INTRODUCTION
In 2013, Valeant Pharmaceuticals, a specialty pharmaceutical company, received the
intellectual property rights to a lead poisoning treatment known as Calcium EDTA as
part of a $2.6 billion deal to acquire Medicis Pharmaceuticals. Prior to the acquisition,
the price for Calcium EDTA was stable at $950. However, by the end of 2014, Valeant
had increased the price of the drug in the USA to $26,927, a 2700 per cent increase
in 1 year.
1
Meanwhile, 500 miles away, over 8000 children in Flint, Michigan, were suffering from
one of the worst lead poisoning crises in history, caused by the city's decision to
opt out of receiving water from Detroit and instead draw it directly from the Flint
River in April 2014 in an effort to save money.
2
At the same time, Mylan, a global pharmaceutical company, increased the price of the
EpiPen, an emergency epinephrine autoinjector to treat anaphylaxis, from $100 for
a two-pack in 2007 to over $600, or six times the original price, by 2016.
3
The EpiPen isn’t subject to price sensitivity; like insulin for patients with diabetes,
it's a life or death drug. Patients simply don’t have the choice to go without it.
Pharmaceutical price gouging isn’t limited to a few drugs or corporations. From 2009
to 2015, 30 medicines with sales of $1 billion or more per year underwent price increases
of over double the rate of inflation as measured by the consumer price index, even
when estimated discounts negotiated by health insurers and pharmacy benefit managers
were taken into account.
4
The average annual increase in retail prices for prescription drugs was 9.4 per cent,
six times the general inflation rate of 1.5 per cent. For brand name drugs, it was
12.9 per cent, over eight times the rate of inflation.
5
The United States pays more for drugs than any other country, leaving economists and
ethicists worried that 300 million Americans are subsidizing drugs for the rest of
the world.
6
Under current regulatory policy, because of the lack of price transparency and the
inability for many payers to negotiate, pharmaceutical manufacturers can charge whatever
they please, setting exorbitant prices that defy normal market forces. As a result,
there is often little correlation between how much a drug costs and its efficacy or
safety profile. Drug companies justify high prices by pointing to high costs for research
and development, patent protection, and the small market size for rare diseases.
7
The Food and Drug Administration (FDA) has even, in certain cases, encouraged this,
by providing extended market exclusivity for drugs meant to treat orphan diseases
in an effort to increase research and development.
8
Policymakers have proposed regulations to mandate that a certain percent of pharmaceutical
revenue be allocated to research and development;
9
however, that alone would be unlikely to lower market prices and instead might incentivize
pharmaceutical companies to command higher prices to reach R&D expenditure benchmarks.
Part of the problem is that the multi-payer healthcare system in the USA has led to
a fragmented market for purchasing drugs, which reduces the ability of payers to negotiate
prices. Unlike European government-run healthcare systems, Medicare, the single largest
US payer for prescription drugs, by law cannot directly negotiate prices with drug
manufacturers.
10
This is largely due to the influence of the pharmaceutical lobby, who argued that
allowing Medicare to negotiate drug prices would undermine the revenue needed to sustain
pharmaceutical innovation.
11
Medicare Part B is required to cover drugs and medical services deemed to be ‘reasonable
and necessary’, leaving open a wide interpretation for what constitutes a ‘reasonable’
service.
12
This contrasts with most European systems, in which the decision to include a drug
within a formulary is at the government's discretion. In most instances, Medicare
cannot refuse to provide coverage for a particular drug, no matter the cost, to patients.
VALUE-BASED REIMBURSEMENT IN HEALTHCARE
Healthcare as a service industry has been transitioning from a fee-for-service enterprise
to fee-for-value, in which reimbursements are directly tied to standardized quality
metrics and patient outcomes. This began with the 2012 Pioneer Accountable Care Organization
(ACO) program
13
and continued with the final rules for the Medicare Access and CHIP Reauthorization
Act of 2015
14
(MACRA), the latter providing the foundation for value-based physician payments beginning
in 2019.
As a result of the unsustainability of the pharmaceutical market under the tension
of high prices,
15
public backlash, and broader reimbursement trends in healthcare, payers and drug manufacturers
have begun experimenting with proposals to bring value-based reimbursements to pharmaceuticals.
Some payers and benefits managers, including the United Kingdom's National Health
Service and Express Scripts in the United States, respectively, have negotiated variations
of value-based contracts with pharmaceutical companies, coupling payments for a particular
drug to corresponding indications and surrogate patient outcomes such as readmission
rates and changes in blood count. The price of the drug varies depending on how well
it performs within either a single patient or a given patient population. Payers and
patients pay the premium price to manufacturers when the medication achieves desired
outcomes. If the drug does not work as advertised, then manufacturers receive a lower
price, or do not get paid at all.
16
This may pressure pharmaceutical companies to align their incentives with those of
the payers.
Value-based pricing contracts allow patients to receive drugs that are otherwise expensive
with uncertain outcomes. Pressure from insurers is a large driver of the shift toward
value-based drug pricing.
17
Private insurers might decline to include new, expensive drugs in their health plans,
but may be more open to include drugs for which their manufacturer has negotiated
value-based contracts. This strategy allows the US healthcare system to contain costs
without restricting the ability for patients to access new, but expensive, breakthrough
therapeutics. For example, in October 2016, Anthem, which provides health insurance
for nearly 38 million people in the USA, refused to cover Exondys 51, a drug for duchenne
muscular dystrophy (DMD) sold by Sarepta Therapeutics, due to doubts about the safety
and efficacy of the medication despite FDA approval.
18
The cost of Exondys 51, $300,000 per patient per year, has neurologists worried that,
unless Sarepta negotiates a value-based deal that makes it cost-effective for insurers
to offer Exondus 51 to all DMD patients, insurers will restrict access to the drug
to only patients who are similar to those that met the inclusion criteria for Exondys
51’s clinical trials.
19
This scenario is likely to occur more often following passage of the 21st Century
Cures Act, signed into law in December 2016. The Cures Act relaxed FDA approval standards
and made it easier for certain drug classes to obtain market approval. For example,
Cures permits certain regenerative therapies to receive approval based on clinical
anecdotes and surrogate marker endpoints, such as tumor shrinkage, instead of clinically
validated outcomes such as increased life expectancy from robust clinical trials.
20
This places a greater burden on insurance companies, along with clinicians and patients,
to gather and evaluate information on a drug's safety and efficacy. As a result, if
insurers believe that clinical trial data isn’t robust enough to merit a new drug's
inclusion within their formularies, they may push for value-based contracts to avoid
potentially paying a premium for an ineffective, or even dangerous, treatment; ideally,
this will help deter manufacturers from conducting weak clinical trials simply to
speed up a drug's market release date.
The following two sections explore variations of value-based negotiating tactics of
two international, government-run health systems, the United Kingdom and Norway, and
how their strategies have influenced the development of value-based reimbursement
models among both public and private actors in the United States.
Public sector value-based drug pricing
Most government-run healthcare plans, such as in the United Kingdom, Norway, and Canada,
already evaluate drugs to some extent under an outcomes-based framework. England's
National Institute for Health and Care Excellence, NICE, puts pressure on pharmaceutical
companies by analyzing and recommending which drugs are worth covering based on their
relative value to patients.
21
In cases when a drug is rejected by a government health agency for failing to meet
standards for clinical or cost-effectiveness, manufacturers will often reduce its
price to increase its relative value. Because the National Health Service covers all
UK citizens, manufacturers have no choice but to negotiate prices or lose out on the
entire market.
In Norway, the Norwegian Medicines Agency (NMA) reviews patient data to determine
the cost-effectiveness of a new drug and whether or not they should include it within
their drug formulary.
22
Evaluations are based on a requested manufacturer reimbursement price, fixed at or
under a preset government cap, along with a comparison of the drug's performance against
existing therapies, usually measured in terms of quality-adjusted life years (QALYs).
Similar to negotiations with the UK, manufacturers who have drugs rejected for coverage
in Norway will counter by either providing additional performance data or offering
a lower price. For example, the NMA deemed the osteoporosis injection Prolia to be
cost-ineffective when compared to Aclasta, an existing osteoporosis drug. Aclasta,
which belongs to a different drug class than Prolia, was deemed to protect against
fractures for a longer duration following treatment than Prolia. As a result, Amgen
and GlaxoSmithKline PLC, the manufacturers of Prolia, reduced their reimbursement
price in order to smooth the way into the market. Norway then agreed to cover Prolia
at a cost of $260 for women over 75 years old, a demographic for whom patient data
illustrated improved outcomes. Medicare, on the other hand, paid $893 per syringe
of Prolia with no age threshold, and no objective evaluation of efficiency.
23
The Centers for Medicare and Medicaid Services has recently declared its aim to experiment
with indication-specific pricing within the Medicare Part B program, which includes
medications prescribed in outpatient clinics and physician offices. Two of the proposed
strategies include (1) outcomes-based pricing, altering prices based on clinical effectiveness
through risk-sharing agreements with manufacturers,
24
and (2) reference pricing, setting a benchmark price for therapeutically similar drugs
and reimbursing drugs that produce outcomes comparable to cheaper drugs at the price
of the cheaper treatment.
25
Private sector value-based drug pricing
Pharmaceutical companies have also taken the initiative to experiment with value-based
reimbursement models. Novartis, a multinational pharmaceutical company, launched a
heart failure drug, Entresto, which was found to reduce the risk of hospital readmission
for heart failure patients by 21 per cent in a trial published in the New England
Journal of Medicine.
26
Novartis has negotiated a contract with insurance companies in which Novartis will
be paid a premium if patients taking Ernesto stay out of the hospital more often than
patients taking other, less expensive medications for heart failure.
27
Insurers covering patients who benefit from Ernesto will pay the premium price for
the drug, but theoretically their clinical improvement as a result may reduce their
overall, long-term medical costs.
Express Scripts and CVS have taken a nuanced approach to value-based reimbursements,
arguing for variable prices on drugs depending on outcomes related to specific indications,
ie certain illnesses or symptoms, rather than entire therapeutic categories.
28
The oncology drug Herceptin provides an example of the CVS approach to drug pricing.
Herceptin is indicated for breast cancer and gastric cancer and evaluated on the basis
of decrease in tumor size. It has performed well against the former but has only a
marginal benefit against the latter. Herceptin would thus command a premium price
only for patients with breast cancer and be offered at a discount when used for patients
with gastric cancer.
29
The controversy surrounding this method of pricing, however, is that prior to Herceptin,
patients with gastric cancer had no other option for treatment. Even the modest increase
in survival rates among gastric cancer patients with tumor variations indicated for
Herceptin was meaningful for that population, and led to an increase in initiatives
to study immunomodulatory responses to variations of gastric cancer.
30
Benefits and challenges of value-based drug pricing
Value-based reimbursement provides a financial incentive to pharmaceutical companies
to develop truly innovative drugs, instead of making small modifications to existing
products in order to extend patent protection. It also helps promote generation of
clinical trial data that clearly outlines risks and benefits of the drug relative
to status quo options. Additionally, medications in the same drug class that currently
command premium prices would be subject to comparisons against each other, providing
downward pressure to both decrease costs and improve clinical outcomes.
31
As a result, only one drug in each class will be able to win the ‘best in class’ label
and demand a premium price relative to the others.
However, treatment variation, adjuvant therapies administered concomitantly with the
drug in question, difficult-to-measure long-term healthcare costs, and subjective
metrics to gauge value, such as ‘quality of life’ and multipliers for ‘novelty of
treatment’, have made it difficult to scale value-based pricing.
32
Additionally, drug companies worry that pharmacy benefit managers and insurers may
pocket savings rather than allow them to trickle down to patients and that payers
may purchase medications at the cheapest indication and use them off-label.
33
Applications of data science for value-based pricing
Utilizing clinical data analytics to monitor health outcomes after a product is approved
for marketing may alleviate some of these concerns from manufacturers and even improve
patient response to treatment. Value-based pharmaceutical pricing offers the opportunity
to use data from electronic health records, population health software, patient-reported
information, and insurance claims to both expand the market for current drugs and
regulate drug prices to reflect their relative value to patients. This would require
precise tracking of when drugs are prescribed and for what indication along with the
collecting of outcomes measures information. However, short of an infusion of government
funds and resources, the capacity to fund, build, and maintain this level of data
infrastructure and analysis will likely fall on private payers.
Designing effective value-based contracts for drug reimbursement is only possible
with high-quality longitudinal outcomes data that is easy to both share and access.
Digital health platforms and experimental delivery models have become promising in
high-cost therapeutic areas, such as oncology.
34
Electronic medical records (EMR) systems, including those prevalent in large hospital
systems such as Epic
35
and oncology-specific data analysis platforms such as Flatiron Health,
36
provide an early foundation for clinicians and scientists to collect and measure discrete,
concrete patient outcomes and match them to novel cancer treatments. Additionally,
the legislative push for interoperability and open access to medical records would
allow technology companies and data scientists to build machine learning algorithms
to mine EMR data and detect patterns in response to treatment and provide clinical
decision support to care teams.
37
Machine learning allows computers to sift through thousands of example cases; in this
case, outcomes data related to medication use from medical records, along with whether
the outcome was beneficial. This is known as a training set. Computers then use that
experience to solve the same problem in newly obtained medical records. Effectively,
the computer is trained to solve by example. Many of the recent breakthroughs applying
machine learning to problems in medicine have been via deep learning, a form of machine
learning inspired by the structure and function of neurons in the human brain. Deep
learning research has already identified a range of clinically relevant information
from medical records, ranging from drug–drug interactions from clinical notes
38
to diabetic retinopathy from retinal fundus photographs
39
. Deep learning algorithms are capable of learning what features of a dataset to focus
on themselves based on prior examples, allowing them to identify previously unseen
connections between inputs and outputs. Applied to value-based drug pricing, this
might include identifying novel side effects when evaluating therapeutics and retrospectively
identifying drug combinations that produce better outcomes.
40
Because deep learning models can be hosted on cloud software
41
and, in theory, become more accurate as their training set grows, scaling algorithms
to collect more outcomes data may not only be relatively inexpensive and cost-effective,
but also provide more nuanced evaluations of treatment outcomes over time.
PROPOSALS FOR VALUE-BASED PHARMACEUTICAL REGULATORY POLICY IN THE UNITED STATES
The following is a proposed framework for establishing baseline drug prices based
on clinical trial outcomes and utilizing postmarket monitoring to evaluate value relative
to competing products over time. The framework is guided by international regulatory
policy, innovations in digital health, and feasible additions to the value-based pricing
strategies currently being tested in the United States.
Legislative policy
The US government will need to take certain regulatory steps to establish the groundwork
to scale value-based pricing in the pharmaceutical industry. Similar to current CMS
value-based reimbursement pilots for Medicare Part B mentioned earlier, the government
could implement a similar pilot for value-based contracts in Medicare, the program
that subsidizes prescription drugs, through a limited waiver of the ban on Medicare
drug price negotiation. The pilot project would need to select a specific drug class
and then decide whether CMS as a central entity or individual drug plans would lead
negotiations with manufacturers. However, because Congress is unlikely to allow Medicare
to directly negotiate drug prices, regulatory steps should favor making the posttrial
clinical outcomes of drugs and their net costs more transparent, in an effort to exert
downward pressure on prices.
Primarily, Congress should (1) authorize and fund the FDA to comparatively evaluate
drugs using metrics such as QALYs and disability-adjusted life years from clinical
trial data, and (2) establish an independent drug review board within either the FDA
or as part of the Patient-Centered Outcomes Research Institute established by the
Patient Protection and Affordable Care Act. The Institute is up for reauthorization
in 2019, which offers the opportunity to amend its role to include the direct evaluation
of pharmaceuticals.
42
This would allow each medication to be given a recommended base price for each indication
based on performance in clinical trials relative to similar drugs in its class and
the manufacturer's asking price.
Congress is unlikely to allow CMS or other government agencies to set strict price
controls, but it can help make pharmaceutical prices more predictable by offering
a price recommendation and transparency to payers and enacting policies to limit the
rate of price inflation. Congress could mandate that manufacturers make the net price
of a drug, that is, the price negotiated by payers, distributors, pharmacy benefits
managers, and other intermediary buyers rather than the list, or sticker, price. The
difference between list and net prices has historically been opaque and gave pharmaceutical
companies the opportunity to make secretive deals with intermediaries to obscure the
true cost of treatment.
43
Making net prices transparent may enable more open and efficient market competition
among manufacturers and intermediary buyers, which benefits patients by driving down
prices, and could possibly improve public trust in the industry. Price inflation regulation
may take the form of requiring that manufacturers match each dollar of price inflation
to an equal amount of additional R&D spending during the last few years of market
exclusivity or increasing tax credits to offset R&D spending that matches price adjustments.
44
Additionally, multiple private organizations in the United States, including the Institute
for Clinical and Economic Review
45
, the Independent Drug Information Service
46
, and Oregon's Drug Effectiveness Review Project
47
, have done comparative effectiveness research regarding the value of different medications.
The resulting analysis, from both governmental and non-governmental organizations,
could be used not only to help payers respond to manufacturer prices and negotiate
discounts, but also determine formularies and educate patients and providers about
the relative value of different medications.
Applying data science to negotiate pharmaceutical prices
Following market release, the recommended base price may be recalibrated through a
‘value calculator’ that collects outcomes data on how well the drug works in practice,
including from postmarket phase IV trials, patient-reported information, medical records,
and related insurance claims, and standardizes this information in a single database.
This encourages collaboration between pharmaceutical manufacturers, insurance carriers,
EMR companies, and clinicians to optimize treatment efficacy to maintain reimbursement
levels.
Many significant interactions and discoveries about how well a drug works happen after
phase III clinical trials end and a drug receives FDA approval. After a drug hits
the market, manufacturers sometimes conduct postmarket surveillance (phase IV) trials
to oversee possible drug–drug interactions, long-term safety, and rare and long-term
side effects, particularly on demographics that may have been excluded from prior
studies, such as pregnant women or children.
48
In some instances, these studies help pharmaceutical companies discover new markets
for a drug. In others, they lead to drug restrictions or recall, such as the recall
of Vioxx in 2004.
49
While the FDA is supposed to regulate postmarket trial data and adverse drug event
reports from MedWatch,
50
it has lagged in listing possible safety issues found with drugs due to both a backlog
of unreviewed postmarket studies and poor standardization of that data for analysis.
51
The value calculator tool would take the shape of an aggregate database composed of
factors that payers, clinicians, and patients find make a drug valuable, including
cost of treatment, each with the ability to be assigned a relative weight by the payer
in question. These factors would vary depending on the therapeutic class of the drug,
that is, advantages of an oncology drug, such as life extension and tumor shrinkage,
will differ from those of a drug for heart failure, which may include prevention of
readmission and pulmonary edema. Drug classes that have discrete, predictive surrogate
markers that measure health outcomes, such as those for high cholesterol and cancer,
are prime targets for initial trials of value-based pricing. Because data analytics
systems to track health outcomes have become increasingly prevalent and continue to
spread, particularly as healthcare payment reform begins to scale, there is an opportunity
to automate the collection and aggregation of outcomes data across EMR systems for
the purpose of determining pharmaceutical value.
The largest challenge facing the development of a universal value calculator is the
significant data sharing required between CMS, the FDA, EMR companies, and private
payers. Memorial Sloan Kettering Cancer Center has been working on a similar concept,
DrugAbacus,
52
which allows patients and physicians to comparatively weigh oncology drug prices based
on personal constitutions of what advantages are ‘valuable’. However, critics of DrugAbacus
argue that for diseases driven by significant genetic and cellular variation, such
as cancer, an individual patient's responses to a particular therapy are much more
valuable in determining treatment decisions compared to the response of the entire
population.
53
Additionally, DrugAbacus does not include patient-centered criteria in its calculation,
such as patient ‘quality of life’ or ‘feelings of hope’.
Continuous metric monitoring will also shift how therapeutics are delivered to patients.
Pharmaceutical companies will have an incentive to package their drugs with ‘digital
solutions’, software and/or hardware that aim to support treatment by improving medication
adherence, chronic disease management, and overall wellness.
54
Packaging a therapeutic with a well-designed technology as a bundled solution could
improve health outcomes and increase the price that a manufacturer is able to charge
for the drug. This is particularly true in the case of medication adherence, where
low numbers can lead to negative health outcomes and make therapies seem much less
effective than advertised. Examples of this include mobile applications that remind
patients to pick up and refill prescriptions and take their medications on time and
electronic pillboxes that dispense only the correctly prescribed dosage and track
adherence. These digital tools, if put into practice, also offer an additional point-of-contact
between manufacturers and patients to measure the use and effectiveness of treatments.
CONCLUSION
To negotiate well-designed value-based contracts, manufacturers and payers will need
to align their expectations of outcomes measures and define the time period to evaluate
those measures. While these value-based proposals are unlikely to serve as a blanket
cure-all for all drug classes or indications, the willingness of pharmaceutical companies
and payers to experiment with value-based pricing strategies and the challenges they
face is indicative of a shift in the industry toward rewarding products that prove
their worth and the need for comprehensive data analysis tools to evaluate their outcomes.