The Fallacy of the van Westendorp Methodology

The Fallacy of the van Westendorp Methodology, in general, and especially in Pharmaceutical Pricing

If you want to get a pharmaceutical pricing expert’s blood boiling, present the results from the van Westendorp method and then expect the same pricing team to scale the results into the pending (demand/board/plan) forecast. The reason this angers us is that it’s not possible.

For those of you not as familiar with van Westendorp, I will provide a summary: Van Westendorp was a true genius. I’m speculating, but I don’t think he ever thought his method would be applied to complex products in dynamic markets. He proposed that products could be priced by asking the same consumer the following questions:

At what point is this product too cheap, such that you’d question the quality?
At what point does the product provide value, such that you’d seek it out?
At what point would you find it expensive, but still pay for it?
At what point is the product too expensive, such that you’d seek alternatives?

Dr. Bruce Isaacson, from MMR Strategy Group wrote this excellent post in 2013. http://mmrstrategy.com/why-you-should-almost-never-use-the-van-westendorp-pricing-model/

The results from the methodology look like this:

The Y axis represents percent of respondents at any given (unit) price, shown on the X axis

The result of this methodology is AREA where the product provides value. Demonstrated as ‘Pricing Space’ in the above graphic. Conceivably the manufacturer can select any price in the acceptable area and be successful. But where to price? Where in that AREA provides the profit maximizing price? You need more research. But the graph is actually just a confusing mess – what does it say about pricing at £5.50? Why is that a price we should consider? A full 50% of respondents think it’s CHEAP! Thus, maybe we should start looking at the RIGHT most point of the grey area – but even that doesn’t work, because you have equal number of consumers thinking it’s CHEAP and TOO Expensive…confusing.

So…Some pricing experts (mainly consultants who want to bill you to produce the van Westendorp) say that this methodology gives them a good starting point in which to ask questions during qualitative interviews. And I suppose this is true. It’s completely unnecessary, of course, because we have cognitive and actual pricing comparator analogues for almost any developmental product, service, or device in health care. These analogs readily provide the groundwork for our pricing studies. One only needs to be creative in seeking these out when designing qualitative studies. And it is precisely against these cognitive and actual comparators that we’ll be selling against…so you’d better know where you stand.

My favorite counter-example that demonstrates the ridiculousness of Van Westendorp is a beer at a sporting event. I’m a behavioral, analytical pricer. I don’t give as much credence to what people think they WOULD do, especially in instances where I can measure what they actually do. I’ve never done the experiment, but I’d be willing to bet a month’s salary that 90%+ of fans in line to buy beer at sporting events would describe the beverages as “too expensive” – they’d much prefer to buy an alternative; but in that context, they can’t, so they readily buy a product that they KNOW is overpriced.

But there are two more problematic and fundamental problems with this method. First, despite being intuitive, there’s NEVER been an academic study that has confirmed that van Westendorp works as well as other methods (like discrete choice or conjoint).¹ And furthermore, it’s extremely unlikely that one could be designed in the pharmaceutical arena – at least under the current global pricing landscape.

Think about it – ALL BRANDED PHARMACEUTICAL products are ‘too expensive’ for global payers. There’s a term for drugs that aren’t expensive: Multi-source Generics. Even more acutely, in the United States, where byzantine buffers between WAC and Net are required to appease PBMs and maximize profitability, payers will blanche at LIST prices that they will gladly ‘pay’ once discounts are put on the table. United States pharma pricing is simply too complicated to test using this overly simplistic method. Ah, but you say, we test the NET price in our van Westendorp. Well then, you’ve just lumped a plan with 100,000 lives in with CVS Caremark, ESI, and United. Pricing products with those mega payers pari passu to ‘Northeast Newark Carpet Associates Plan’ defeats the purpose of performing the research in the first place. Furthermore, doing weighted average pricing using a never-substantiated pricing methodology is akin to doing high-level probabilities for soothsaying.

So why do we see it used? Because the graph looks pretty. And it SEEMS analytical. It’s the difference between junior level, in-the-trenches pricing and Senior Executive box-checking. And it’s extremely difficult to put that much faith into the knowledge and expertise of the interviewers performing the study. But that’s what you must do. Pharma companies are at the mercy of these interviews. Payers ‘game the system’ and it’s much easier to put your faith in a pretty graph that SEEMS empirical, than to seek out the best, most knowledgeable interviewers you can find. (see below for quantification of how much van Westendorp might cost you…~35%? Yikes!)

Key takeaways:

Van Westendorp has never been academically confirmed
If your pricing people love it, ask tough questions and consider replacing them if they don’t understand this post
Resist the temptation to go with something that ‘feels right’ but doesn’t add to the discussion
Consider cognitive and actual comparators – in the end these are mental competitors to your product’s value proposition
It’s not tied to competitive response or net profit generation (even if weighted by lives)
Unfortunately, we actually buy things we think are outrageously expensive more often than we’d like – and this is especially true for U.S. payers
Find the best interview moderators you can find – they will generate better discussion guides too, but with the right interviewer the subtly will be captured and appropriate ‘push-back’ will be made

¹ Comments are active. I will edit this post – and credit the commenter if anyone proves this claim false. If, for nothing else, that I’d love to see the academic reference. Note also, that if the reference is in the Pharma industry, I will post a redaction and delete the post. You might also wanna check with these guys at Pricing Solutions, who found van Westendorp to be ‘biased…and 35% low’.

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.

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.

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.

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?

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?

Let’s stop pretending that Value-Based contracts are the future
…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)
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)
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…