The Future of Pharmaceutical Pricing…(it’s not what you’re being told)

Novartis’ launch of Kymriah has opened up a number of discussions about pharmaceutical pricing. Perhaps surprising to many, I’m going to completely sidestep that discussion. But a lot of the talk of Kymriah returns to ‘value-based’ pricing. So today I want to go back and reinforce the points I’ve been making about the potential that the future will look more like it does today. While it’s tempting to see a future, where indication-based pricing dominates, I think this marks complexity for complexity’s sake. What other industry can we think of where the WAY a product is used determines its value. What we need to successfully differentiate pricing is differentiation – think Avastin and Lucentis, for starters.

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Photo credit Zach Dischner

Yes, stock quotations vary depending upon the time duration of their delay. “Live” quotes are most costly, slight delays moderately priced, and 15-minute delay cheapest (often included for free).

You’d walk out of your luxury car dealership if the price that you paid depended upon HOW you were going to use the car. So why the tendency to think that this is the future of pharma? “Well health care is different” you hear the proponents saying.

How so? Healthcare buyers have every right to use the products as they see fit. Worst still, doctors in the U.S. have the explicit ability to use FDA approved drugs for any use they see fit – further complicating payers’ decisions as to how to cover products, and what to cover. So, the current conversation goes, the way to decrease drug prices, while balancing Pharma profits is indication-based pricing. But this simply provides doctors and insurers the incentive to document the use of the product for the lowest cost indication. Unless, of course, the manufacturer pays for the testing required to document the actual indication – and this introduces all sorts of privacy concerns…

And what about complexity? Healthcare is complex. To demonstrate the various and complex value of pharmaceuticals, the industry has hired numerous highly educated and brilliant health economists & pharmacoeconomic experts. I argue that during this period we’ve seen a HUGE increase in prices and an ever-decreasing value of these medications to the GENERAL population. Certainly, we can’t BLAME the PHDs. for this. They are a symptom, not the disease. But who’s stepping back from this insanity and asking whether this is the kind of system we want to have. I don’t want to be the only dissenting voice here.

Now that the industry has all these ‘value justifying professionals’ there’s a huge need to justify value.

My suggestion is, and will always be, to simplify pricing. To stick to simple, intuitive pricing schemes with some sometimes-I-win-sometimes-you-win outcomes. As I’ve argued, there’s more areas of complexity in value-based contracting than there are rays of light – at least now.  

Not today! Q&A on ‘Value-based Contracts’ in the U.S.A.

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I recently took issue with a well written, but incomplete article called Value-based Contracting: New, Necessary, but Not Easy from Simi Mathew in the online version of Managed Care Magazine.

Please stop and think of these questions, every time you see one of these articles – as the authors often don’t have the inside view from a pharma company or major payer.

  • Are the contracts tied, precisely and exactly, to the clinical trials that were performed by the manufacturer?
  • If they aren’t straight out of the label, do they rely on FDAMA 114 data including HEOR Studies?
  • Do they include, or must they include to make the financials make sense, product for zero dollars or a nominal value?
  • Would the payer be better off if the contract included another product that’s co-administered with the product in question, but manufactured by another company?

In they article Ms. (in fairness soon-to-be Dr.) Mathew correctly states:

Value-based contracting also creates a whole new set of logistical problems. Developing the infrastructure for an auditing method introduces a new upfront cost. To track outcomes, all parties require access to data that are typically siloed in individual health systems. Regulatory pitfalls must be anticipated. Discounts could trigger Medicaid best-price rules, 340B ceiling prices, or anti-kickback laws.

But merely pointing out that something doesn’t or can’t work isn’t enough. I’ll address the points one-by-one, and demonstrate how non-trivial these problems are.

  1. Developing infrastructure

What this point says is, ‘we’ve now entered into potentially adversarial relationships between payers and pharma, we need systems to handle this’. Some might argue that Pharma/Payer contracts have ALWAYS agreements between frenemies. ‘Value-based’ contracts take the adversarial relationship to a new level. The payers have all the data – and like any pharmacoeconomic study, success or failure will boil down to how small or large one defines the population – so it’s in their best interest to ONLY provide the data that tells the best story for them. And contracting in advance to get exactly the data you’ll need at the end of a multi-year study isn’t easy.

  1. Tracking outcomes

Here’s one that I don’t think anyone has thought of properly, outside the rooms where these deals are being discussed – and to give credit to folks I’ve seen on the Pharma side in Managed Markets teams.

Let’s contrast clinical trials with the real world. In clinical trials patients meet with their doctors, often weekly, and have HUGE incentives to stay on therapy. In the real world…unfortunately this isn’t the case. Here’s the problem, manufacturers are being held to task for something that’s the Doctor’s, Patient’s, and Plans’ responsibility, namely keeping the patient on therapy. Medical Possession ratio is a nice metric, but what if the medication doesn’t work because it’s sitting in a bottle on the medicine cabinet? Why should Pharma discount the drug there?

  1. Discounts and Federal Programs

No ‘money back guarantee’ under the current system, especially not for drugs with any Medicaid business. Simply put, until these programs are excluded from best price calculations pharma pricers will not have enough flexibility to make them meaningful. Not to mention the concomitant use of drugs from multiple manufacturers, often in high dollar therapies like oncology, make the most attractive discount scheme (discounting somebody else’s medication and not yours) the most attractive. Who’s going to do that to enable a competitor’s profits?

I’m not a regulatory or compliance expert so I’m not going to address the nightmare that is arguing that you’re not ‘promoting’ the use of these products through these contracts…I’ll leave that for others to outline.

So what can we do about it?

  1. Let’s stop pretending that Value-Based contracts are the future
  2. …Until we see meaningful regulatory changes at the FEDERAL level it will be difficult for payers and manufacturers to craft these agreements in ways that will enable their broad acceptance
    1. Change best price to exclude these kinds of contracts
    2. Loosen promotional activities directly related to FDAMA 114 and provide clear direction that HEOR teams can and should sit, not with medical but with Managed Care (silo them if that makes sense)
    3. Provide mechanisms for various companies to come together to provide appropriate discounts on bundles of products including MULTIPLE manufactures (weighted average value approach)
  3. Assume that highly publicized ‘Value-based’ contracts look and feel a lot like every day managed care contracts (because you don’t and can’t know what they say unless they’re made public)
  4. Invest in a trusted, objective third party systems to collect ALL the data and publicly report the results (I support a For Profit technology-based approach)

Until we see ALL these points addressed we won’t see the dawn of the age of the Value-Based contract. Another time I’ll write about how such adoption might continue to DRIVE UP the WAC prices for products in the United States…