford & T.P. Young (2012) Pricing of medical devices under coverage uncertainty – a modelling
approach. Health Economics, In Press. Published online in Wiley Online Library (wileyonlinelibrary.com). DOI:
10.1002/hec.1807
A.J. Girling, T.P. Young, C.A. Brown & R.J. Lilford (2010) Early-stage valuation of medical devices: the role of
developmental uncertainty. Value in Health 13(5), 585-591. DOI: 10.1111/j.1524-4733.2010.00726.x
Pricing Decisions
The Headroom is supposed to represent a price at which device can be sold to the NHS. But, in
practice, the NHS may choose not to buy at this price!
1. It may not accept the vendor’s analysis.
2. The Cost/QALY threshold is not set in stone.
3. Local policies and budgetary constraints.
Choosing a commercially viable price that will appeal to the healthcare provider is an
optimisation problem. The idea is to maximise the vendor’s expected net revenue, taking
account of the possibility that this will equate to zero if no sale materialises.
This leads to a robust practical choice of
Price = 0.26 × U + 0.84 × H − U = 0.84 × (H − U) per item.
with an expected revenue that is likely to be at least
0.80 × (H − U) per item.
This figure is carried over into the Investment model as the projected net trading revenue for the
new device.
Market-Gate
Investment-Gate
Concept
Assessment
Investment
Decision
Product
Development
Investment-Gates
Pricing &
Marketing
Decisions
Post-Market