The Need for Value Based Pricing Healthcare is Acknowledged but is Far From a Reality
“Value-based pricing”, “value-based assessment”, “value-based healthcare”, “value-based insurance design”, “value-based purchasing”… I recently saw a “value-based marketplace” although I’m unsure about this one. OK, we get the message, healthcare funding decisions must be based on value. But doesn’t it sound like a bombardment of truisms? Yes, but sometimes truisms are worth saying, Jacques de La Palice would surely agree with me. If he weren’t dead, of course.
In the case of pharmaceutical pricing, I see the “VBP invasion” as a balancing act. A call for action to move away from all the other idiotic pharmaceutical pricing techniques which are enforced around the world and across segments of public and private care. If like me you have been involved with pharmaceutical pricing for some years, there must have been plenty of diners with friends or relatives asking you to explain why and how is drug pricing so different than the pricing of any other good. When I’m asked, I am trying to pick an example people can relate to – ” See the new iPhone for example. There must have been some meeting at Apple to decide if the larger screen and extended battery life justify a price tag crossing the $1,000 line, right? Well, that is the exact opposite of what is happening in the pharma industry.”
The Current State of Play in the World of Pharmaceutical Pricing
So what is really happening the often-fantasized world of pharmaceutical pricing? Here is a short list, surely not exhaustive, in plain language, of the things that can only be seen in drug pricing, sorted by random order of value-denial:
- External Reference Pricing (ERP) – a mechanism by which country A sets the price of product X at the exact same level as seen in country B. Just like for their UEFA Euro 2004 surprise triumph, the Greeks are the undisputed champions at ERP, more agile and more creative than anyone else to constantly check that no product is more expensive in Greece than anywhere else. It is a bit like saying that as of today, by national decree, parmesan will replace feta in all greek salads by virtue of external referencing to Italy. Weird. Inbeeo investigated the impact of introducing EPR on drug prices in this blog post.
- Internal Reference Pricing (IRP) – a mechanism by which product X gets the same price as product Y because it belongs – more or less – to the same therapeutic class. Important methodological note: the fact that product Y launched in 1946 is linked to often fatal renal toxicity is not factored in the decision, which is made by the country’s top-notch chemical engineers. As occasionally seen in Germany.
- Cost-based methods – the price of product X is set at the level of its cost plus a little something. The definition of what is included in “cost” varies. Less and less used by governments with some resistance in Asia, this heating fuel-inspired pricing method is oddly more and more self-inflicted by the pharmaceutical industry in a desperate attempt to use R&D costs to justify drug prices.
- PBM target rebate-based pricing – a sophisticated retro-engineered pricing mechanism by which the price of product X is set high enough so that Pharmacy Benefit Manager A can negotiate a substantial rebate from drug company B that he can pass on to his commercial Health Plan client C who will in return show their appreciation to PBM A. A US-only scheme and a strong competitor for the all-time winner of the value-denial grand prize, now that it’s getting more publicity.
- CPI-based pricing – a mechanism that limits year-on-year price increases of Product X to the same level as the Consumer Price Index increase, also called “inflation”. Introduced by payers, this rule is being reinterpreted as we speak by the pharma industry as the “10% pricing pledge”. Another self-inflicted PR faux-pas from the industry ignoring the fact that this represents around 5x the inflation.
- Profit-regulation pricing – a complex multi-year mechanism by which the price of product X will be cut by a factor Y if its marketing company’s profit exceeds a pre-agreed level Z, regardless of any benefit or harm to the patient. A European technocratic masterpiece and for all rugby fans, another England vs. France crunch. I’ve been trying to explain their respective “PPRS” and “accord-cadre” to my US colleagues forever.
The Realisation of Current Pharmaceutical Pricing Mayhem can be a Catalyst for Change?
When you consider it like this, why a pharmaceutical product has to be priced according to these rules, instead of being priced based on its features and the value it provides to its customers seems crazy!? If I believe that seeing my pictures in a larger format, and not having to worry about charging for a full day, justifies spending more money on a new smartphone, then so be it. That’s value-based pricing.
The only silver-lining I can see in this mayhem is that the value-denial syndrome used to be broadly shared between payers and the industry, and now they both seem to come to the same realization that value-based pricing is the only way. Easier said than done, but that’s a start.
Related Content From Inbeeo
Four Definitions of Value-Based Pricing and Counting – What is Value-Based Pricing? It’s pricing based on value! Or is it? Inbeeo defines what it is once and for all.
Tackling Rising Drug Costs in the US: Is ERP an Option? –Rising drug prices in the US are hot topic. Inbeeo takes a look at the recent drug pricing proposal by the Democrats suggesting the use of ERP.
Three Reasons Why Value Definition Is The Ultimate Challenge for Pharma – Inbeeo’s perspective on what is the true value of pharmaceutical innovations