Will Value-Based Drug Pricing Work?

By Camille Mojica Rey, Contributing Writer
Follow Me On Twitter @CamilleReyATX

This is the second in a two-part series on value-based healthcare. In Part I, Life Science Leader explored the role of the pharmaceutical industry in the shift toward value-based healthcare.

In August 2017, the FDA announced the approval of the first-ever gene therapy treatment. Novartis’ Kymriah was created to treat children and young adults with an aggressive form of leukemia called B-cell acute lymphoblastic leukemia, whose cancer has resisted standard therapies or who have relapsed. The treatment is unique in that it trains the patient’s cells to attack the cancer, but it is also the first-ever cancer treatment to come with a money-back guarantee. If the patient does not respond to the onetime $475,000 treatment within one month, there will be no payment to Novartis. This makes Kymriah a test case not just for the commercialization of gene therapy, but also for value- or outcomes-based payment models and arrangements.

“This is a step forward,” says Shefali Shah, an industry consultant who helps pharmaceutical companies price their drugs. Shah, who did not work with Novartis, says many of her clients are considering value-based payment arrangements. Supporters of moving the entire healthcare system to value-based pricing hope that these kinds of payment arrangements will create winwin situations for patients, payers, and companies that make life-saving drugs and treatments. The ultimate goal of value-based care is to bring down the cost of healthcare while rewarding innovation. What remains to be seen is whether value-based models will be applied on an industrywide basis, and, if so, will that bring down the cost of prescription drugs? Regardless, experimentation on the part of drug companies with value-based models has begun, largely in response to public outrage over the cost of prescription drugs and the U.S. government’s efforts to rein in those costs using value-based payment arrangements for healthcare providers.

The big question most industry experts have when it comes to the use of value-based models is: “What’s in it for pharma?” People view these models as being inherently fair. They don’t want to pay for something that doesn’t work. A “money-back” policy promotes trust. According to Shah, companies like Novartis who enter into value-based payment agreements are letting patients know they are “committed to them.” It’s also true that cost can get in the way of building a client base. Shah points out that many people who go into drug development do so because they are interested in the science of healing and potential for advancing patient care. “The leaders of some of these companies want to give the science a chance to succeed without being weighed down by cost.” This is already evidenced by the millions of dollars worth of drugs the industry gives away at little or no cost to those who cannot afford them. It also cannot be ignored that offering to give money back if a drug doesn’t work is just good PR. In the case of Kymriah, the value-based payment agreement helped to relieve some of the sticker shock experienced by patients and the general public when the approval was announced.

OBSTACLES TO VALUE-BASED DRUG PRICING
Currently, there are both logistical and social obstacles to the adoption of value-based models for drug pricing. The biggest obstacle at the moment, according to Shah, is the federal government’s current reimbursement system. The pricing of Kymriah, though steep, is fairly straightforward. “From a reimbursement standpoint, Kymriah doesn’t have a lot of the challenges other therapies would,” Shah says. That’s because Kymriah is administered on an inpatient basis. Drug reimbursement rates for inpatients are not based on average sales price, or ASP. So, having to give away some free of charge will not affect a measure that determines reimbursement to the hospital or physician. Also, because it is approved for a young demographic, Medicare is not involved. Medicaid’s Best Price (BP) applies to covered outpatient drugs, a definition which can vary from state from state but may provide the path to avoiding BP implications for Kymriah. “This is important because ASP and BP are considered some of the key barriers to indication-based pricing and outcomes-based payment for drugs that are used primarily in the outpatient setting and in older patient populations,” Shah says.

Another barrier to value-based pricing payment agreements is the way Medicare reimburses insurers for different types of drugs. Within Medicare, if you have a drug that is an oral, it is covered under Part D. Drugs delivered intravenously are covered under Part B. “Under Part D, there is far more pricing flexibility because the drugs are not priced on a per-milligram basis. You can have a 10- or 15-milligram pill that costs $10. The insurer doesn’t pay more for higher doses,” Shah says. So, patients with different dosage needs could pay the same amount. Under Part B, insurers and physicians are reimbursed on a unit price or per-milligram basis. Because some patients need higher doses, reimbursement calculations are thrown off. One possible fix for the problem is if drugs could be given multiple reimbursement codes. For example, if the dosage of a particular drug for the treatment of colon cancer is half of that for the treatment of breast cancer, diagnosis-specific codes would allow for these patients to pay the same for treatment with the same drug. “The big losers of offering indication-based pricing within the current system are these manufacturers and doctors,” says Shah. “Who wins? Insurers. The savings are not passed to the patient. Until some aspects of the Part B side of Medicare are fixed, it’s going to be very hard to adopt value-based models.”

"The leaders of some of these companies want to give the science a chance to succeed without being weighed down by cost."

Shefali Shah
Pharma Industry Consultant

Critics of value-based models maintain that, until the federal government changes the reimbursement system, many companies will not feel the pressure necessary to develop innovative value-based payment agreements. For David Howard, the question is one of motivation: “Why would a drug company rearrange their pricing to lower their profits?” Howard is a professor in the Department of Health and Policy Management at Emory University. He also questions whether these models would really bring down drug costs. “The price for a patient who does not get a benefit goes down, but the price for those for whom it works goes up. It seems it could be kind of a wash.” Howard also says that the administrative complexity required to implement a value-based pricing model would be prohibitive. “It’s hard enough for hospitals to track the outcomes of their patients, let alone drug companies writing tracking into their payment contracts.”

Other critics question the premise that the implementation of value-based models will result in lower prices. “Value does not inherently require lower cost,” says Louis Jacques, M.D., senior VP and chief clinical officer for industry consulting firm ADVI. “A focus on value could increase costs if there is a larger incremental increase in value as reflected in improved clinical outcomes for patients.” That said, Jacques says he sees inertia as the main barrier to the widespread implementation of value-based payment agreements. “People tend to be risk-averse in healthcare payment policy and see comfort in a known paradigm, even as they complain about its failings.” Likewise, the call for lower-priced drugs is, in part, due to a complicated healthcare payment system; most people don’t actually know the real cost of the drugs they take. “The public conversation on value focuses on healthcare because the ultimate consumer is insulated from the true cost of the purchase. We don’t seem to have similar public debates on the value of flat screen TVs or OTC drugs. I think that is because the marketplace accurately reflects value choices made directly by consumers. Arguably, the ongoing insulation suggests this will remain a challenge well into the future.”

HOW TO PREPARE
Like Shah, many industry leaders believe they see the writing on the proverbial wall: The U.S. healthcare system is already moving in the direction of value-based care. (See Part I of this series.) It’s only a matter of time, they believe, before the federal government begins to use these models as well. These leaders are already hiring pricing experts who are well-versed in value-based models. They are already thinking about ways to measure the value of their products and price accordingly. Shah says there are many ways to prepare for the shift to value- based pricing and, for those who see the value in using these models for themselves now, tips for success. First is starting the conversation around value and pricing early in the drug development process. “It is important for the industry to be thinking about the value that the drugs they deliver have as they are developing them,” Shah says. Large companies may have the expertise in-house, but midsize and small companies often do not. That is a problem the industry will have to address. “It is a complicated process. You need to have a value-based expert involved in the earliest stages. During Phase 2 is the best time. A lot of pivotal decisions are made during this phase that cannot be undone,” Shah explains.

Shah adds that working early with payers is also important. Novartis, for example, would have had to be working closely with the CMS to have announced the value-based payment arrangement on the same day FDA approval was announced. That’s the way to do it, Shah says. “It makes sense for companies to be working closely with CMS, other payers, and the FDA simultaneously.” Companies need to be thinking about value-based payment models in parallel with the clinical trials process. “It’s much easier to come up with a value-based price, especially for high-value treatments that bring significant value to patient care, before a drug hits the market.”

ADVI’s Jacques says pharmaceutical companies will have to learn to trust third-party evaluations of their products if a value-based system is to become a reality. “Value is demonstrated in head-to-head comparisons whether we are talking about drugs or automobiles. I think the automobile market has benefited from having trusted third parties do these comparisons, looking at factors that buyers consider as contributing to value (e.g., occupant protection in crashes, frequency of repair, load-carrying capacity, fuel economy). As we amass more therapeutic options even in just the biopharmaceutical space, it is a challenge to determine which choices bring the best value for individual patients in real-world settings.”

"It’s hard enough for hospitals to track the outcomes of their patients, let alone drug companies writing tracking into their payment contracts."

David Howard
Professor, Department of Health and Policy Management, Emory University

NEEDED CHANGES
The current government reimbursement systems remain the largest obstacle to the implementation of value-based models. Until these models become widely adopted, there are other ways to lower the cost of prescription drugs. One way, says Emory’s Howard, is to change the approval process for biosimilars. “A new pathway for approval of generics of biologics that are not exact copies would be one of the best ways to lower drug prices and encourage patients and physicians to adopt biosimilars,” states Howard.

Changes on the part of insurers and physicians could also bring down drug prices, Howard says. “Insurers and physicians should be more willing to push back on drugs that don’t give a lot of benefit. The healthcare system has shown a high degree of willingness to adopt new treatments regardless of how high the benefit or the cost. As a result, that gives drug companies a lot of pricing power. So if physicians were not so quick to adopt drugs with marginal benefit, drug companies would have to do more to compete on price.”

Whether value-based models continue to grow in popularity remains to be seen. “I think value-based pricing could be a step in the right direction, but likely will not solve every potential issue as medicine continues to advance,” Shah says. “As treatments become increasingly personalized, it will be harder to use one-size-fits-all payment models and the bundling of services favored by proponents of value-based healthcare delivery.”