0 comments on “Tackling Rising Drug Costs in the US: Is ERP an Option?”

Tackling Rising Drug Costs in the US: Is ERP an Option?

The rising cost of pharmaceuticals is a global trend and, quite simply, it makes sense considering we are now able to modify a person’s genes to treat disease. And with this great power comes great…prices. However, questions surrounding to what extent such drug price increases are justified are becoming more frequent.

The Institute for Clinical and Economic Review (ICER) has released its first annual Unsupported Price Increase report, which is likely to further fuel the drug pricing debate. After reviewing nine US prescription drugs which had substantial price hikes, the report suggested that for seven out of nine drugs there is no new clinical evidence to support these increases. In the US, the problem with high treatment costs is compounded by the disparity between these prices in the country compared with other developed nations. As drug pricing is very much a political issue, it follows that as the US 2020 elections approach, the two words on every politicians’ lips are “healthcare” and “costs”. The fight between the Republicans and Democrats to prove their commitment to tackling prescription drug costs has intensified, with the Democrats releasing their final bill proposal on the topic.

Ultimately, if this proposal was passed it would give the Secretary of Health and Human Services the capacity to negotiate prices of the top 250 Medicare Part B and D drugs which present the greatest total cost to the US healthcare system and do not have generic competition. According to the plan, an upper limit for a drug price would be based on “no more than 1.2 times the volume-weighted average of the price of six countries (Australia, Canada, France, Germany, Japan and the United Kingdom)”. The price determined by the negotiation process would be available to all beneficiaries – not just beneficiaries of Medicare, which would likely have significant nationwide ramifications.

Since the details of the proposed external reference pricing (ERP) model were provided in the proposal, at Inbeeo we thought it would be interesting to put together a few back-of-the-envelope calculations to test the potential effectiveness of this approach in controlling US drug prices.

Five drugs which cause significant costs to Medicare (and therefore likely the whole US healthcare system) were selected from the Part B and D Drug ‘spending dashboard’. These drugs were selected based on the total spending in 2017 by Medicare and the availability of pricing data (plus partly random choice). A potential maximum ERP price for each drug, based on 1.2 times the volume-weighted average, from the six referenced countries was then calculated. We used publicly available pricing data (see end of article of specific sources) for each country – a mixture of list prices and manufacturer prices, therefore note that the potential ERP is an estimate. The volume-weighted average was based on the relative population sizes of each country. This calculated ERP price was then compared with the US FSS price to get a rough idea of the potential savings that could be made.

FSS prices, which are discounted prices negotiated by the Veterans Association and are available to all direct federal purchasers, are a lower and arguably more realistic benchmark for drug prices compared to list prices or wholesale acquisition costs (WAC) in the US. A report by Mattingly et al. which estimated US drug costs for select drugs based on manufacturer drug price transparency reports, suggested there can be substantial difference between the WAC and FSS prices, with rebates as high as 80-90% in some cases. We used FSS prices in our analysis to see whether referencing external prices could further lower the FSS price benchmark – or maybe the administration would be better off pursuing internal reference pricing?

The analysis demonstrated that for four out of the five prescription drugs the potential maximum ERP was lower than the current US FSS price. On average, the potential ERP was 35% lower than the FSS price, suggesting that reference pricing could be effective at driving down prices. The range of percentage differences was broad, with the highest difference observed for Januvia®, at -91%, and the lowest for Keytruda®, at 2%. Interestingly, estimated ERP prices were lower than current prices for both high-cost drugs, such as Revlimid® (57% difference), and cheaper drugs like Eliquis® (4% difference). Keytruda®, however, was the exception to the trend, with the estimated reference price 2% higher than the current US FSS price suggesting that ERP may not be an effective price control tool for some medicines.  

Translating these percentages into overall cost savings, we can see that certain drugs have the capacity to save Medicare several billions of dollars per year. For Revlimid®, a potential cost saving per year of almost USD 1.9 billion highlights the tremendous savings which could be made by Medicare as a result of implementing ERP in the US. Lower cost drugs, such as Januvia®, could also bring huge overall cost savings (an estimated USD 2.5 billion) given large prescribed patient populations.

ERP could be an effective cost-control tool for drugs causing some of the biggest dints in healthcare budgets, but is it the right approach to tackle the drug cost issue? The basket countries proposed by the Democrats to utilize in ERP have been criticized for their lack of comparability in terms of relative market orientation. Also, how well the model works to control individual drug prices is important, but the wider implications of this for the industry and across countries must be considered. Market launch delays, price convergence and price instability have been cited in the literature as potentially harmful outcomes of ERP on patient access. The other concern is that cutting pharmaceutical prices may decrease manufacturer revenues, which could lead to reduced innovation and development of new pharmaceuticals.

Overall, the Democrats proposal to use ERP to contain prescription drug costs in the US may be an effective solution for both high and low-cost therapies. Although, the degree to which ERP reduces individual drug prices is likely to vary on a case-by-case basis. Our analysis demonstrated that estimated maximum ERP prices for four out of five Medicare Part B and D drugs were considerably lower than current US FSS prices, with an average price difference of 35%. Patients who currently face excessive patient co-pays for prescriptions could be set to benefit from reduced prices for certain drugs, which also would fulfil politicians’ intentions to get voters on side. However, there are gaps in the evidence surrounding the overall quantifiable impact of ERP on health policy objectives. If the bill proposal in question is to be approved, I think a closer look at the impact of ERP beyond its effect on drug prices would be essential to assess the risk of compromising patient access in the long-term.

Price sources

US: Veteran’s Association FSS Price Database; UK: NICE BNF; Germany: G-BA Module 3A documents; France: here, Drug Basis and Pricing Information; Canada: CADTH Pharmacoeconomic Review and Economic Guidance documents; Japan: IHS Markit; Australia: Pharmaceutical Benefits Scheme website


Summary of the drug pricing proposal. Full version here.

CMS Office of Enterprise Data and Analytics (2018) Medicare Part D and Part B Drugs Spending Dashboard.

ICER (2019) Unsupported Price Increase Report.

Mattingly TJ et al. (2018) Estimating Drug Costs: How do Manufacturer Net Prices Compare with Other Common US Price References? Pharmacoeconomics. Available here.

Office of Health Economics (2019) Press Release. Available here.

Further Reading

Fontrier A. et al. (2019) International Impact of External Reference Pricing: Should National Policy-Makers Care? The European Journal of Health Economics.

Kang S. et al. (2019) Using External Reference Pricing in Medicare Part D to reduce drug price differentials with other Countries. Health Affairs.

Kanavos P. et al. (2017) The Impact of External Reference Pricing within and across Countries. London School of Economics.

Young K. et al. (2017) The perverse impact of external reference pricing: a comparison of orphan drugs affordability in 12 European countries. A call for policy change. Journal of Market Access and Health Policy.

0 comments on “Four Definitions of Value-Based Pricing and Counting”

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!

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?’