Value‐based drug pricing in the Biden era: Opportunities and prospects

1. INTRODUCTION

Complaints about the U.S. pharmaceutical industry and its pricing are well known. Even after accounting for discounts and rebates, prices of leading brand‐name drugs in the United States are two to four times higher than they are in Canada, Japan, and many European countries. ¹ Most new cancer drugs cost hundreds of thousands of dollars per patient annually, even though many seem to offer modest gains in life expectancy or lack such evidence at all. ² , ³ Even some older, generic products like insulin have experienced dramatic price increases. Rising drug spending stretches already stretched public budgets. ⁴ , ⁵ Out‐of‐pocket spending for deductibles and coinsurance creates financial difficulties for individuals and their families, particularly among the sickest patients. ⁶ , ⁷ , ⁸ , ⁹

Critically, high prices for brand‐name drugs—rather than reflecting a policy flaw or “bug” in the system—is an expected and even intentional outcome. Monopolistic pricing is a system feature, designed to incentivize companies to invest in expensive and risky drug discovery that can take years by providing the prospect of a big payoff if the investment succeeds. The government grants firms that develop new drugs exclusive, though temporary, rights (through legally protected patents and market exclusivity) to sell their products and thus recoup their investments and earn profits. Congress has enhanced these exclusivity provisions to encourage certain policy goals (e.g., the Orphan Drug Act of 1983). Companies with new drugs can charge what the market will bear without worrying that a generic manufacturer will undercut their pricing. ¹⁰

When patents expire, generic drugs enter the marketplace and prices of brand‐name products fall, often precipitously, benefiting future generations of patients. Generics now comprise 90% of all prescriptions in the United States (though high and increasing prices of some generic drugs have also come under scrutiny, further highlighting the complexity of drug markets and the need for reforms). ¹¹

But how much protection should patents and market exclusivity offer? How much is enough to incentivize drug development? At what point do high drug prices become an unnecessary and excessive industry windfall?

2. PROPOSED SOLUTIONS FOR RISING DRUG PRICES

Taking action on prescription drug prices has attracted bipartisan support. ¹² , ¹³ , ¹⁴ , ¹⁵ , ¹⁶ Some of the proposals are as follows: rein in the “middlemen”; increase competition; align U.S. drug prices with the lower prices available in other wealthy countries; and leverage the government's bargaining power. Each has challenges.

2.1. Cutting out the middleman

Pharmaceutical benefits managers (PBMs)—entities that negotiate with drug manufacturers on behalf of insurers and manage high‐cost specialty medications—use volume‐buying leverage to negotiate discounts from manufacturers. ¹⁷ They seek the return of revenue in the form of “rebates.” Because patient co‐payments can depend on a drug's list price (not the net price after rebates), those co‐payments often remain elevated if the PBM negotiates a substantial rebate (returned to the insurance company) rather than a reduced list price. ¹⁸ Proposed measures aim to funnel gains to customers but they do not always have the intended effect because in “converting” PBM rebates to consumer discounts, drug manufacturers would reduce the rebates, and that would, in turn, raise premiums. ¹⁹

2.2. Lower prices through competition

Competition from generics has reduced prices for many drugs, ²⁰ but their introduction can be hampered by regulatory delays. ²¹ , ²² Moreover, some off‐patent drugs enjoy temporary de facto monopoly status because they are produced by a single manufacturer, or serve small markets or benefit from a closed distribution system. ²³

Policymakers have proposed various measures, such as increasing food and drug administration (FDA) funding for generic drug application reviews. ²⁴ , ²⁵ Keeping prices low for generics, however, would have little effect on drug prices in the aggregate because the drugs most likely to lack real generic competition tend to serve small markets and hence add little to overall drug spending. ²⁶ Other proposals target tactics brand‐name drug companies use to delay the introduction of generics, though the resulting savings would likely be modest because the courts and Federal Trade Commission challenges have already addressed the most egregious cases. ²⁷ , ²⁸ For biosimilars—near copies of complex pharmaceuticals that are grown, rather than manufactured—some have proposed simply mandating lower prices once the 12‐year exclusivity period for the originator biologic expires. ²⁹

2.3. Importation

Allowing Americans to import prescription drugs from Canada is a popular concept ⁸ but would trigger other effects. One study found that Canadian drug supplies would be exhausted in under 8 months if the United States imported even 10% of its prescription drugs from its northern neighbor. ³⁰

2.4. International reference pricing

“Reference pricing” means that drug companies can charge no more for their products in the United States than a benchmark reflecting what they charge elsewhere (e.g., in selected European countries). ³¹ , ³² In theory, savings could be substantial, ¹ but by adopting other countries' prices, the United States would implicitly embrace the preferences for trade‐offs from those countries and hence their notions of value.

2.5. Direct negotiations

Medicare negotiates Part D drug prices indirectly through the many private plans that administer the program, though those entities have limited leverage because each covers only a fraction of the Medicare population. ³³ Proposed legislation would eliminate Medicare's “noninterference” clause and require the Secretary of Health and Human Services to negotiate to reduce drug prices. ³⁴ In March, Senate Democrats introduced the Medicare Drug Price Negotiation Act, which would enhance Medicare's purchasing power by (a) allowing the program to use benefit design and formulary tools employed by commercial insurers to extract greater discounts and rebates; and (b) establishing “fallback” prices based on an index of prices paid by other federal agencies and key countries. ³⁵

In addition to the concerns raised above on reference pricing, the proposed legislation has its own trade‐offs. Any credible negotiator must be willing to walkaway from the table—that is, deny access to a drug if its price is not acceptable. ³⁶ Various proposals, for example, imposing binding arbitration, ³⁷ ostensibly avoid such outright denials, but they risk reduced future innovation and patient health.

2.6. Eliminating patent protection

A more radical strategy would remove patent protection and have the government directly fund drug development. Of course, there are issues. Most federally funded research (over 90%) ³⁸ cannot substitute for drug company product‐specific development because it instead focuses on basic research questions that facilitate the development of multiple therapies. ^{38 ,pp. 91–96,} Importantly, someone must still assess the downstream value of products because research must be prioritized.

In sum, the proposed solutions have their own challenges, and many are incremental in nature. Moreover, while policy prescriptions focus unsurprisingly on reducing drug prices, they sidestep the question of what prices are “reasonable” or “fair.” Value‐based pricing answers that question by aligning prices with the value of a drug's benefits.

3. MEASURING THE VALUE OF PRESCRIPTION DRUGS

Although drug companies retain exclusive marketing rights for drugs prior to their going generic, their pricing power faces limits. Beyond government rules that influence and constrain prices, drug companies must also contend with competition from other brand‐name products, physician and patient demand for a product, ^{39 ,p.47} limits on what the market can afford, and concerns about the “court of public opinion”—the idea that overly aggressive pricing will attract unwanted government intervention.

Drug companies price their products by forecasting product demand. Because some of the factors influencing these forecasts have little to do with perceived (patient) value, this kind of modeling does not necessarily result in value‐based pricing. A major factor is the role played by prescribing clinicians, whose incentives are often not perfectly aligned with their patients' interests. Another factor is the price of existing products, whether they are aligned with value. While drug prices often align with clinical benefit and the number of competitors, ⁴⁰ there are exceptions—for example drugs introduced for more severe conditions command high prices regardless of the competition, ⁴¹ and prices for all drugs in a therapeutic class sometimes rise to meet a new entrant. ⁴² , ⁴³ For certain drugs, pharmaceutical companies enjoy substantial leverage that persists for many years. ⁴⁴

Although economists have used different approaches to value health programs, ⁴⁵ , ⁴⁶ , ⁴⁷ , ⁴⁸ , ⁴⁹ the favored method in recent years has been cost‐effectiveness analysis (CEA). CEA expresses health gains using a standard metric—for example, quality‐adjusted life years (QALYs) gained—thus avoiding the need to monetize health benefits. It describes value as the ratio of an intervention's incremental costs to its incremental benefits. Smaller ratios, like lower prices, are more favorable because they indicate that an intervention produces health at a lower cost.

There are many controversies about appropriate practices. One pertains to perspective, which dictates the elements included in a study. A “health care sector” perspective includes the patient's health and costs incurred by the health care system, but it can omit important outcomes, such as effects on a patient's family. In contrast, a societal perspective accounts for everything that matters to somebody, including, for example, an intervention's impact on worker productivity or on a student's school performance.

In 2016, the Second Panel on Cost‐Effectiveness in Health and Medicine recommended that the health care sector and societal perspectives share top billing. ⁵⁰ Still, most international health technology assessment guidelines and published cost‐effectiveness analyses prioritize a health care sector (or payer) perspective. ⁵¹ In many cases, the choice of perspective has a modest impact on results, ⁵¹ but in some cases, it can matter a lot (e.g., vaccines in a pandemic for which societal costs and benefits are immense). ⁵²

The use of QALYs has also been controversial. QALYs account for both longevity and quality of life, but some argue they are not patient‐focused, that health insurers use them as rationing tools, and that quantifying the value of life with different health conditions is dehumanizing. ⁵³ , ⁵⁴ , ⁵⁵ Critics complain that QALYs do not capture certain aspects of people's preferences (e.g., particular goals individuals have in treatment decisions). ⁵⁶ People may prioritize treatments for severe diseases, even if it is inconsistent with QALY‐maximization. ⁵⁷ , ⁵⁸ A key objection is that QALYs discriminate against older and disabled individuals. ⁵⁹ , ⁶⁰

Determining the value of a QALY—that is, how much we ought to pay for each additional QALY—is a longstanding matter. For many years, most cost‐effectiveness analyses in the United States referenced a benchmark of $50 000 per QALY, despite its lack of a clear conceptual or empirical basis. ⁶¹ Research based on surveys and on trade‐offs people make when making real‐world purchasing decisions have yielded values from $1000 to $5.4 million per QALY. ⁶² , ⁶³ , ⁶⁴ , ⁶⁵ Studies of how people might balance purchases of health care against purchases of other goods and services indicate people would be willing to pay about twice their annual incomes (or about $110,000 in the United States) for a QALY—and that as incomes increase, so does a QALY's value. ⁶⁶ , ⁶⁷ Other approaches that have examined how much it costs to improve health have estimated a QALYs value to generally be less than each country's GDP per capita. ⁶⁸ , ⁶⁹ , ⁷⁰ , ⁷¹ , ⁷²

A reasonable question is whether value assessments need QALYs at all. For example, Germany's assessment agency does not use QALYs. If a new drug provides no more clinical benefit than drugs already available, Germany does not pay any more for the new drug than for the available alternatives. If a new drug does confer added benefit, the national association of insurers negotiates a price with the manufacturer. France's approach is similar.

Although Germany and France boast drug prices substantially below U.S. prices, their approaches have limitations. ⁷³ Although the relative prices for drugs treating the same condition may seem sensible (e.g., drugs with no added benefits have the same price as existing drugs), the lack of a common metric, like the QALY, means that these systems cannot readily compare spending across diseases. Moreover, the trade‐offs and values behind their negotiations are opaque. Finally, in some cases, Germany and France rely on reference pricing—that is, drug prices set by other countries—thus importing the decision making criteria from countries, including in some cases use of the QALY.

4. TOWARD VALUE‐BASED PRICING FOR DRUGS

Several issues must be addressed for value‐based pricing to advance in the United States. First, payers must insist on value as a criterion for reimbursement. For public payers, new legislation would be helpful. For example, Congress could grant Medicare authority to directly negotiate drug prices based on value. By itself, that move would put much of the nation's medication purchases within a value‐based regime.

Because private payers often follow Medicare's example, such legislation could also promote value‐based pricing in the commercial insurance market. That impact would be important, as few private insurers openly promote the use of formal value assessments to align drug prices with value.

There are some exceptions—for example, Premera Blue Cross, a regional plan in the Pacific Northwest, implemented a value‐based formulary benefit for its employees that assigned drugs to co‐payment tiers based on cost‐effectiveness. ⁷⁴ CVS Caremark announced in 2018 that it would allow its client health plans to exclude coverage of high‐cost, “me‐too” drugs with cost‐effectiveness ratios exceeding $100,000 per QALY, as projected by the Institute for Clinical and Economic Review (ICER). ⁷⁵ But while such initiatives have attracted attention, few other plans have adopted the models. Most commercial plans have been reluctant to use economic evaluations too openly. ^{76 ,pp. 23–25, 77}

Congress could broaden the FDA's mandate to make drug approval contingent on a “fair” or “value‐based” price, though such a change would be ill‐advised. Determining whether a drug is safe and effective already taxes the FDA. Diverting the FDA's attention away from clinical matters toward economic concerns risks eroding its considerable public support. Judgments about value and reimbursement are better left to public and private payers who are better positioned to consider their budgets and their enrollees' characteristics.

Second, the question of who should conduct value assessments in the United States must be addressed. Although formal drug value assessment efforts worldwide tend to be carried out by government reimbursement authorities, ⁷⁸ , ⁷⁹ , ⁸⁰ , ⁸¹ , ⁸² , ⁸³ , ⁸⁴ , ⁸⁵ that approach has met with resistance in the United States. The Congressional Office of Technology Assessment was abolished in 1995. The Oregon Health plan, which famously attempted to develop a prioritized list of paired medical conditions and treatments based in part on cost‐effectiveness, proved controversial and was never attempted elsewhere. ⁷⁶ The Medicare program for years attempted to incorporate cost‐effectiveness analysis into its decision making processes for new drugs and other technologies, but has been thwarted by legal and political hurdles. ⁸⁶ The government‐funded technology assessment functions that have endured (e.g., U.S. Preventive Services Task Force) have focused on clinical (not economic) evidence, and on preventive services, rather than treatments. ⁸⁷

Against this backdrop, the emergence of ICER is notable. Though it is a private, nonprofit organization with no regulatory authority or reimbursement responsibilities, ICER's clinical and economic assessments have garnered headlines and stirred debate about drug prices and affordability. ⁸⁸ , ⁸⁹ External parties (mostly drug companies) submit scores of comments during ICER's public input period. ⁹⁰ When surveyed, health plan officials concur that ICER influences their price negotiations and conditions of reimbursement. ⁸⁸ , ⁹¹ , ⁹² Some drug companies have even reduced their prices to earn a more favorable designation by ICER. ⁹³ Certain state Medicaid programs and the Veterans Administration have attempted to use ICER's findings to obtain lower prices for drugs. ⁹⁴ Though other organizations (e.g., the Americal Society of Clinical Oncology and the National Comprehensive Cancer Network) have issued their own value frameworks, they have played a more limited role and have proven hard to apply in practice.

ICER has wrestled with a host of methodological issues and controversies. For example, in response to criticisms that budget considerations (i.e., a drug's total cost across the whole population) should not be part of value determinations, ICER excluded a drug's budget impact from its calculation of a value price. ⁹⁵ To allay concerns that the QALY discriminates, ICER has added a value calculation based on Equal Value of Life Years Gained (evLYG), which equally values any gains in length of life, regardless of a treatment's impact on quality of life. ⁹⁶ ICER has also adopted elements of a societal perspective and now presents a modified societal perspective as a co‐base case for certain topics (when including societal impacts substantially influenced estimates). ^{97 p. 25}

Some additional changes to ICER's approach would help to legitimize its role as a public resource—for example, elevating the societal perspective; accounting for price changes over a drug's life cycle (properly discounted); making the source code for its computer simulation models public (to make its science as transparent as possible) ⁹⁸ ; and providing value‐based price estimates corresponding to a wide range of cost‐per‐QALY benchmarks. ICER points to the feasibility and sustainability of a private sector solution, but as a private organization lacking public accountability, the question of the legitimacy of ICER's role remains. Creating a new public health technology assessment institute, based on the ICER model, would be valuable, though the political hurdles to such an institute remain formidable. ⁹⁹

Finally, a major source of resistance to value‐based pricing is the concern that it will not make drugs affordable and hence accessible. That concern reflects the reality that ensuring prices are in line with conventional cost‐effectiveness benchmarks of $100 000 per QALY—would still leave many therapies out of reach of most Americans. The solution, however, is not the abandonment of value‐based pricing. Rather, insurance should protect against such expenses. Instead, many insurers now impose high cost‐sharing requirements on patients or restrict access in other ways (e.g., step‐therapy protocols). ⁷⁷ There is little evidence that co‐payment or restrictions reflect a therapy's value. ¹⁰⁰ , ¹⁰¹ , ¹⁰² A better approach would encourage high‐value care and discourage low‐value care though value‐based insurance designs and restrictions that align with value. ¹⁰² Just as the government makes the COVID vaccines free to individuals to encourage their use, insurance should remove cost as a barrier to the use of other medicines that confer favorable value.

5. CONCLUSIONS

Pharmaceutical industry critics presume that much drug company revenue is superfluous, fueling excessive profits, inflated executive compensation, and wasteful spending on marketing and advertising. The implication is that drug company revenues could be reduced without affecting vital innovation. But attempting to discern how much revenue the drug industry “needs” for important innovation is an endless conundrum. Instead, revenue should be seen as a potent if imperfect signal to stimulate worthy technological advances. Prices and innovation are inextricably linked: higher prices and profits attract more investment, which in turn gives rise to more rapid innovation and more therapies.

The critical question is not how we can keep drug prices down. Constraining drug prices is easy, as the government could readily impose price controls and other measures. The important question is: what is a reasonable price for each drug? Paying too high a price diverts resources from better uses elsewhere. Paying too little fails to send industry suitable signals to incentivize the development of new drugs. The right price corresponds to value, measured appropriately.

Value‐based pricing may mean higher insurance premiums, possibly raising questions of health insurance affordability; if so, the value conferred by other types of health care and by nonhealth spending should be assessed. We are living in a time of remarkable scientific breakthroughs, but these advances come at a cost. In the end, paying value‐based prices, even as we strive to promote access to health care, makes sense because it helps ensure that drug companies produce more of what people want—products that improve people's health—while considering society's other pressing priorities.

Neumann PJ, Ollendorf DA, Cohen JT. Value‐based drug pricing in the Biden era: Opportunities and prospects. Health Serv Res. 2021;56(6):1093–1099. 10.1111/1475-6773.13686