The US drug pricing debate: Managing risks to results

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The unsustainable trajectory of the health care spending in the US is generating much dialog and consternation across a variety of stakeholders including governments, industry, media academic think-tanks and the general public. Prescription drug prices, despite comprising only 10% of overall spend, are a major focal point of this dialog.

While drug prices have been steadily increasing, much of the focus has been caused by the objectionable acts of a select few. Acts that have generated hearings on Capitol Hill with specific industry players, calls for self-regulation on drug prices by industry leaders, reviews of industry and pharmacy benefit manager (PBM) practices, and discussions of policy changes such as allowing the government to negotiate drug prices with companies.

The drug pricing environment

Drug companies have enjoyed a free-pricing environment in the US, which is different from every other major developed country in the world. In the US, companies are able to set drug prices and raise them without oversight or regulation by the government. Market forces, via payer, health system, hospital and PBM contracting, create the checks and balances for this system.

In recent years, drug price increases have been under scrutiny due to three main factors:

  • Manufacturers, facing a large number of brand products moving to generics, raised prices prior to the revenue cliffs to protect earnings
  • Products with little or no competition have sustained overall commercial performance through unrestrained price increases
  • While recent value-based reimbursement initiatives have put hospital spending in check, drug spending is seen as one of the last frontiers of ‘uncontrolled’ health care costs

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In response, the public, policymakers and media have called for reform. The pharmaceutical industry has been cast as a rogue villain taking advantage of the current status quo. Diverse stakeholders in the US, from Democrats to President Trump, have vowed significant action to change the status quo. How this change happens remains a core question.

Potential changes in the US related to drug pricing

  • Forced transparency related to drug price increases and list-to-net contracting specifics
  • Re-importation of drugs from Canada
  • Drug price negotiation by Medicare as a large block purchaser
  • Special rules for drug price increases for public payers, like Medicaid
  • Increase the government’s exercise of its march-in rights to grant additional licenses to the product if federal funds were utilized in its development
  • Test additional payment models to determine if efficiencies can be developed in the Part B and Part D Medicare drug programs
  • Extend Medicaid rebates to prescription drugs purchased under Medicare
  • Reference pricing
  • Expediting FDA approval of generics

As part of the pricing debate, there is a new reality for the life sciences Industry: a drug’s price increasingly must reflect the value that the product delivers. While value is a flexible concept, it is largely seen as a function of clinical benefit/cost. Value-based pricing as a conceptual framework places increasing burden on bio-pharma companies to justify a product’s price within both the context of its impact and relatively to other products on the market.

Future and innovative pricing models

While near term, it is unclear how much pressure the US government and regulatory bodies will exert on drug prices, longer term it is expected that the price-to-value relationship will expand. In addition to pricing decisions at launch, price evolution over time will be increasingly impacted by the degree to which a product’s impact is demonstrated in the real world.

Once a drug goes to market, continued observations will occur to allow payers to adjust access based on outcomes. Payers will glean insights using advanced analytics offerings that collect and examine data from real-world monitoring platforms or in collaboration with manufacturers. Real-world data taken from pre- and post- launch perspectives on the value of a drug are necessary to align with value-based pricing demands.

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In the not too distant future, the data supporting the analysis of impact/value is important because innovative pricing models will consider comprehensive sets of outcomes and expanded continuums of care to more closely determine the total cost of a drug or treatment plan. New pricing models will also mean managing patient populations while evaluating value, instead of tracking single patients.

By fully capturing a product’s effectiveness within a patient’s entire pathway and understanding outcomes within the contexts of patient populations, the value of an optimized treatment protocol can be realized. In addition, by integrating analytics within new pricing models, a broad overview of a drug’s value can be demonstrated to inform pricing decisions.

New commercial models are developing in response to these market pressures. While the future state is not certain, most stakeholders see three main pillars as driving the future state:

  • Providing an integrated offering across patient pathway, including product and services serving healthcare ecosystem
  • Forging more outcome-based contracting models in an integrated healthcare delivering system
  • Communication and leveraging ‘proven value’ of products/services tailored to much broader array of evolving customer groups

Value-based pricing

Risk-sharing and value-based agreements are changing the way value is determined. The evolving health care landscape is shifting risk from payers onto hospitals, accountable care organizations (ACOs) and other health care provider facilities. This places more decision-making power onto the provider and creates an opportunity to examine the link between products, care delivery and value. These shifting roles will require increased transparency of pricing protocols, which will enable greater pricing predictability and allow for better allocation of resources across stakeholder groups.

Now more than ever, innovation is needed to build trust and collaboration between the pharmaceutical industry, payer and provider stakeholders. By involving stakeholders in pre- and post-launch discussions, developing innovative pricing models that support comprehensive paradigms of treatment, and taking advantage of risk-sharing and value-based agreements, life sciences companies can better prove the value of a drug.

Managing risk to results

One thing is clear: change is inevitable and uncertainty will prevail, at least in the short term. Self-imposed or externally imposed, drug prices will remain under pressure with increased scrutiny on outcome measurement and value. With top-line growth challenged, driving sustained profitability and shareholder returns will require a focused re-evaluation of the cost and profitability drivers across the value stream. Converting this uncertainty into an opportunity requires a focused approach toward risk management.

“A bend in the road is not the end of the road…Unless you fail to make the turn.” – Helen Keller.

These short-term disruptions are a bend in the road, and as companies navigate the bend, a key focus on the right risks will keep biopharma companies on course to success. Companies that consider changes to pricing models, in terms of the many dimensions of risk and uncertainty that they need to manage, are more likely to leverage turbulent times successfully to their advantage.

Read our full report, The US drug pricing debate: Managing risks to results