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Four Definitions of Value-Based Pricing and Counting

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±2.5 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.

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 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!

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Six Drugs that Cost a Medicare Part D Beneficiary more than $10,000 a Year

No one will argue that Medicare Part D met a genuine need at its inception in the mid-2000s – offering US Seniors an affordable voluntary health insurance plan that would cover their outpatient prescription needs. Fast forward 10 years. Has Part D met its objective? Looking at the front-end of things in terms of the availability of a wide range of plans at an affordable premium in all parts of the nation, yes, definitely. Looking at the back-end of things in terms of actual payments made to beneficiaries, this is a question mark.

The good thing about CMS is that they are true to their commitment to data transparency and availability. Seventy percent of all claims leading to a Medicare Part D reimbursement event are available on their website for anyone to download and analyze. Which I did and which I will keep doing regularly given the wealth of insight laying in that goldmine for anyone interested in value-based healthcare. And because this is individual claims data, you can aggregate them by any variable you are interested in – product if you are a pharma company, region if you are a policymaker, indication if you are a physician, etc. I have looked at it through the lens of the beneficiary. More precisely, by asking the data

“How much could the maximum financial burden for a patient be in one year and for one single medicine?”

The short answer is “a lot”. In more details, there are 6 prescription drugs that will, on average, cost a patient more than US$10,000 a year

  • Cinryze® – a C1 Esterase Inhibitor indicated for the prevention of swelling and/or painful attacks in teenagers and adults with Hereditary Angioedema (HAE)
  • Berinert® – a C1 Esterase Inhibitor indicated for the on-demand treatment of swelling and/or painful attacks of hereditary angioedema (HAE) in adults and children
  • Actiimune® – an Interferon Gamma-1B indicated for the treatment of chronic granulomatous disease and severe malignant osteoporosis
  • Gattex® – a glucagon-like peptide-2 (GLP-2) analog indicated for the treatment of adult patients with Short Bowel Syndrome (SBS)
  • Kalbitor® – a plasma kallikrein inhibitor indicated for treatment of acute attacks of hereditary angioedema (HAE)

Now, the purpose of this post is not to discuss the merit of these products from the point of view of value-based pricing. Because value-based pricing is my day job and I somewhat consider this blog to be my night job. No, the purpose of this post, also because it is getting late in the day and I am craving sugar, is to write about donuts. More specifically what is usually in the middle of it – a big hole.

Somewhere in the thick piece of legislation that provides the framework for Part D, lawmakers have designed a sophisticated scheme that would make the beneficiaries financially accountable for a portion of their drugs payment. The definition of “portion” has been the subject of intense Experts meetings and has led to this –

source: Center for Medicare and Medicaid Sevices / Inbeeo’s analysis

I have put this schematic together because trying to write about it would have led to something like-

The beneficiary funds the first tens of dollars of the cost – except in the case of $0-deductible plans – and then splits the cost 25-75 with the plan, before paying a bigger portion of the cost in something called the “donut hole” – portion that becomes smaller and smaller as manufacturers are required to chip in as part of the Affordable Care Act – for finally paying a small portion of the highest tranche of the cost – for which the manufacturer is not required to chip in – although it is aptly named the “catastrophic coverage portion”.

And there goes the rule to write short sentences in articles – down the toilet!

So, how big is the problem? Surely small in absolute terms. Surely big if you ask the affected patients. And there are worryingly more and more of them-

part D copay greater than 10K evolution
source: Center for Medicare and Medicaid Sevices / Inbeeo’s analysis (based on 70% of all claims; beneficiaries of Low-Income Subsidies were excluded)

Putting the initial legislation aside, what stuns me the most in this story is the level of sophistication that has been applied to the progressive closing of the donut hole, while the Catastrophic Coverage Portion was ignored altogether. It inevitably reminds me of one of my all-time favorite scenes from The Simpsons-


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The Dust Never Settled after Drug Pricing 9/22

Google is powerful. You knew that, I knew that. It really is. But it keeps amazing me when it differentiates a church from a cathedral in my photos while Adobe can’t recognize my face, when it sends me a weather alert before I get on my bicycle while my iPhone thinks I’m driving when I’m on the tube, or when it perfectly filters all the spams from my Gmail account while Outlook keeps trashing emails from clients. In a recent acute distraction episode, I started reading on the hot topic of how investors were increasingly leveraging Google’s analytical tools to make investment decisions. You may have heard for instance that the correlation between the price of bitcoin and google searches of the term was at an astonishing 91%. Enlightened by my discoveries, I tried to bring them back home and started to analyze how search topics such as “pharmaceutical market access”, “drug pricing” or “value-based pricing” were trending.

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Google Search Index for “value-based pricing”, “pharmaceutical market access” and “drug pricing” over the past 5 years – source Google trends

The first piece of insight I gained from my exploration was that my line of business was not exactly booming, at least not the bitcoin-like booming. But it was stable. The second – and way more striking fact – was that something happened around September 2015. Something that had had a sustained effect on how many people around the world were genuinely interested in how prescription drugs are being priced. The data looked like a textbook example of a structural change in a time series. Now, when things get really interesting with Google’s analytical tools, is that you can dig deeper into regions, associated search terms, time frames, type of searches e.g. web, news, blogs etc. Trying to put my finger on the event(s) that triggered the shift, my first list of suspects was without surprise:

  • Hot topics in the US included Medicare Part D, 340B federal discount program, drug coverage, and Valeant
  • US elections also came up quite significantly with the usual pharma-targeting Constant Gardner-inspired evil corporation rhetoric
  • Other regions on the heat map included Canada, Western Europe, and India

All of those were interesting, but nothing really coincided with that week of September 20th, 2015 when the surge happened. Slicing the data like a salami, I zoomed into that week and split the data into search types. And then it was apparent “like the nose in the middle of the face” (you don’t really say that in English, do you?). On Tuesday the 22nd of September the news of Turing Pharmaceuticals jacking up the price of Daraprim by 50x broke globally. However, searches of “Turing Pharmaceuticals” were insignificant. Instead, all the noise was crystallizing around the name of the company’s founder, Martin Shkreli. So how does “Martin Shkreli” search term correlates with “Drug Pricing”? Well, it’s bitcoin-like correlation.

Google Search Index for “drug pricing” and “Martin Shkreli” over the past 5 years – source Google trends

To be complete, the only other search term providing a similar level of correlation was “pharma bro”. If you’re having doubts about one man significantly and durably raising the profile of prescription drug pricing like this (or if you’re a statistician about to add a “you forgot to account for the confounding factors” comment), here is the order of magnitude between him and the other associated search terms.

Screen Shot 2017-11-16 at 13.49.04
Google Search Index for “Martin Shkreli”, “Turing Pharmaceuticals”, “Valeant”, “Medicare Part D”, and “304B” over the past 5 years – source Google trends

So what did we learn? I’m not sure, to be honest. This piece of data left me voiceless, and I wanted to share it. It saddens me to think that the incredibly important topic of drug pricing has been brought to light by this individual. Taking a step back, there must be a silver lining here

  • People are watching – and that’s a good thing. In the end, pharmaceutical companies and payers are both accountable to the people they serve. Pricing, discounting, coverage, and co-pay decisions must be based on patient value
  • It is personal – corporations can be detestable. Remember Enron? But nothing matches the  power of a bad guy a la Joker in Batman, or more so a la Pellegrin in The Constant Gardener, to mobilize the masses
  • Google is powerful, use it! – I mean not for googling. For everything else. Companies are spending millions in market research while they could reinvest that money in R&D and start leveraging the data they have free of charge at their fingertips
0 comments on “Why I Prefer a Value-Based Healthcare Mayhem over the Status Quo”

Why I Prefer a Value-Based Healthcare Mayhem over the Status Quo

“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.”

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.
  • 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. See here.
  • 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. See here for instance.
  • 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.

Why a pharmaceutical product, instead of being priced based on its features and the value it provides to its customers, has to be priced according to these rules? 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.

0 comments on “Three Reasons Why Value Definition Is The Ultimate Challenge for Pharma”

Three Reasons Why Value Definition Is The Ultimate Challenge for Pharma

My first client call when I started my second spin in consultancy went like this

We have a value dossier. It does a great job at linking our data to an exhaustive list of value messages [pause]. But we don’t have a story to tell.

I thought this was a bit weird and probably unusual. Six months down the road, it turns out it was a pre-recorded message that would keep repeating itself over and over.

0 comments on “The Care Affordability Index or How to Go Beyond the “# of Lives Covered” Metric”

The Care Affordability Index or How to Go Beyond the “# of Lives Covered” Metric

A Care Affordability Index could constitute a way more informative measure of patient-access performance than the binary “number of lives covered”. And it is not that complicated to implement. A post for dashboard lovers.

We all see our mailboxes bombarded by emails trying to sell us syndicated reports claiming that they will solve the key issues the life science industry is facing for us. Rather than seeing these emails as the annoying spams they probably are, I actually read them, and over time, I have even developed a genuine interest in them. Indeed, trying to charge me USD5,000 for something I know was true in 1996 is not email marketing, it is art. Here is a gem from a recent one –

“Physicians want efficacy, payers want cost-efficiency, and patients want access.” How 1996 is that?

0 comments on “Drug Pricing – Feeling the Squeeze”

Drug Pricing – Feeling the Squeeze

A new year, a new administration in the US, a hard Brexit, general elections approaching in France and Germany. We are entering an era of deep uncertainty in major pharmaceutical markets. It is hard to make any prediction for pharma and biotech companies in these circumstances. But I’ll take a chance: there will be more pressure on drug prices on both sides of the ocean. OK, I admit it, I took no risk at all. In times of uninhibited populism, with the extra bit of legitimacy granted by a handful of shameless, unethical players, drug companies remain the perfect scapegoat for politicians of all kinds in their rhetoric on public money sparing. I am still puzzled by the reaction of the stock market right after the US presidential election (see the left half of the picture). The old equation of (R) = pharma revenue up and (D) = pharma revenue down has been invalid for many years. Today, the lines are blurred, and the recent ‘drug companies are getting away with murder’ comment by President Trump is just another confirmation of this fact. Anyway, stock prices are back to where they were pre-election (see the right half of the picture), and that leaves us with the same question – ‘what’s next?’

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Three Things Drug Companies Can Learn from Vaccines

One of the many perks of my recent shift to consultancy is that I get to work on more diverse therapy areas – such as vaccines – as compared to when I was a pharma employee. With the vaccine market being concentrated among a handful of players, you can spend an entire career in pharma without being directly involved with vaccines. In fact, you could even be developing drugs at one of the top vaccine players such as GSK or Sanofi, without having much interaction with your vaccine colleagues who operate in a standalone business unit at a different site. Which means you are missing out because one – it is a fascinating business that has been reinventing itself for more than 2 centuries and two – it is a gold mine of insights for the broader curative pharma business. In this brief post, I have selected three major aspects of the vaccines value chain that could bring a positive change to pharmaceutical drugs market access and commercialization – if applied with discernment.

Vaccines are Contributing to Public Health