In the face of a continuing upsurge in the price of prescription drugs, private insurers, public payers, and government policy makers are looking at “value-based pricing” as one way to bring drug costs under control.
As things now stand, most prescription medications for sale in the United States are priced two to six times higher than they are in the other major industrialized countries of the world. For those Americans whose lives depend on some of these drugs, these staggeringly high costs can bankrupt them or force them to borrow on the equity in their homes.
In early March 2016, the Obama administration introduced a proposal that could in time dramatically alter the way Medicare pays for prescription drugs by linking payments to the drugs’ effectiveness, not just their prices. As it now stands, Medicare is prohibited from negotiating prescription drug prices with drugmakers.
Part B Drugs First Target
At least initially, the new proposal would cover only a small segment of the drugs for which the Centers for Medicare and Medicaid Services now pays. The administration’s initial target is drugs, such as chemotherapeutic agents, that are administered by physicians under Part B of Medicare. In 2015, such drugs accounted for only about $20 billion of total annual U.S. prescription drug spending that is closing in on the $500 billion mark.
Of the proposed new pricing formula, Patrick Conway, M.D., chief medical officer at CMS, said that it “would test how to improve Medicare beneficiaries’ care by aligning incentives to reward value and the most successful patient outcomes.” He went on to say that “the choice of medications for beneficiaries should be driven by the best available evidence, the unique needs of the patient, and what best promotes high-quality care.”
Predictably, the pharmaceutical industry was decidedly less enthusiastic about the prospect of the new CMS pricing formula. Allyson Funk, a spokeswoman for the Pharmaceutical Research and Manufacturers of America, said, “Proposing sweeping changes to Medicare Part B drug reimbursement without thoughtful consideration and stakeholder input is not the right approach and puts Medicare patients who rely on these medicines at risk.”
In an opinion piece published in the December 15, 2015, issue of the “Journal of the American Medical Association,” Peter B. Bach, M.D., and Steven D. Pearson, M.D., call into question the rationale for the “relatively unrestrained pricing power” of the drug industry. They note that under current law drug manufacturers can set the prices that CMS pays for new drugs, “and they also benefit from significant negotiating power over private insurers.”
Need Seen for Change
Both Drs. Bach and Pearson lead programs dedicated to setting drug prices that are commensurate with their value. Dr. Bach, director of Memorial Sloan Kettering’s Center for Health Policy and Outcomes, leads DrugAbacus, while Dr. Pearson heads the Boston-based Institute for Clinical and Economic Review. Each of these initiatives seeks “to convert evidence about the improvement in patient outcomes a drug provides into a price for that drug compared with other treatment options.”
Yet another effort to tie drug prices to their track record in treating patients was announced late last year by Express Scripts, the country’s largest pharmacy benefits manager. PBMs serve as intermediaries between drug manufacturers and the insurers and private corporations that pay for the drugs used by their insureds or employees.
Express Scripts Initiative
In mid-November 2015, Express Scripts announced that beginning in 2016 it would introduce a new value-based reimbursement model. The company said that it would first use this new reimbursement model with cancer drugs, which is also the first target of the proposed value-based pricing model at CMS. However, if the trial with cancer drugs goes well, Express Scripts indicated that it would next target anti-inflammatory medications.
In discussing the company’s plans for the new reimbursement model, Steve Miller, M.D., medical director at Express Scripts, noted that “many of these drugs are indicated for lots of different diseases, but they have variable success.” He went on to say that drug manufacturers can opt into value-based pricing program to ensure that their products are covered across the board. He also said that drugs that surpass all others in the treatment of certain cancers would be covered even if their manufacturers decided not to sign on to the program.
Those drugs with variable results in treating different cancers might only be covered by Express Scripts for use against the cancers they’ve been shown to be most effective if their manufacturers choose not to participate in the program. This tactic would be employed only in situations where suitable alternative drugs are available.
Other Value-Based Initiatives
According to an article posted at FiercePharma.com, the Express Scripts value-based pricing initiative on cancer medications is inspired at least in part by similar programs launched by the American Society of Clinical Oncology and Memorial Sloan Kettering’s Center for Health Policy and Outcomes. ASCO is experimenting with a drug-evaluation framework that rates the benefits, side effects, and costs of various treatments. At Memorial Sloan Kettering, Dr. Bach’s DrugAbacus advocates basing a drug’s price on the results it produces in different indications.
As an example of how such a program would work, Dr. Bach cites the cancer drug Erbitux. Under Bach’s proposed value-based pricing formula, the drug would warrant a monthly payment of $10,319 when used to treat premetastatic head and neck cancer, an application where it has proven to be highly effective. However, the same drug has been shown to be far less effective in treating head and neck cancers that have recurred or spread and thus would warrant a payment of only $471.
Even a couple of top executives at major pharmaceutical companies have shown some support for the pricing of drugs based on their outcome or value. However, according to a report at Reuters.com, the chief executive officers at Novartis and Roche believe that U.S. electronic medical records systems aren’t yet capable of accurately tracking a drug’s role in reducing hospital stays and preventing further trips to the ER.
Joe Jimenez, the CEO at Novartis, and Roche CEO Severin Schwan both agree that the current pay-per-pill approach cannot be sustained. However, they both feel that the inadequacies of current medical record keeping have been the primary obstacle to changes in the way drugs are priced and reimbursed by insurers and governments.
Hurdles to Overcome
Acknowledging that all parties seeking such changes face “a complex road,” Schwan said that it would be wrong to characterize his hesitancy as resistance. Rather, he said, it is simply the recognition that there are “practical hurdles that need to be overcome.”
Both Novartis and Roche have made limited efforts to adopt new pricing strategies tied to the effectiveness of some drugs they sell. According to Reuters, Roche is testing new pricing formulas for the cancer drugs it markets in Italy, while Novartis is experimenting with one customer on its Gilenya multiple sclerosis drug.
However, a broader rollout of outcomes-based pricing is unlikely before some of the more daunting barriers to its expansion are removed, said Schwan. Among such barriers, he cited privacy concerns, major IT infrastructure changes needed to accommodate value-based pricing, and health care practitioner resistance to what many see as more bureaucracy.
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Don Amerman is a freelance author who writes extensively about a wide array of nutrition and health-related topics.
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