The Move to Value-Based Pricing for Prescription Drugs
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,regulators will assess the product’s value based on a five-point scale. During the three-month time, price can be negotiated and the company has the option of commissioning additional research.
This “back end” component raises the importance of late-phase, patient-focused or “real-world” research done by companies like OptumInsight Life Sciences to better understand and position products for payers, providers and consumers.
The U.K. will introduce compulsory, value-based pricing on all newly licensed drugs starting in 2014. That system will replace the current Pharmaceutical Price Regulation Scheme (PPRS), as well as the current guidance on the use of new drugs issued by the National Institute for Health and Clinical Excellence (NICE), although NICE will continue to evaluate treatments as at present. The U.K. will negotiate with companies on price to make new drugs more available based on four key factors: treatment value, innovation, societal impact, and meeting an unmet need in dealing with the burden of disease.
In contrast to Germany, the value-based price in the U.K. will be based on a detailed cost-effectiveness assessment on the front end, at approval and launch, and the company and regulators can revisit the price based on further real-world evidence—once again reinforcing the importance of late-phase research, including patient-reported outcomes.
Already there is talk about other European countries moving to similar value-based pricing models—not unlike the U.S. system. U.S. payers seek to hold down health care costs by encouraging providers and patients to use less-expensive, higher-value drugs—often generics —that are in a tier with the lowest or no co-payments. Branded and more costly medicines are in tiers with much higher co-pays, or no reimbursement.
As the European Union moves to value-based pricing, and potentially changes in how government health systems reimburse patients, it’s quite possible, I believe, that Europe and US could have similar systems within the next five years. In the still-evolving world of health care reform in the U.S., there is mounting pressure to hold the line on ever-more-costly medicines, including demonstrating measurable value to patients over existing therapies.
Clearly there are questions about how the new systems will work. Will pricing decisions depend on evidence, as opposed to negotiation? How will companies be rewarded for innovation, and if not, will that adversely affect new drug development?
Regardless, the growing move to value-based pricing places a much stronger incentive to focus research and clinical development on new pharmaceuticals that have a clear, measurable impact on patient health. The moves to tie pricing to value should also have an effect on reducing the power of drug marketing. Ultimately, patients and the health care system will hopefully benefit from the changes.