Is The U.S. Ready For Value-Based Drug Pricing? by [email protected]

Wharton Patricia Danzon and Georgetown’s Jack Hoadley discuss value-based drug pricing.

A U.S. government proposal to introduce value-based drug pricing has the potential to change the business fundamentals for health insurance companies, drug makers and physicians, and what patients pay for their treatments. In a model where patients pay for drugs based on health outcomes, insurers must renegotiate what they pay drug companies, and pass on discounts or rebates to patients, which could include lower-priced health plans, say experts at Wharton and Georgetown University.

On March 8, the Centers for Medicare & Medicaid Services (CMS) announced a proposed rule to test new models to improve how Medicare Part B pays for prescription drugs and supports physicians and other clinicians in delivering higher quality care. The initiative “is designed to test different physician and patient incentives to do two things: drive the prescribing of the most effective drugs, and test new payment approaches to reward positive patient outcomes,” according to CMS.

For consumers, the move towards value-based drug pricing “is certainly a good step in the right direction,” said Patricia Danzon, Wharton professor of health care management.

However, she cautioned that “any attempts to rein in drug prices must ensure that they retain the incentive for R&D and provide some relationship between prices and outcomes.”

“The new drugs for cancer, hepatitis C and multiple sclerosis are coming in with high price tags and are starting to put new tensions on both public and private payers, and that is leading to new ideas for how to adjust prices,” said Jack Hoadley, health policy analyst and research professor at Georgetown University’s Health Policy Institute. The shift to low-priced generic drugs has also slowed in recent years as most drugs launched in the 1990s or early 2000s are already available as generics, he added.

Danzon and Hoadley examined how those changes will impact insurers and patients on the [email protected] show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Hoadley explained how high drug prices are driving the shift towards value-based drug pricing. oHo“When you see new cholesterol drugs on the market that cost $15,000 a year, whereas the previous generation of drugs to treat cholesterol were more like $2,000 or $3,000 a year — and when available as generic drugs, even less — that gives [a reason] for consumers to [want to] only use drugs that work well.”

“Any attempts to rein in drug prices must ensure that they retain the incentive for R&D and provide some relationship between prices and outcomes.”–Patricia Danzon

Danzon said cholesterol drugs are in focus particularly because newer drugs to treat the condition are more expensive than older drugs, which are now available in generic forms at lower prices, and work for the majority of patients. The other reason is that particular classes of drugs have “good surrogate markers that are measures of outcomes,” she added.

Cancer is another therapeutic area where outcomes-based pricing arrangements are common in other countries, “where say, tumor shrinkage or recurrence can be measured with reasonable accuracy,” Danzon said. “These arrangements work well when there is a good, predictive short-term surrogate marker,” she added. “Cholesterol levels happen to be one of those, and in several cancers there are good markers.”

Danzon noted that the idea of having some link between prices and the outcomes that drugs promise was used 10-15 years ago, but didn’t take off and spread widely. “Now, there is a widespread interest because the data systems to track the outcomes are much better than they were when they originally started,” she said. “There may be hope now of using [such data analytics] in a more consistent way.”

Issues to Address

A shift to outcomes-based pricing would encounter several humps, however. One problem is the “plurality of insurance companies in the U.S.,” which allows patients to move their health plans across insurance carriers. That makes it difficult to track the long-term effects of the medicines they take, said Danzon. She noted that such arrangements have worked well in Canada and some European countries that have a single-payer system. With many drugs, the clinical response may take several years, noted Hoadley.

Another concern relates to whether rebates that insurers may collect from drug makers reach the patients who have paid the premiums, said Danzon. Making health plans cheaper may be one way of compensating patients for outcomes that fall below expectations, said Hoadley.

Issues will also arise around how best to track the value that patients receive for the drugs they take. One option is to use surrogate markers, said Hoadley. These are substitutes of the disease being treated, such as cholesterol levels for cardiac problems. “The question is whether we structure the rebates based on surrogate markers, or on actual improvements in cardiac health, like heart attacks avoided or other cardiac events avoided or made less serious,” he said.

“The new drugs for cancer, hepatitis C and multiple sclerosis are coming in with high price tags and are starting to put new tensions on payers.”–Jack Hoadley

According to Hoadley,value-based drug pricing arrangements enable patients to receive medications that are expensive and where the potential results are uncertain. Insurers may typically not offer such expensive drugs with uncertain benefits in their health plans, but may relent if drug makers agree to value-based drug pricing, he noted.

However, in such cases, it could take time to identify the drugs where such arrangements work well and where the clinical indicators suit it, he said. Such agreements would also be difficult in the public sector plans such as Medicare or Medicaid because of regulatory obstacles “that make such plans impossible or difficult to do,” he added.

Countries that use value-based drug pricing models for drugs use two broad approaches, said Danzon. One is to include measures of incremental outcomes in setting the price of the drug, such as determining how effective a new drug is relative to an existing drug. The second way is tracking patients to see if the effectiveness is what it was promised to be, but this approach is less extensively used because it is more expensive and time-consuming, she said. However, the second approach is used in the U.K., Italy and Canada, especially for cancer drugs which are expensive and for which there exist good surrogate markers, she added.

The federal proposal on value-based drug pricing is scheduled to go into effect later this year or early next year, if the government decides to go forward, said Hoadley. The last date for receiving public comments was May 9, and the government will review them before making a decision, he noted.

Is The U.S. Ready For Value-Based Drug Pricing?

Value-Based Drug Pricing