Four Definitions of Value-Based Pricing and Counting

A Value Based Pricing Buzz but not so much Substance

I just got back from the annual ISPOR conference in Barcelona after a few years of absence (my absence, not ISPOR’s; it turns out they kept hosting the conference without me #weird). And I still feel energized by the quality of the scientific exchanges I had the chance to participate in (it also turns out the overall quality of the conference went up in my absence #weirder). At Inbeeo, we got an energy boost from all the buzz around ‘value-based pricing’, or VBP. My VBP’o’Meter counted an average of 24.6 mentions across the three plenary sessions. Quite a good sign as we are rolling-out our very-own i-vbp^®. At the same time, if like me you are more on the tangible application side of things, you might have returned from the conference with a hint of frustration. There was no hands-on session on VBP, not even a presentation on how it is defined.  A formula maybe? Nope. By contrast, if you are new to the field and this was your first ISPOR conference, chances are you now have a good sense of what is an Incremental Cost-effectiveness Ratio (ICER) or a number of Quality-Adjusted Life-Years (QALY). Not so much of what is a value-based price.

So what is the Definition of Value Based Pricing?

It left me with a paradoxical feeling and many interrogations. Why would such an important topic not receive the clarity it deserves? Is it because it is so obvious, no one would want to waste the attendees’ time with some form of description? And no one would dare to ask, of course. A bit like ten years ago everybody would mention ‘hashtag’ and you would not dare to ask, because you knew it would have made you look bad. Or is it because it is not so clear? Or even worth, not clear at all? Maybe this is because there are 5,485 definitions of value-based pricing, i.e. one per ISPOR attendee? That would be extreme. More reasonably, the only plausible explanation I can find is that there are a few definitions of value-based pricing that co-exist at the moment. And they mainly depend on one thing – perspective.

The health-economist’s definition

If you are a health-economist, chances are you have developed expert skills at estimating the incremental cost-effectiveness ratio of medical innovations vs. the standard of care in a given indication. You do this by applying your craftsmanship to cost-effectiveness model building. Whether you are addicted to Excel, R, or TreeAge, you have also become an expert at “stochasticizing” your otherwise largely deterministic models. For you, value-based pricing is straightforward. You plug a monetary threshold representing the willingness-to-pay of the payer you are building your analyses for in your model, and you perform a ‘break-even analysis’ of the price of the new treatment. You literally push the treatment price up to the point that will break the bank. Or more precisely, you look for the lowest price point that will push the ICER of the new treatment just above the set threshold.

The US Pharmacy Benefit Manager’s definition

As a PBM, you know very well about value-based price. It is your job to obtain value-based prices from pharmaceutical companies to get the best deals for your clients. Whatever is the way to get there – rebates, value-based-contracts, market-share based agreements – value-based price can have only one definition: the cheapest, with cheapness being measured as the gap between the product price tag and the one you have skilfully negotiated. And yes, you have recently started to embrace the health-economist’s definition (see above) by leveraging the reports from the Institute for Clinical and Economic Review (ICER, but not the same as above ICER) in price negotiation. After all, it’s leverage.

The European public payer’s definition

As a European payer, you have a lot of respect for the health economist’s definition of value-based pricing. You employ a few health-economists yourself and you have put a lot of energy in the development of your very own guidelines for health-economic evaluation. But after careful consideration of the health-economist’s value-based price, you have no other option than applying a price point that is a tiny bit lower – the affordable price. Literally the price you can afford given your budgetary constraint in the given therapy area and the pressure from your boss. Whether you get there by playing with the thresholds like in England, imposing pre-historical price comparators like in Germany, or ‘just because’ like in France, it does not matter. You don’t have a choice.

The pharmaceutical company’s definition

As a pharmaceutical leader, you are fully committed to your mission of providing value for your end-customer – the patient #wewontrest. There is no doubt in your mind that payers around the world demonstrate a very fragmented view of the value of your product. You have decided to embark on a journey to educate them on the many dimensions of the value they are missing out on, blinkered by their restrictive value assessment frameworks. Value-based-price for you is a multiple of what any breakeven analysis will produce, and it finds its justification also in the considerable investments you are making in Research and Development.

 Inbeeo’s Value Based Pricing Definition

Spoiler alert! There is a clue in the blog’s picture. We believe it is pricing based on value. Or if I elaborate,

True value-based pricing is realized at a point where the value provided by a new product matches the differentiated worth the company is claiming for it.

This definition is freely inspired by Harvard’s Strategy Professor Utpal M. Dholakia’s, and frankly, we believe it says things in a way that sums it all up nicely.

Having said this, because this definition is largely driven by consumer goods pricing, it requires a bit of extra work for health technologies pricing. Because the demand for drugs and medical devices is intermediated, and because the realization of value cannot be seen at the level of one agent in isolation of the others, value-based pricing must span across several perspectives to reach an elusive goal of reliability. To be fair, it means that there are bits and parts of the four definitions of VBP described above in our definition of value-based pricing. It is all a question of how you weight them against each other. Surely a hot topic for many more posts to come. Watch this space!