Introduction

Balancing patient access to therapeutics in the face of rising healthcare costs is the central challenge facing healthcare stakeholders. This issue is no longer exclusive to emerging markets, where affordability remains challenging despite government reforms and a rapidly improving economic picture. In developed markets, new waves of scientific innovation have produced breakthrough therapies for grievous diseases such as cancer and hepatitis C. These life-saving products frequently come with list prices near or above $100,000 per patient, and some must be taken chroniclly, straining the budgets of health systems after years of economic austerity. Kenneth Frazier, chief executive officer (CEO) of Merck & Co., notes, “The good news is that [biopharmas] are on the verge of incredible breakthroughs if we don't kill the innovation engine. The bad news is unless we make changes in the system, people won't be able to afford the wonderful things that are coming out of our pipelines” [1]. This comment demonstrates that biopharmaceutical companies understand that getting the patient access/drug pricing balance right is essential.

In recent years, the issue of the affordability of prescription drugs has become more urgent, playing out in the pages of high-profile scientific and medical journals, mainstream news outlets, and, increasingly, on social media sites such as Facebook and Twitter. Oncologists and infectious disease specialists, for instance, have questioned the high costs of new cancer and cystic fibrosis drugs, portraying the potential financial harm as an adverse side effect [2,3].

News outlets have focused their attention on price increases associated with older, established biopharmaceutical products, intensifying public skepticism of one argument manufacturers have traditionally used to justify their pricing practices—the high cost of R & D required to bring new products to market. Indeed, after a series of articles in the US mainstream media about major price increases associated with Mylan's EpiPen (epinephrine injection), the issue has become so contentious that a number of biopharmaceutical companies have promised to be more transparent about their drug pricing decisions [4,5].

The transatlantic disparity in drug pricing, which has resulted in much higher drug costs in the United States than elsewhere in the world, has also been a critical issue. So, too, is the growing influence of social media, which has given consumers new channels to discuss pricing disparities in near real time, even as other digital tools make product pricing more transparent [6,7].

Beyond pricing transparency, advances in digital health will directly affect traditional biopharma pricing strategies. As discussed later in the chapter, biopharma companies will need to use emerging digital tools to capture real-world evidence to demonstrate product value in the data-rich, highly networked environment in which they operate. These data, coupled with powerful analytics capabilities, will help accelerate new pricing models between biopharma companies and payers that are less transactional and more collaborative.

The Economics of Drug Pricing

The economic drivers that guide the pricing of televisions, mobile phones, and clothing do not apply to the pricing of drugs. There are multiple reasons for this, including market exclusivities. Market exclusivities protect a new branded drug from competition for some limited period of time. These exclusivities are a trade-off that governments—and, by extension, society—make to encourage drug companies and the investors who back them to do the hard and risky work of drug development, which can take up to 10 years and cost billions of dollars [8]. At the end of this period of exclusivity, competitors are free to create alternate versions that, at least for traditional oral small molecules, are much cheaper than the original branded versions.

As a result, biopharma companies have only a limited window to recoup and maximize their research and development investment. If development costs are too pricey or the path to market is too uncertain, it can be difficult for drug companies to justify investment and they will exit a therapeutic area. For instance, beginning in the late 1990s, many drug companies stopped investing in antibiotic research because the space appeared to be well served by existing, low-cost generics; the need for new, higher-powered anti-infectives was less acute and so was the willingness to pay for them. However, a little over a decade later, a public health crisis directly tied to this lack of investment has emerged: the rapid increase in drug-resistant microbial infections. Recognizing this problem, more than 80 biopharma and diagnostic companies called on governments to consider new economic models to reinvigorate antibiotic development [9,10].

Market exclusivities are just one reason drugs are priced differently from other products. Another key reason is that the end user of the medicine—the patient—has traditionally been divorced from bearing much of the cost of treatment as a result of public health systems or private insurance. This scenario has resulted in a situation where patients themselves are not required to prioritize price when making decisions about their prescription drugs, further skewing the market forces associated with healthcare.

But the primary reason for high drug prices stems from the structure of the current fee-for-service-based healthcare system, which relies on unit-based pricing methodology. Indeed, the system is too one-dimensional for the current needs as it does not prioritize payment based on either improved patient outcomes or the ability to reduce total healthcare costs. This has resulted in the creation of incentives that encourage drug companies to adopt pricing practices that are driven by what is possible rather than what others stakeholders might deem reasonable.

Biopharma companies have responded to the existing market incentives in rational and predictable ways. They have established public, unit-based list prices in individual markets and then negotiated specific, undisclosed discounts or rebates based on in-country regulations and health technology assessment criteria. This approach has had two benefits: (1) it is relatively simple to implement and (2) it preserves pricing flexibility, especially in markets where reference pricing is the norm.

Biopharma's pricing model is now under threat (Figure 7-1). As the costs of R & D and sales and marketing continue to accelerate, cost-constrained payers cannot afford to pay for every new innovative product. As a result, they have adopted blunt mechanisms that limit access to therapy for many patients. Moreover, as drug costs have become a bigger line item in national budgets, stakeholders are calling for increased transparency around true R & D and commercialization costs, since those metrics in the past have been used to justify high drug prices [11].

Global Pricing Regulation

Total drug expenditures as a percentage of health costs have remained consistent in most major markets since the 1960s according to the Organisation for Economic Co-operation and Development [12]. Since 2013, however, drug expenditure inflation has started to stand out relative to other healthcare costs, such as imaging, laboratory testing, and in-patient procedures. Much of this can be attributed to a wave of innovative branded products that command high prices [13].

Since 2000, the US Food and Drug Administration (FDA) and the European Medicines Agency (EMA) have each approved more than 500 new medicines. Analysts predict that, by 2020, another 200, primarily high-cost specialty products, defined as complex, often injected, therapies to treat serious diseases, could be approved. If all of these products reach the market, it could result in an additional $600 billion in spending worldwide just on pharmaceuticals. “The budgetary impact of these new innovations is huge,” said Douglas Long, vice president of Industry Relations for IMS Health at a November 2015 Pharmaceutical Forum convened by the US Department of Health and Human Services [14].

Already stretched to provide access to existing products, payers worry about the trade-offs required to make room in their budgets for new therapies. Governments in most major markets, meanwhile, have either sharpened existing cost-containment measures or responded with sweeping legislation to keep their systems sustainable:

• In Europe, where a full portfolio of cost-containment measures already exists, countries have tightened and supplemented their policies.
• In Japan, the government has instituted biannual drug price revisions, while promoting the use of generics.
• In the United States, the 2010 Affordable Care Act expanded health insurance to the uninsured and legislated reforms that reward providers for delivering better health outcomes at lower costs, but required biopharma companies to pay additional rebates.

As Figure 7-2 shows, these reforms vary depending on the specific market in question, resulting in markedly different pricing regulations around the globe. As a result of these differing regulations, it is essential for biopharmaceutical companies to develop pricing strategies that are global in scale but can be deployed at the local level. Only by adopting such a global-local mentality will manufacturers be able to address the price sensitivities of the various regions in which they operate, where different degrees of market competition combine with policy and social expectations to allow—or limit—product pricing flexibility.

European Union: A Portfolio of Pricing Controls

Austerity in the wake of the 2008 global financial crisis and a distinctive social contract with citizens have enabled single-payer governments in Europe to take a firm line on drug pricing. Although specific regulations vary country by country, most European Uniton (EU) nations use variations of the following mechanisms to manage drug prices and the costs of medicines:

• Strict health technology assessments (HTAs) to define value based on efficacy, relative therapeutic benefit, and, increasingly, cost effectiveness
• Positive and negative drug lists to control the availability of therapeutics
• Internal and external reference pricing

Before drugs can be marketed, they must receive regulatory approval from the EMA. However, marketing approval is only a first step to coverage. Pricing and access decisions occur at a country level, and most are strongly influenced by HTAs. HTAs are defined as systemic evaluations of the properties, effects, and impacts of health technologies and interventions and are an important step in determining reimbursement. According to a 2015 World Health Organization survey, 80 percent of European countries use HTAs to determine reimbursement and benefits related to medicines, medical devices, procedures, and health services. Each country uses its own guidelines when developing and issuing these value assessments; most prioritize medical need, clinical effectiveness, effectiveness relative to existing therapies, and budget impact. Increasingly, cost effectiveness is also important. To promote sharing and reuse of HTA information, in 2014 the EU created a voluntary network including EU member states, Norway, and Iceland [15]. This initiative builds on EUnetHTA, a network of national HTA agencies, research institutes, and health ministries designed to help inform common approaches to drug assessments and health policy [16].

In addition to using HTAs, many EU member states have positive and negative lists that determine which drugs will be fully or partially reimbursed by the health system (positive lists) and which will not (negative lists). As noted in the above discussion of HTAs, the criteria used to determine reimbursement status vary from country to country and are influenced by health and social policies as well as economic constraints. The United Kingdom and Germany use negative lists; France, Italy, and Portugal are among the countries that use positive lists. Spain uses both positive and negative lists [17].

The final mechanism European countries use to reduce drug expenditures is reference pricing, which comes in two forms, internal and external. Countries that use internal reference pricing set the reimbursement total for a medicine by comparing the prices of equivalent products. Equivalency can be defined narrowly: products that share the same active ingredient. It can also be defined more broadly (and controversially) as products with “therapeutic equivalence,” in which the medicines are judged to have the same—or similar—effects. This broader definition is used in Germany and the Netherlands [18].

Active ingredient-based groups are most commonly used to regulate the prices of off-patent medicines. The reference price then applies to all the medicines within these groups of comparable products. In some cases, a generic drug in a particular category may decrease the prices of all comparable therapies, including those still on-patent. This is the case in Germany, where the practice can limit use of on-patent medications that are therapeutically equivalent to lower-cost reference products. That is because patients may have to pay the price difference between the on-patent medicine and the cheaper alternative unless a manufacturer lowers its price to the reference price level [19].

External reference pricing involves using the prices of a medicine in other countries to derive a benchmark price that serves as the basis for further negotiations or pricing decisions. As of 2015, 25 European countries use the mechanism for at least some of the medicines they cover. However, the basket of countries used as a reference varies widely. Countries commonly used in reference pricing decisions include France, Italy, Spain, Germany, and the United Kingdom. Croatia and Greece are also sometimes referenced, but their inclusion is controversial given drug prices in these markets are reduced because of the lower incomes of their citizenries.

A 2013 RAND study suggests that, as a cost-containment strategy, external reference pricing may ultimately have limited impact. That is partly because pharmaceutical companies have responded to the policy by launching their products first in countries with more flexible pricing policies and delaying—or avoiding altogether—countries that would require much lower prices. While that approach avoids any negative effects that might stem from international pricing benchmarks, it has the potential to contribute to drug shortages in certain markets and further complicates the biopharmaceutical industry's reputation as trusted stakeholder [20].

Japan: Direct and Indirect Price Controls

Because of its elderly population and rising chronic disease burden, Japan has also taken a strict line on drug prices as one means of minimizing its health expenditures and the potential pressure on its national debt. One of the government's most prominent initiatives is to increase generic prescribing volume from 52 percent in 2014 to 80 percent by 2020 and to simplify generics pricing, which until 2014 was highly variable. In Japan, generic reimbursement prices are set by the government at a threshold of 70 percent of the branded drug's price or 60 percent if there are more than 10 generic alternatives [21].

Biannual price cuts on products that do not meet an innovation threshold are another mechanism Japan is using to hold the line on drug prices. The government has linked the National Health Insurance (NHI) prices of off-patent medicines to those of generics and will impose statutory price cuts every two years until the rate of generic utilization reaches 60 percent. The country is also contemplating using health technology assessments to re-price already marketed products. If implemented, these assessments will make it harder for biopharma companies to obtain premium pricing for their products unless the medicines are deemed both innovative and cost effective.

At the same time, Japan is taking strides to bolster access to breakthrough medicines. It extended a pilot program started in 2010 that allows premium prices for innovative new medicines and protects them from the biannual price cuts until loss of exclusivity [22].

United States: Prioritizing Value to Control Drug Costs

For now, the highly fragmented US healthcare system remains the most “free” market in terms of access and drug pricing. However, more than 50 percent of US reimbursement is from public payers such as Medicare, Medicaid, the VA, and states. Even here, signs of stress as a result of rising drug costs are evident. A 2017 analysis by the pharmacy benefits manager Express Scripts, which manages prescription utilization for nearly one-third of Americans, estimates price inflation for branded drugs increased 208 percent from 2008 to 2016, compared with a roughly 14 percent increase in the consumer price index during the same period.

As noted, much of this increase was due to greater use of specialty medicines. According to Express Scripts, projected spending on specialty medicines will account for nearly 50 percent of total drug spending in the United States by 2018. To keep a lid on costs and encourage price sensitivity in consumers, payers are piloting new value-based insurance designs; they have also passed along some of their costs to consumers and employers through increased drug co-pays and premiums [23].

Unlike in Europe and Japan, where governments exert some level of pricing control, the US government does not directly negotiate drug pricing via its Medicare and Medicaid programs. US payers and health systems have sought to gain negotiating leverage in this environment by consolidating into larger organizations that have a greater ability to demand price concessions in high cost therapeutic areas. Thus, a wave of acquisitions in the commercial payer space has reshaped their influence in the marketplace, concentrating decision-making power within fewer organizations that represent more Americans [24–26].

Without direct price controls, what has emerged in the United States is a fragmented system in which individual payers or their representatives broker specific deals with biopharma manufacturers to gain a rebate on some portion of the cost of the medicine. In exchange for these rebates, payers give the medicines better positions on their formularies, essentially lists of branded and generic drugs that will be reimbursed by insurance. The better the formulary position, the fewer the market access hurdles for the product, including lower co-pays for patients. As a result of these lower market access barriers, drugs can achieve greater utilization and market share.

Companies typically pay higher rebates—and, thus, have less pricing flexibility—for me-too products in competitive therapeutic areas than they do for first-in-class or best-in-class products, where, traditionally, the reimbursement hurdles have been lower. But even in the United States there are signs that the window of pricing flexibility for best-in-class or first-in-class products is shrinking. Gilead Sciences, for instance, only enjoyed pricing freedom for Sovaldi (sofosbuvir) during its first year on the market when the drug was the sole all-oral hepatitis C regimen. Indeed, on the day a competing product, Viekira Pak (ombitasvir/paritaprevir/ritonavir with dasabuvir), was approved, Express Scripts announced it would no longer cover Gilead's treatment in favor of AbbVie's cheaper product [27]. As a result of its decision, Express Scripts estimated it would save its clients, employers, and some government plans more than $1 billion, while the US healthcare system as a whole would bank more than $4 billion due to an “industry-wide ripple effect” [28].

Increasingly cost constrained, US payers now respond cautiously when determining patient access to new high-priced agents. A case in point is when Praluent (alirocumab) won US regulatory approval in 2015, most payers delayed their coverage decisions until a similar product, Repatha (evolocumab), was approved one month later. In this instance, payers wanted to wait in order to leverage marketplace competition when negotiating access to this class of drugs, which can cost more than $14,000 annually. Since launching, many payers have continued to restrict coverage, even though outcomes studies showed a reduction in the risk of cardiovascular events [29].

Competing Definitions of Product Value Complicate Drug Pricing

In most industries, the price of a product reflects its value to the consumer. By and large, the higher the value to consumers, the greater the price. This simple relationship does not hold for drugs. For starters, patients do not necessarily act like consumers (especially when dealing with a debilitating illness). Moreover, patients' notions of value will depend on both their level of medical need and their financial burden.

Thus, a critical challenge when developing balanced pricing strategies is accounting for the different value definitions of stakeholders (Figure 7-3.) It is still true that stakeholders value product efficacy and safety, but, as with improvements in quality of life, these attributes should be considered necessary but not sufficient.

In a world increasingly focused on improved outcomes, the most common and widely agreed-upon components of value include:

• Unmet medical need
• Significant differentiation compared with the standard-of-care
• The ability to subsegment the population most likely to benefit (a topic addressed in Chapter 4)
• Real-world outcomes
• Up-front affordability of the medicine
• Total cost to the healthcare system
• Time required to achieve cost savings

Even in Europe, where health technology assessment organizations delineate value via clinical effectiveness and cost effectiveness, there is no standardized value definition. Not only do the value formulas vary from country to country, but how those formulas are implemented within a given market may be inconsistent. In the United States, where there is even greater payer fragmentation and it has been politically intolerable to use cost-effectiveness measures to determine drug prices, it is even more difficult to reach a universal viewpoint on the subject. That does not mean payers in the United States are disinterested in objective frameworks to define the concept, however. Thus, in 2015, one of the key new developments in the value discussion was the proliferation of third-party tools that compare the efficacy, side effects, and costs of different products (Figure 7-4) [30].

While payers and patient advocacy groups in the United States laud these solutions, the different frameworks under development have created analytic challenges for them. As researchers from the Institute for Clinical Research and Health Policy Studies at Tufts Medical Center noted in a November 2015 New England Journal of Medicine perspective, “more work is needed to determine how best to consider factors such as adverse events and ancillary benefits that matter to patients” [31].

Ultimately, whether value frameworks originate from health technology assessment organizations or alternative groups, their existence directly affects the pricing of biopharmaceutical products. That is because these different assessments provide credible pricing alternatives that manufacturers must address head on when trying to justify the value of a product. Moreover, in the absence of credible alternative data about product value, payers will use the information gleaned from such tools to demand deeper and deeper discounts in the marketplace. Such payer behavior ultimately limits biopharma value creation, turning drugs into commodities and manufacturers into vendors.

Proving Efficacy in the Real World

Although biopharmaceutical companies amass a considerable amount of efficacy data during clinical trials to support regulatory decisions, these data do not necessarily demonstrate real-world value. That requires evidence outside of a clinical trial showcasing improved outcomes against the current standard of care.

With multiple therapeutic options available in almost every drug class, a majority of products now coming to market will be classified as having “potential value” until there is proven evidence. As a result, at launch, many products must bridge a “value gap.” As Figure 7-5 illustrates, stakeholders typically categorize newly launched drugs into one of four categories, based on existing data:

• High-price/high-value product
• High-price/low-value product
• Low-price/high-value product
• Low-price/low-value product

Examples of high-price/high-value products include curative therapies such as the all-oral hepatitis C regimens and medicines that provide a step change in the standard of care. These medicines are of high value to stakeholders but, because of the up-front costs, raise concerns about affordability.

High-price/low-value medicines include specialty products that are undifferentiated relative to standard of care or me-too products that offer incremental improvements in efficacy or real-world outcomes. This category may also include chronic disease products that treat broad populations but are not well targeted. Thus, while a given medicine may be very effective in a subsegment of the population, the observed efficacy in the broad population may be underwhelming because a majority of patients are nonresponders. Products in this category are most at risk for pushback from payers and skepticism from providers and patients inasmuch as benefits achieved relative to their costs are harder to determine.

Low-price/high-value products include vaccines and generics and are viewed by stakeholders as having the greatest utility because the benefit/cost ratio is highest. Even products in this category, however, may be susceptible to up-front affordability concerns, depending on the macroeconomic conditions of the market and the number of patients affected.

Low-price/low-value therapeutics, which include over-the-counter medicines and topical ointments, traditionally hold the least value because their therapeutic benefits cannot be broadly attributed across the population. For pharmaceutical manufacturers, these products traditionally have been viewed as the lowest development priority because the likely returns are lower relative to their development and commercial risks.

Setting the Pricing Strategy

Categorizing a product based on the perception of stakeholders is just one piece in establishing the right global pricing strategy for new biopharma products. To be most effective, companies must also:

• Understand how product and market attributes support—or limit—pricing flexibility
• Refine the pricing analysis, incorporating global-local launch plans
• Link the pricing strategy to the company's overall business strategy

Eight different factors help determine how much pricing flexibility a company has when launching a product. (See Figure 7-6, Figure 7-7, and the text box “Product Factors Determine Pricing Flexibility.”)

Notice that a high degree of uncertainty around any one attribute increases stakeholder skepticism or real-world utility and, thus, the likelihood that there will be a value gap at product launch. By understanding which factor results in the greatest uncertainty, a company can proactively develop data to maximize pricing flexibility. In effect, this attribute becomes the fulcrum for stakeholder engagement around new pricing models, described later in this chapter.

Companies must also refine the analysis relative to the list prices of currently available products and set the product's maximum and minimum prices around the globe. Setting this so-called global price band is as much an art as it is a science. Increasingly, stakeholders are willing to embrace “good enough” innovation if products satisfy basic safety and efficacy requirements but come with lower price tags. This is the value proposition associated with biosimilars and the second and third entrants in the all-oral hepatitis C category.

Moreover, if companies set a price band that is too wide (i.e., there is a big differential between the product's maximum and minimum prices), the company puts its ability to maximize its profits at risk due to reference pricing and parallel trade practices. If the band is too narrow, however, the company may also reduce its global profits because the price range may be unaffordable in certain geographies, ultimately limiting market penetration.

What companies therefore strive to achieve is a price spread that is neither too wide nor too narrow. Within this global price band, regional price bands for major markets (such as the European Union, the United States, and Asia) will exist. Because of external reference pricing, the European price band continues to tighten. The US price band has been more elastic historically; as this market becomes more price sensitive, there may be closer alignment between the maximum price in the United States and in Europe. Asia, meanwhile, continues to have the widest price band as a result of differences in national pricing policies and purchasing power [32].

Finally, successful biopharma companies also strive to link their individual product pricing decisions with the overall business strategy, including assessing downstream consequences on the uptake of other medicines in the portfolio. For instance, the greater a product's importance to a company's overall portfolio, the greater the pressure to accelerate market share and close any existing value gap quickly.

In addition, as more products are used in combination, it will be important for companies to harmonize individual pricing decisions across the portfolio to create a coordinated commercial strategy. Analyzing pricing decisions across a product portfolio enables companies to align product-centric assessments with overarching strategic choices. These include the decision to invest in one business unit rather than another or the potential value creation that might come from divestiture.

Analyzing New Pricing Models

Increasingly, product pricing will shift from being a contractual, transactional event to one step in a long-term relationship that redistributes reimbursement risk and is influenced by stakeholder definitions of value that prioritize total costs to the healthcare system in question. Going forward, that means proof of outcomes will be required if biopharma products are to achieve maximum pricing flexibility. Thus, pricing approaches of the future will require companies to work with other stakeholders, especially payers, to co-create data to bridge the value gap. As Len Schleifer, the CEO of Regeneron Pharmaceuticals told the audience at the 2015 Forbes Healthcare Summit, as an industry “we have to think about a different pricing approach that is a little bit more responsible” [33].

These innovative pricing models, which may also be known as managed entry agreements, risk-sharing agreements, outcomes-based contracts, or value-based contracts, generally exhibit the following characteristics:

• The product's price or reimbursement level is linked to an outcome.
• To demonstrate this outcome, drug manufacturers and payers must collect real-world data for some prespecified period of time.
• These data address uncertainties associated with the product's utility outside clinical trials. These uncertainties could be related to efficacy, safety, or the size and value of future cost savings achieved as a result of the drug's usage in a given patient population.

According to researchers at the University of Washington, as of the date of publication, the number of innovative agreements that share product risk is modest, numbering in the hundreds over a two-decade span. Since many of these deals are confidential, it is hard to get accurate numbers. Still, most of these arrangements have been brokered in Europe, where payer austerity and monopsony governments have forced biopharmas to embrace more creative pricing strategies. In Italy, for example, access to most high-priced oncology products requires some kind of pay-for-performance arrangement that requires monitoring via patient registries. In the United Kingdom, financially based risk-sharing agreements are the preferred approach. In the United States, there has been more limited experimentation with innovative pricing due to concerns that novel pricing arrangements would jeopardize government contracts and regulations related to Medicaid prices [34].

The need to broker individual contracts with each payer means these innovative pricing arrangements are both complicated to set up and hard to scale. Both parties must agree, for instance, on the length of time of the arrangement, the data that should be collected and analyzed, and the financial stakes. The need to invest in infrastructure to collect and analyze these data, as well as uncertainty tied to when product revenues can be recognized, are also material barriers to the adoption of novel pricing strategies. Examples of new pricing solutions are summarized in Figure 7-8.

A key factor influencing how fast new pricing models are adopted is new kinds of payers, a topic that is addressed in Chapter 8. In the future, payers will not only be governments or private insurers. Increasingly, physician groups and other providers that are at-risk financially for their prescribing decisions will also by buyers; so will patients themselves. This may add complexity to the payer landscape, but it also presents opportunities for pharma to try out new models with payers whose priorities may be more directly aligned with clinical outcomes.

Deployment of New Pricing Strategies

Figure 7-9 arrays innovative pricing solutions based on their complexity and maturity in the marketplace. So-called financial-based agreements (FBAs) represent the majority of the innovative pricing models currently being used in the marketplace. That is because these contracts are among the least complex to implement since they are not associated with complicated monetary clawbacks related to a drug's performance. In addition, such deals also provide budgetary certainty, an important benchmark in a resource-constrained environment.

AstraZeneca's single payment access strategy for Iressa (gefitinib) is a classic example of how biopharma companies can use these financial agreements to enable market access (see the text box, “AstraZeneca's Single Payment Access Strategy for Iressa”). A more recent example is the deal Gilead Sciences brokered in 2014 with the government of France to establish access to its hepatitis C medicine, Sovaldi. At the time, the French government threatened to tax Gilead if it insisted on maintaining the original price tag of Sovaldi; however, Gilead agreed to reduce the cost of the therapy by roughly €15,000, in exchange for no patient co-pays. Gilead also agreed to a volume-based cap on the use of the medicine; thus, if the number of patients exceeded a pre-agreed-upon level, the price of Sovaldi would drop even lower. Both of these conditions helped the French Ministry of Health project the costs it would incur for providing its estimated 200,000 hepatitis C–infected citizens access to a life-saving medicine [35].

While financial-based agreements shift the reimbursement risk slightly, in many respects they are simply a slightly different spin on straightforward rebates already used in the marketplace. More interesting are performance-based agreements (PBAs), which are designed to manage patient utilization and provide additional product efficacy data. Since Johnson & Johnson negotiated its PBA for Velcade (bortezomib) in 2007, PBAs have been much discussed as a mechanism payers and biopharma companies can use to enable outcomes-based pricing [38].

These kinds of deals have remained rare in the United States and Europe, however, due to the practical hurdles discussed above. As Steve Miller, the chief medical officer of Express Scripts put it, over the course of the last several years, the industry has seen multiple attempts at outcomes-based reimbursement “but most have collapsed under their own weight” [39].

But with drug spending on an unsustainable upward trajectory, payers and drug companies now have increased motivation to make value-based contracts work. In late 2015, both CVS Health Corp. and Harvard Pilgrim, a regional payer based in Massachusetts, announced value-based contracts that give Amgen's Repatha (evolocumab) preferred formulary status in exchange for outcomes- and utilization-based discounts. Entresto (sacubitril/valsartan), a first-in-class therapy to treat congestive heart failure manufactured by Novartis, is another product that has used outcomes-based deals to enable market access. Aetna, Cigna, and Harvard Pilgrim have all signed novel contracts around the drug, which has mounted slower-than-anticipated sales due to reimbursement delays. These examples, though still relatively few in number and limited to opportunities where there is significant product competition, represent an important shift in product pricing strategy [40,41].

By themselves, however, they will not drive a meaningful shift to value-based reimbursement. That is because few of the existing performance-based contracts risk much—either for the payer or the pharma. Moreover, because performance-based contracts are typically structured between a specific payer and manufacturer, it is difficult to expand their use to additional payers and at-risk providers quickly. Ultimately, that makes it challenging to share best practices and lessons learned that would more broadly accelerate the shift to value-based reimbursement in the current regulatory environment.

So-called “Value Labs” are structured collaborations among manufacturers, payers, healthcare systems, data providers, and adjudicators and represent one way to explore value-based contracts in a safe forum. Inherently multistakeholder, Value Labs promote experimentation while mitigating known pain points, such as defining and measuring outcomes and building systems to share data. It is important to note there will not be one Value Lab, but many. Depending on the therapeutic area, different stakeholders will need to be involved. Emerging experiments, such as the Learning Lab created by Merck & Co. Inc. and UnitedHealth Group's Optum division to explore various value constructs, are examples of the trend [42].

Experimental Pricing Strategies

Payers and providers are also experimenting with other solutions that prioritize paying for outcomes while providing patients accessibility to innovative, but potentially pricey, prescription drugs. Two approaches that are worth watching: indication-specific pricing and bundled payment models.

Bundled Payment Models

In other industries, consumers pay a single price for a desired package of goods or services. For instance, when customers buy a car or smartphone, they generally do not pay separate fees to separate manufacturers for the individual components; instead, they pay a single, fixed fee to a single entity for an all-inclusive experience. That is not usually the case in healthcare, where fee-for-service reimbursement systems mean patients receiving care from different physician groups or parts of a health system are billed for each individual interaction (e.g., the lab facility for diagnostic tests, the hospital for in-patient care, and the rehabilitation center for outpatient follow-up).

Currently, there is recognition that so-called bundled payments, where all drugs, devices, tests, and services required to treat a given condition are bundled into a single fee, is another mechanism that rewards outcomes delivered rather than volume of services rendered. Because bundled payments provide fixed reimbursement sums, they encourage providers to adhere to standardized treatment protocols that provide the most cost-effective care and the most efficient delivery, often via integrated, multidisciplinary practice units. If appropriately structured, bundled payments can also promote patient centricity, a topic discussed in Chapter 6, since the bundles of services and the outcomes achieved can be defined based on patient priorities, for instance, delivering a healthy child or reducing pain [51].

Much like indication-specific pricing, the concept is not new: bundled payments have been used to pay for care in certain niche areas such as organ transplantation and in self-pay scenarios, such as plastic surgery and in vitro fertilization, where patients pay for all the care out of pocket. There are currently a handful of bundled payment success stories, and evidence shows that the approach does not simply bend the cost curve downward but actually results in meaningful cost reductions. Thus, interest in implementing the concept is high across different countries, types of organizations, and therapeutic areas. In 2011, the Centers for Medicare and Medicaid Services (CMS) embraced the approach as a means of reducing costs and improving the quality of care associated with end-stage renal disease and has, via the Affordable Care Act, created a voluntary Bundled Payments for Care Improvement initiative that includes more than 14,000 bundles in 48 medical and surgical conditions. In 2016, CMS launched a mandatory bundled payment program for joint replacements covering 800 hospitals in more than 60 US metropolitan areas (Figure 7-10) [52,53].

Still, there remains skepticism that bundled payment models can be used outside acute settings, because defining which products and services are included in the bundle—and which are not—is significantly more complicated when treating chronic conditions such as diabetes or chronic obstructive pulmonary disease. Time-based bundles are one solution; providers and payer groups define the scope of services and products provided (also known as the episode of care) based on a discreet time span, say three months or one year. UnitedHealth Group, one of the largest commercial payers in the United States, sought to test the limits of this approach in a three-year pilot of more than 800 breast, lung, and colon cancer patients treated at five community oncology practices. The results, which were published in 2014, showed that a bundled payment approaches could reduce overall cancer treatment costs by 34 percent without affecting quality. Interestingly, the results seemed to suggest that improving the efficiency of care delivery, not reining in drug spending, is the best opportunity for cost savings (see text box, “Lessons from UnitedHealthcare's Bundled Payment Program in Oncology”) [54,55].

Theoretically, the implementation of bundled payment models should put downward pressure on drug costs. Under this system, if cheaper generics provide the same outcomes as costlier branded medicines, physicians have no compelling reason to use the more expensive products. Moreover, with a fixed price for all goods and services in a defined cycle of care, providers and payers also have incentives to try and negotiate lower drug prices. Drug manufacturers, meanwhile, may be willing to provide rebates if they fear their medicines will not be prescribed because of cost.

For now, it is hard to know the full impact of bundled payment models on drug pricing. In its pilot, UnitedHealth did not include the drug costs in the overall bundle but reimbursed them separately. Moreover, it is clear that bundled payments work best in situations where clinical behavior is tightly controlled, so that care pathways are aligned around standardized treatment protocols. The administrative burden for such efforts remains high and the payout may only come years down the road. Employers are one group that may play a more forceful role in driving these experiments, a topic addressed in Chapter 8.

Financing the Future: Affordability

While new payment models like UnitedHealth's bundled care experiment or Harvard Pilgrim's outcomes-based deal for Repatha make product pricing less transactional and more collaborative, the agreements fail to solve one of the most urgent issues payers face currently: near-term affordability. Indeed, as noted earlier, the most pressing issue related to Sovaldi has not been tied to concerns about the efficacy or cost effectiveness of the product but its upfront cost. Concerns about near-term affordability are also coming to a head because scientific advances make possible the creation of curative, one-time therapies for grievous rare diseases such as thalassemias or severe combined immunodeficiency. As researchers at RAND noted, this has created a dilemma for payers and policymakers: “Make treatment available and accept high short-term costs with the expectation of long-term savings or insist on budget discipline, forgo clinical benefit and long-term savings, and anger affected populations” [58].

Because neither option is particularly attractive, the RAND team proposed a third way: using debt-financing instruments to cover the acquisition cost of a breakthrough biopharmaceutical product. The instrument could be structured in various ways—as a bond, as a mortgage, or even as a credit line with fixed monthly payments. To make sure that such instruments did not simply result in a scenario that resulted in payment regardless of the results, the RAND team proposed linking ongoing reimbursement to demonstrations of real-world efficacy.

In a separate analysis, a team of researchers from the Massachusetts Institute of Technology and the Dana-Farber Cancer Institute have proposed the creation of consumer-focused healthcare loans that would be financed by investors who purchased bonds or equities issued by the organization that issued the credit. In essence, consumers who need expensive but curative therapies could take out loans to cover their co-payments from a special entity created to fund expensive drug purchases. The loan repayment would be amortized over time, similar to a car or house payment or student loan debt. The loan underwriter, meantime, would be financed by a pool of investors that purchased bonds and equities it had issued [59].

Currently, no payer or manufacturer has brokered either type of financing alliance. All of the uncertainties associated with other innovative pricing models remain—risks linked to data capture, revenue recognition, and best-pricing regulations. Moreover, structuring the debt correctly will require new capabilities such as cost-of-illness modelling, statistical analysis, and a deep understanding of financial products. Nevertheless, for high-cost, curative therapies for rare diseases, the financing model may soon emerge as an important alternative to other pricing strategies.

New Tools for Outcomes-Data Capture

As outcome-based pricing experiments become more common, both payers and biopharma manufacturers will need to adapt their business model and acquire new capabilities. In particular, manufacturers will need to leverage new digital and analytics tools, topics discussed in Chapters 9 and 10, to capture real-world data linked to outcomes. These data must be easy and inexpensive to measure and accumulate over a time frame that is consistent with payers' budget cycles. Process-based endpoints, for example, hospitalizations, are one of the easiest endpoints around which both parties can find common ground, inasmuch as such information is routinely collected via existing health claims and does not require mining individual patient records for unstructured clinical data. In the future, however, drug companies and payers will also be able to utilize new wearable and remote-sensor devices linked to smartphone or tablet applications to demonstrate product value.

For new outcomes-based partnerships to be successful, the partners must also agree up-front on the following: standard definitions of what is—or is not—an outcome and the party responsible for collecting and monitoring the data related to this outcome. Because trust between healthcare stakeholders is not high, it may be important for a neutral party to confirm the authenticity of the data and compliance with the outcome-based partnership. Drug manufacturers, meanwhile, may need to add actuarial capabilities so they have a better understanding a priori of what risks they can sensibly own, or not. Because revenue flows may change significantly under an outcomes-based partnership, biopharma companies will also need to alter their revenue forecasting methods. Finally, companies will need to educate and convince their shareholders that showing flexibility on the timing of revenues is a worthwhile compromise that builds healthier stakeholder relationships and avoids far more damaging scenarios such as mandated price controls.

Conclusion

The current debate about drug pricing requires that drug companies embrace different models now, when the risks are lower and there is an opportunity to be an active partner. Payers, even in the United States, are not waiting for companies to demonstrate value but are defining it themselves, using newly available tools to provide alternative definitions of worth that may or may not reflect the value assessments of patients. Absent credible data about product value, payers will use the information gleaned from such tools to demand deeper and deeper discounts in the marketplace. Such payer behaviors ultimately limit biopharma value creation, turning drugs into commodities and manufacturers into vendors. If biopharma companies want to shift their market access negotiations from price to value, and be engaged members of the ecosystem, they will have to alter their pricing strategies, putting greater emphasis on strategic payer engagement, a topic addressed in the Chapter 8.

Summary Points

• Drugs remain one of the most efficient ways to deliver improved healthcare outcomes. However, drug pricing and its impact on the long-term sustainability of healthcare stakeholders remains a hotly debated topic and a target of government reforms. It is a top strategic issue for biopharma management teams.
• Market-specific reforms have resulted in markedly different pricing regulations around the world. It is therefore essential that biopharma companies adopt a global-local mentality, setting global pricing strategies that, because they are deployed locally, address the price sensitivities of the market in question.
• Consolidation among payers and providers will further pressure drug prices as these groups have more leverage in the marketplace because of the greater number of lives they manage.
• While all stakeholders value efficacy and safety, new determinants of value have emerged. These include the degree of targeting, real-word outcomes, up-front affordability, and, most especially, the total cost to the health system.
• When setting a price, companies must adopt a systematic approach that optimizes pricing flexibility in specific markets and takes into account newly emerged definitions of stakeholder value.
• Commercial teams need to fully investigate and understand which product attributes are most likely to have the greatest impact on patients and on patient outcomes, and thus on the ability of a biopharma to achieve maximum pricing flexibility at launch.
• Biopharma companies need to accept and embrace novel pricing structures that distribute reimbursement risk in closer alignment with the outcomes delivered. This will also improve their reputations with other stakeholders.
• Such novel value-based pricing arrangements are difficult to construct because of the need to invest in infrastructure to capture, analyze, and share data.
• Emerging digital tools that conveniently capture relevant real-world data of interest to biopharma companies, patients, and payers will be a critical enabler of these new value-based pricing models in the future.