Healthcare is struggling with how to pay for innovations and that is most apparent when it comes to pharmaceutical pricing, where drugs can run tens of thousands of dollars a month for cancer treatments and rare diseases. Medicines do not always work and payers are looking to shift some of the financial risk back to drug makers, given the unsustainable trajectory of pharmaceutical prices.
Some companies with new medications that are trying to gain access to a crowded market for certain indications filled with generic treatments by offering value-based pricing, but there is typically not an outcome-based end point to get the price. In other words, these contracts are sophisticated discounting programs.
But the barriers to adopting value-based pharmaceutical pricing are very well pronounced.
Technology and data infrastructure hurdles are foremost when it comes do setting a foundation for value-based pricing. The foundations of electronic health records, patient reporting tools, the Internet of Things, social media create connectedness between the patient and the rest of the world, but making sense of the data, determining whether manufacturers or payers need to collect and manage data, and managing outcomes over time.
Patient privacy restrictions pose another obstacle to value-based pricing. General Data Protection Regulation in Europe could restrict how patient data is used to develop a pricing system driven by health outcomes. Authorities need to determine the scope of how patient data can be used.
Payers are not always motivated to embrace outcomes driven reimbursement. Unclear incentive structures leave payers relying upon market dynamics to drive discounts in exchange for formulary access and opting to avoid the complexity of outcomes based contracts.
Regulations have not been conducive to these arrangements, since the laws require that certain government payers get the most favorable discounts. Also, different health plans worldwide have diverging priorities when it comes to healthcare budgeting, adding additional layers of complexity.
Drug makers and payers have these challenges to implement outcomes-based contracts, but there are three approaches that can be taken as a transition toward these payment arrangements:
- Pay-by-use or indication specific pricing. This addresses some of the inefficiencies in pricing for drugs, bringing the pricing to fair value for how they are used. This mode of pricing is more common in Europe, where multi-indication drugs can offer superior outcomes for one condition and only marginal benefits for other conditions. Approximately 50% of cancer treatments have more than one indication, making this category a logical area for this type of pricing.
- Combination therapy pricing. Certain treatments have a multidrug protocol and can serve as a starting point for bundling treatments. The difficulty is measuring value of the components of care and their relative worth during treatment. Payers and drug makers need a great deal of cooperation to successfully achieve this type of agreement, but the right combinations of therapies and proper data gathering can drive this.
- Product-to-patient strategies. Patient and healthcare provider support programs can help medication adherence, care delivery protocols and the transportation to physician appointments and treatments, placing a great deal of value across the continuum of care. The approach here is to address inefficiencies in how, where and when patients are treated, and where the patient outcomes can be best improved.
Manufacturers can brace themselves for outcomes based pricing, but it makes sense to implement some of these intermediate steps to show that drug makers can succeed in this era of taking on more risk. This will entail a greater dialogue with payers, sharing information, developing studies, and business cases to show where new pharmaceutical pricing models can benefit patients, payers, providers, and the drug makers themselves.
Peter Gilmore, principal in KPMG Strategy, has more than 15 years of experience advising senior management teams at leading pharmaceutical, medical device and consumer health companies, focusing on a wide range of commercial and R&D issues.
Amy Hunckler, managing director in KPMG Strategy, has nearly 10 years of experience supporting leadership teams at biopharmaceutical, medical device and diagnostics companies.