Can Value-Based Pricing Counteract the Rising Costs of Drugs? Part 1

By | June 18, 2018

In continuing our conversation concerning value-based pricing of services, we would be remiss if we neglected to focus on the escalation of drug prices. Even now, treatments exist for various diseases that are swiftly approaching the $1,000,000 mark. With increasingly more of these agents coming to market, we can rapidly discern a time where the cost of our medications will far surpass our ability to maintain any semblance of financial sustainability.

Hence, the pharmaceutical industry has attempted to offer new payment models for their products. Many of these are termed “value-based,” but are they? Bach and Pearson in 2015 defined that term as basing the price of a drug on data demonstrating its benefits and harms. This concept is grounded on the notion that rewards innovation based on the magnitude of its benefits, not what the market will bear. However, in healthcare, this is not a true market since our insurance model creates a dynamic that removes the actual cost from the person that is receiving the benefit. Viewed differently from other products, healthcare remains a necessary service. If I cannot afford to buy a car, I can walk or take a bus. Unfortunately, if I cannot afford my treatment for an illness, the choices are not the same.

Pharmaceutical companies have been touting new payment models as value-based. However, they do not fit with the above definition. For instance, they utilize outcomes-based contracting. Meaning, a company will offer a rebate if the drug does not perform as indicated. This rebate, based on a known likelihood of failure is merely cost shifting and does not impact the unit price of the drug based on its actual value. Another approach drug companies apply is mortgage pricing which only allows one to pay the treatment cost over an extended period. Once again, when resorting to this method, the basic premise of value is not met, since all this does is change the payment timing. Though both methods are creative concerning the payment of high priced items, they do not address the underlying issue of the financial impact of the drug itself.

As we previously discussed, anchoring the price for a service or a product on an agreed-upon benchmark such as Quality Adjusted Life Years (QALY), is required as we shift to true value-based models. Admittedly, this is not an effortless task since placing a dollar amount on a year of life denotes a certain sense of omnipresence. However, we must begin somewhere. The insurance industry and judiciary system have already overcome this hurdle. The time is ripe for healthcare to address such questions. Caring for all, even if to the degree that seems less than perfect, is the goal. Without models that allow us to do so, this will only lead to a situation that is not acceptable.