The Move to Value-Based Pricing for Prescription Drugs

12/21/11

The standard marketing value equation taught in business school states value equals utility or benefits less costs. Because the relationship between the price of medicines and the value they deliver isn’t always clear, there are those who would argue that the established marketing value equation has not been universally applied by the pharmaceutical industry.

The relationship between value and price in medical treatments is changing in Europe and the United States. Up to now, economic evaluation of drugs in the European Union has been used primarily to determine whether or not to reimburse—not to determine price. Prices usually are set by the manufacturer, sometimes with some negotiation, or are based on international reference pricing. In the U.S., prices continue to be set by manufacturers.

Much of the impetus for change comes from mounting pressure to limit health care costs amid the global financial crisis. Another factor leading to change is the continued escalation in the cost of healthcare technology and new medicines. Value-based pricing—where the maximum price allowed for reimbursement of a drug is linked to the value that the drugs adds, over and above existing care—is here in a number of forms, from payer limits in the U.S. to new value-based pricing plans in two of Europe’s most-influential drug markets; the United Kingdom and Germany.

Drug prices in the U.K. and Germany are some of the most-referenced in the world, used by approximately 50 other countries. Germany is the largest drug market in Europe and the third-largest in the world, behind the U.S. and Japan. In the past, Germany and the U.K. had fairly “free” pricing, with limited controls. Reform legislation passed in both countries now puts the emphasis on establishing a “value-based price.” While there are some differences between the two new value-based pricing systems, in both Germany and the U.K., companies now will have to provide details of how they arrive at fair prices for their innovations, while also more clearly demonstrating the value to patients.

Effective this year, Germany now imposes price controls on newly licensed medicines tied to a preliminary assessment of the medicine’s benefits. The new rules require pharmaceutical companies to negotiate prices for new drugs with health insurers, severely limiting companies’ previous freedom to set prices. Germany had no previous pricing controls over new medicines, leading to some of the highest drug prices in the world.

If the new treatment has no extra therapeutic benefit, reimbursement will be set at a level no greater than the comparable medicine already on the market.

These new rules in Germany require a quick decision be made on each new drug’s value-based price, followed by post-launch research and/or negotiations, if needed. New products will enter the market at the company’s established price. Then, within three months, … Next Page »

Michael Drummond is a member of the Guidelines Review Panels of the National Institute for Health and Clinical Excellence (NICE) in the UK, and is a principal consultant for OptumInsight. Follow @

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  • Tom

    Sounds like socialized medicine where there is no free market and innovation gets crushed as there is no reward for improvemnts. Thats what generics are for.

  • Stwart Jenssen

    This man needs in-patient drug treatment. This is his very first try at it. of course he doesn’t get it. he is still using. he is still thinking the wrong way. he is thinking he can fool the system. he doesn’t get it. Yet. But he will. The drug he is addicted to is the most powerful drug out there. IT’s wont be easy at all. he may take 10 years to get it. And if may take him one year. But the system has to allow him the opportunity of an in-patient. Judge Vigil has been the drug court judge for 15+ years. In my opinion it was HE who should have known this particular drug treatment was not going to work for him until and unless Block completed a 6 month or MORE in-patient program. Then and only then should he have been able to do the 9 month out-patient drug court program.

    ControlledSubstances.net