Pharma Focus Asia

Value-Based Pricing For Pharmaceuticals

Summary:

Health care reform and industry trends are driving pharmaceutical (pharma) companies to rethink strategy in their U.S. pursuits. The move to bundled payments, accountable care, comparative effectiveness research (CER), evidence-based medicine (EBM),1 and payments linked to performance are the direct result of regulatory and market pressures to reduce health costs without compromising safety and quality.

For pharma companies, these trends represent a paradigm shift in the structure of the U.S. market and call for innovative approaches to commercialization and pricing. In a new value-driven health care system, pharma companies will need to provide pharmaceuticals that demonstrate real, measurable value to stakeholders.

As a result, value-based pricing – the alignment of incentives between purchasers and manufacturers – is getting increased attention. In this Issue Brief, we summarize what is known to date about value-based pricing and identify opportunities for additional exploration.

Overview:

Under value-based pricing agreements, payers and Pharma companies agree to link payment for a medicine to value achieved, rather than volume.2 Agreements dictate price (and/or coverage) relative to actual (i.e., observed in real-world) performance.

A successful value-based pricing arrangement is “incumbent upon a clear definition of when the medication works, and when it does not work.”6 There must be a formal, well-defined, consensus value metric (Figure 2). Value attributes (e.g., outcome or performance variables of interest) must be collected, measured, valued, aggregated, and converted (using a decision rule) to evaluate whether the value metric was achieved. Also, there must be a consensus program of data collection, typically initiated early in the commercial life cycle. Value is relative to some alternative;7 incremental value over other treatment options is the basis for a higher price. The price must be linked explicitly by formula to the value metric of this program of data collection. A clear payment or reimbursement mechanism is required.

Pharmaceuticals are widely used: 57 percent of U.S. health care consumers take prescription medications and nearly half of such users take three or more prescription medications daily,8 according to Deloitte’s 2011 Survey of Health Care Consumers in the United States. National spending on pharmaceuticals increased 1.2 percent in 2010, according to U.S. National Health Expenditures (NHE) data (Figure 3). By 2014, spending on specialty pharmaceuticals is estimated to “constitute up to 40 percent” of U.S. pharmaceuticals spending.”9 The growing prevalence of chronic disease is likely to increase the use of life-long chronic disease pharmaceuticals by 2020, 157 million American adults are projected to have at least one chronic illness.11 Spending for pharmaceuticals in year 2020 is forecast to be $512.6 billion.12

According to NHE data, private insurance paid 45 percent ($117.0 billion); the Centers for Medicare & Medicaid Services (CMS) programs (Medicare, Medicaid, & Children’s Health Insurance Program [CHIP]) paid 31 percent ($81.3 billion); and consumers paid 19 percent ($48.8 billion) of the total $259.1 billion spent on pharmaceuticals in 2010.

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