Value-Based Drug Pricing – a Few Thoughts

In the past, success in the pharmaceutical industry simply meant to have a “blockbuster” – an extremely popular drug that generates annual sales of at least USD 1 billion for the company that creates it. In the face of stagnant healthcare budgets, and ever-growing demand for care – e.g. age and obesity are both associated with more illness and the prevalence of diseases such as diabetes has soared – pharmaceutical companies are under severe pressure to demonstrate the value of their products. Often it is no longer enough to show that drugs are efficacious and have no adverse side-effect profile; they now need to demonstrate improved outcomes that justify the price versus established therapies – preferably with real world evidence.

With many Western economies still in recovery mode, global pharmaceutical companies are under the public and political microscope, with demands for an alternative to the traditional, sales-led approach to marketing. In previous years, pharma had four “profit” levers: R&D productivity, cost cutting, extension of the market exclusivity period and marketing. Today, the latter has much less impact as it does neither matter how many sales reps a company fields nor how many samples it hands out. If a new treatment does not offer more value than existing therapies, healthcare payers simply won’t purchase it.

Value based pricing has been in use for the last decade with an increased prevalence in the last five years. Two examples on how costs were reduced through value-based pricing agreements as a response to budgetary pressures are the following: In Denmark, Bayer entered into a “no cure, no pay” initiative on Levitra (vardenafil) for erectile dysfunction in 2005; patients not satisfied with the treatment were eligible for a refund. In 2007, after the United Kingdom’s National Institute for Health and Clinical Excellence (NICE) initially concluded that Velcade (bortezomib) was too expensive relative to its estimated benefit to the population, Johnson & Johnson offered in response to forgo charges for patients who did not have an adequate medication response.

Value comes from achieving the highest possible health outcomes for patients, measured against the total cost of care. The other key component of value is appropriateness, both for the choice of product, and of care. Under- or over-use of a treatment, or use in inappropriate conditions, can compromise the value.

But pulling the “value lever” will require major changes, and three functions will be particularly deeply affected: R&D, market access and marketing & sales. Rather than focusing on commercial potential, the R&D function will have to focus on creating value for customers when it decides which medicines shall progress through the pipeline. Collaboration with hospitals, doctors and professional societies will be crucial to select outcomes and clearly define inclusion and exclusion criteria for patients, as well as gain support and buy-in. These outcomes and inclusion/exclusion criteria will then need to be agreed with the regulatory authorities. The CEO of Novartis, Joe Jimenez, stated in the Washington Post on 2. September 2015, that “previously, the only thing that you had to do was prove that your drug was safe and effective. Now, there is much more onus on us to prove that the drug delivers more than that and has a positive patient outcome. So one of the hardest things we had to do in the development of Entresto® (Editor’s note: an innovative drug for treating chronic heart failure) was to agree with the FDA on the endpoints of the trial. How are we physically going to measure things like reduced hospitalization? There was a lot of back and forth”.

Similarly, rather than using unit prices and sales volumes to produce budgets and forecasts, the market access function will have to use outcome-based modelling. It will also have to set up systems capable of managing an intricate network of contingency payments, rebates and innovative pricing and contracting approaches. However, many current healthcare payments systems worldwide are not compatible with value based pricing requirements due to pricing structures and restrictive legislation. To achieve greater buying power, many countries set drug prices centrally. In Switzerland, for example, the Federal Office of Public Health (OFSP) regulates both inclusion in the positive drug list (“Spezialitätenliste”) and pricing of reimbursed pharmaceuticals. The OFSP sets maximum prices for all listed drugs, original preparations – on- or off-patent – as well as generic drugs. Without specific provisions for value based Aus der ZeitschriftLSR 1/2018 | p. 5–6 Es folgt Seite № 6⬆pricing arrangements, there is no clear route for payers to negotiate separate value based pricing schemes in such systems. In addition, it is often unclear how value based pricing arrangements fit within existing legislation. Some health systems explicitly prohibit payments outside of legally mandated reimbursement systems (e.g. the US Anti-Kickback Statute).

The marketing and sales function will have to make even bigger adjustments. The so-called “dinner for three”, where one person orders the meal, another one pays and a third person eats the meal is now long gone, and the one that picks up the check is increasingly asking whether you really need foie gras, or whether liverwurst might just be OK. Marketing and Sales will have to deal with rigorous scientific data and complex economic studies, as well as developing the skills to negotiate with healthcare payers equipped to perform their own sophisticated analyses. For example, Merck’s subsidiary in the UK recently acquired a general-practitioner-led company that has developed a facilitated program for the clinical management of diabetes. The program currently works with some 250 practices covering 1.5 million patients nationally on a fee-for-service basis. With better management of the care for patients with high-risk factors for diabetes, the program has reportedly contributed to a reduction in expensive outpatient appointments and hospital admissions.

A good example for a creative value based pricing model is AstraZeneca who signed collaboration agreements with HealthCore (the health-outcomes-research subsidiary of WellPoint) in the U.S. and health information and technology provider IMS Health in Europe. The partnerships, intended to advance the use of real-world evidence based on observational and retrospective studies, reflect an appreciation that having access to such information is critical in helping to determine where to focus R&D, how to target new products, and how to position existing products with payers and providers.

To sum up, value-based pricing has the potential to bring value to pharmaceutical companies, payers, patients and providers in advanced health systems. There are three main items to keep in mind to implement an effective arrangement:

1. (i) focus on appropriateness of care: the aim of any therapy is to achieve a good outcome at an optimal cost. Hence, it is important to provide the right drugs at the right time to the right population;
2. (ii) keep the payment mechanism simple: while value based pricing can be complex, an emphasis on simplicity should help all parties operationalize and more accurately measure the effectiveness of this approach (e.g., decreased blood pressure or biomarker available, shorter timeframe to achieve value performance); and
3. (iii) keep transaction costs at reasonable levels: It is essential to keep the transaction cost low through smart measurement processes as the setting-up and maintenance of an outcome measurement infrastructure can be so expensive that it may undermine the cost-effectiveness of the entire value based price arrangement.