Value-Based Pharmaceutical Pricing: Tying Drug Prices to Health Outcomes

Posted at 1:14 PM on Jan 6, 2017


Value-based pharmaceutical pricing, aimed at achieving better value for pharmaceutical spending and lowering drug prices, while maintaining innovation, is a concept that is gaining traction.  In the U.S., prescription drug prices are set by pharmaceutical companies to maximize profits, not based on how well a drug works. In contrast, according to its proponents, value-based drug pricing would mean real health outcomes (not just profits) determine the cost of a drug.  

President-Elect Trump’s push for healthcare reform that focuses on free market, consumer-driven initiatives will enhance the political viability of value-based drug pricing. It has more support by the pharmaceutical industry than other popular policies to bring down drug prices, as it’s viewed as more in line with free market principles than other policy proposals, such as allowing Medicare to negotiate drug prices. 

New drugs used to treat cancer are often the most expensive and, therefore often under scrutiny by the healthcare community.  The average cost of cancer medications is about $100,000 per treatment, with increasingly more insured Americans having co-payments at 30% of cost, about $30,000. Some argue that their prices are unjustified by their value, particularly their relative value to other drugs.

Dr. Peter Bach, a renowned physician and Director of the Center for Health Policy and Outcomes at Memorial Sloan Kettering Cancer Center, created an interactive online tool called the DrugAbacus that works to define the value of a cancer drug in relation to its cost. The DrugAbacus is geared toward providers and policymakers and provides a value-based analysis of FDA approved cancer drugs. It measures value based on several components, including: the value of a year of life added; drug toxicity; research and development costs; treatment novelty; rarity of the disease; the burden caused to population health; prognosis; and unmet needs. In response to the mounting concerns over the costs for cancer medications, the American Society of Clinical Oncology also developed a value framework to aid physicians and patients in evaluating the costs, effectiveness and side effects of cancer treatments. 

Pharmacy benefit managers are also defining the values of cancer drugs in relation to cost.  Earlier this year, CVS Caremark and Express Scripts, the nation’s largest pharmacy benefits managers, announced plans to link value-based pricing to indications for cancer drugs. The Centers for Medicare & Medicaid Services (CMS) also announced a proposed rule to begin testing new models in order to improve how Medicare Part B pays for prescription drugs. The initiative is aimed at providing physicians with greater incentives to select high performing drugs.

Healthcare providers are also getting on board with value-based pricing.  The nation’s largest physician organization, the American Medical Association (AMA) recently  adopted a policy in support of value-based drug pricing at its interim meeting last month.  Under the AMA’s policy, the physician group believes drug prices should be set by objective, independent agencies that use evidence and data. The AMA also wants a transparent process for setting drug prices without causing a burden to physicians or patients while maintaining affordability for patients. By adopting the value-based drug pricing policy, the AMA is aligned with other clinical groups such as the American College of Physicians that foster value-based decision making.

Value-based drug pricing is by no means universally embraced in the public health and healthcare policy communities. One core critique is that some drug prices will actually be grossly inflated under value-based models and that such models do not operate under normal market principles. For instance, the generic and very low cost medication penicillin saves people’s lives. Unlike new cancer medications, penicillin is off patent and subject to a robust competitive marketplace of competing drug manufacturers and marketers. Like in most free markets, the price is based on markups from the cost of production, but not on its “value”. 

Mounting pressure from both American consumers and policy makers demand a solution to lower drug prices in America. Value-based drug pricing is not yet a policy supported by Prescription Justice: but it’s on our radar and we strongly recognize its growing support, and, if done right, potential value (pun intended).

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