Pharma: Please stop blaming R&D for high prices!

I cringe every time I hear a CEO or pharma policy representative suggest that high prices are necessary to encourage innovation. It implies that pharmaceutical prices ARE high because of the investments made to get products approved. Thinking in this way is a mistake. It’s falling victim of the Sunk Cost Fallacy – as the value of a product in the market is completely disconnected with the amount of investment to get that product to the market. Let’s look at this in more detail.

For years, Pharma, PhRMA, and Bio have made the argument that we need to have high prices (particularly in the United States) to enable investment in future biopharmaceutical research. However, the monies flowing into biopharma flow from the high profitability of the industry, NOT directly from high prices. In fact, high prices COULD divert broad scale research AWAY FROM diseases that affect large portions of the population, i.e. diabetes, heart disease, common forms of cancer, by making orphan diseases ‘artificially’ profitable. This is (potentially) fuel for another piece in the future.

Here I want to talk about what we really use to price pharmaceuticals in the United States. The process is simple. We take all possible clinical outcomes, model the financial offsets (also known as HEOR) if they are available, and talk about potential patient populations – both at launch and over the drug’s lifecycle. These are presented in a brief designed to mirror a condensed form of the pharmacy and therapeutics dossiers produced by U.S. payers during the review process. Yes, these dossiers do benefit from and include various outcomes of the R&D process. But there’s not a single payer in the U.S. – state, Federal, or commercial – who cares how much money was invested to produce those clinical outcomes.

Once these value propositions are completed we debate their merits and try to understand where the product fits within the current set of options available. We attempt to include developmental products that will likely come to market during the products’ protected period. We include competitive product characteristics and trade-off various products’ value propositions. Generics & biosimilars will typically offer more value-for-money versus branded alternatives. Many payers have generics first preferences. Understanding this, we work with payers to understand their preferred treatment pathway, and where the new agent fits within that treatment pathway. These treatment pathways create the drug Tiering and controls that define coverage. Depending on the therapeutic area’s unmet need Step Edits (through Generics or Brands) may be appropriate. Depending on the clinical outcomes from misuse or off-label use, prior authorization may be appropriate.

Again, at NO TIME do we talk about the investment required to bring products to market. Because these investments aren’t relevant to the value of the products we produce. Payers don’t care.

Imagine a couple of examples –

First, my wife and I purchase a property in the mountains, far off the road and away from others. We invest to bring expensive building materials to the site and construct our dream home. After we’ve built the home and enjoyed it for years, we decide we want to sell the mountain home to purchase something else. Buyers will come to the property and evaluate the value we’ve created relative to the replacement cost, building from scratch, and their perception of the value of being able to live/vacation at the property. They won’t and shouldn’t care how much money it cost us to build it – instead their perception of value will stem from what we’ve created.

Another example…imagine if the film industry constantly reminded us that we need to pay more for movies in which they’ve cast expensive stars. They’d say, ‘public, you’d better go see this movie because we spent $200m to film it!’ and ‘if you don’t go see these fancy movies, we won’t make them anymore.’ They don’t say that because it’s laughable. Everyone knows that stupid movies with expensive stars that don’t make money flop. And Hollywood, Bollywood, and now China will continue to make movies because SOME make a lot of money.

We need to get more sophisticated about the way we talk about value creation in the biopharma world. It would be great to have a consistent view of value creation and reward – and I believe that will happen in my lifetime. In the meantime, it’s important to discipline yourself, your organization, and your leadership to avoid falling for the sunk cost fallacy when pricing pharmaceuticals & talking about your pricing. Because those of us in the know see through it, and it sounds silly to pharmaceutical outsiders.

Ask the Expert: The Difference between Qualitative and Quantitative U.S. Payer Research – with Use Cases

One of the biggest sources of confusion with my clients is whether to do small N or larger N qualitative payer research versus adding in Quantitative research. While the needs of each organization are different, here is my take.

Qualitative Payer Research:

One thing to keep in mind in any United States payer study is that the clear majority of lives in the U.S. are at least influence by the ‘Big Three’ PBMs. Estimates vary, but it’s clear that >80% of lives are covered by the biggest PBMs. Thus, I’ve made the argument that increasing the number of respondents can increase project budget without providing additional incremental insights. This is a little different if you find yourself with significant behavioral or attitudinal segmentation. But as I’ll demonstrate below, qualitative methods aren’t as good as Quantitative studies for market segmentation anyway.

So, what’s the right number of respondents? I consider the specifics company confidential to Chiral Logic – and I have a surprisingly high number of readers of my blog from competitors (thanks guys!) – but the basics are, if you can get 50% of lives for an early stage asset (and that’s all the money you have for a study…) you MIGHT be alright. Following the bouncing ball – you can get a ton of marketing insights, especially if response is homogeneous, from 10-12 conversations. The trick is you need the RIGHT Payers. It helps if your moderator has years of experience and isn’t intimidated to push back.

Large N (25-30 respondents) projects are often requested by pharma companies who want to go the extra mile. And, if your guide is too long to get through in an hour, or if you expect heterogenous responses, this might make sense. We moderators hate these studies though – it’s very difficult to stay excited about a project after the 25^th HOUR of asking the same questions to different payers. Beyond that, you’re retreading the same path, repeatedly…

Quantitative Payer Research:

Quant is great for market segmentation. It’s ESSENTIAL to translate your qual research into the forecast and your qual was reported by respondent. (Chiral Logic doesn’t report our findings by respondent, instead using a methodology that can be directly tied to forecasting). Unfortunately, quant is expensive, requires longer timelines, requires a different skillset & partners, and can return the same insights that were found in qual.

Typical Use Cases:

Development assets typically need a small N assessment to get a developing picture of the competitive landscape, likely restrictions both at launch and at maturity, net pricing, and what kinds of value substantiating programs will maximize access.

Before launch (using either information from FDA submission or expected equivalents), I like to complete a comprehensive payer qual study. This study should be sufficiently powered to uncover attitudinal and behavioral segmentation. One of the benefits of the Chiral Logic approach is that we can scale the study, while it’s happening, to generate the insights required.

Then, in cases where forecasting requires, a follow-on quant study can fill in the gaps and eliminate any strategic discrepancies. Also, there are some launches that are so important to the company’s future that no stone should be left unturned…and in these cases a qual/quant methodology can be optimal.

There’s always the problem of getting a ‘normal’ distribution of U.S. payers (something that we’ve been thinking about for years and have a reasonable work-around). But this, I’ll leave for another blog. As my thoughts on the inherent dangers of these developing on-line platforms where marketers can communicate ‘directly with payers…’

Wait! This isn’t how it’s supposed to work…

As large hospital systems buy up independent medical practices, the cost of health care rises

This piece is worth listening to for a number of reasons. One of my pet peeves since our children’s birth is that consumerism doesn’t apply well to births in the United States. I’m all for women who elect to have a C-section. Personally, for our family that wasn’t the right choice, as my wife did extensive research that suggested that natural births produce better outcomes for the babies.

You can dispute that finding, but what you can’t dispute is that ELECTING to have a C-Section drives up the cost of care in a way that should justify increased costs to the family of the woman making that decision. Planned C-sections are easier to schedule for the doctor and provide an increased revenue stream – as per the report. Thus patients should bear the differential price, thus driving down costs for the rest of us.

This doesn’t apply to C-sections for medically necessary reasons. However, again we could look to the Finland and other developed nations with much lower C-Section rates AND higher infant and maternal survival rates. Nobody should be financially penalized for interventions that are medically necessary.

So why are reimbursements twice as high for OB-GYNs associated with large group practices? Oligopoly Power of course. And herein lies the pathway to truly reducing the (out sized) costs in our healthcare system – remove the perverse incentives for doctors to join these groups, and you’ve taken one step closer to reducing overall costs.

The increase of high deductible health plans SHOULD contribute to reducing costs – but only if healthcare consumers are smart enough to ask questions about cost and become educated enough to make informed decisions.

The most interesting part of this piece for me was the suggestion, toward the end, that consolidated group practices don’t improve the quality of care:

But Kristof Stremikis, associate director for policy at the Pacific Business Group on Health, which represents employers, said that studies suggest that is not the case. “All of the evidence that we see shows that the quality in these larger systems is the same or worse,” he said.

Jenny Gold aught to be careful not to bite the hand that feeds her. But a strong tip of the hat to the impartiality and independence of Kaiser Health News as I’d imagine that the Kaiser organization would argue that they make every effort to improve the quality of the care that they provide.

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…