The United States must get value-based drug pricing right

The changing landscape of drug pricing policy in the U.S. has implications for the global pace and direction of innovation. Drug policy changes are being influenced by perceptions of the value of novel medicines relative to their budgetary impacts, with some believing that many medicines may not be worth their cost, creating an important role for health technology assessments (HTA). The goals of these assessments are to ensure that society does not overpay for new medications, but also does not inadvertently discourage the development of worthwhile medicines and other health technologies.

For years, the U.S. was apparently content to allow market-based pricing for patent-defined periods of time to drive investment on medicines and incentivize innovation, regardless of pricing in other countries. The U.S. incentivized global biomedical innovation with its willingness to pay more for medicines, while other countries assumed perhaps they could count on getting those medicines at a discount either before or after they went generic. U.S. payers — commercial insurers, employers, and government—have often paid for medicines that other countries said were not cost-effective.

With the U.S. becoming increasingly sensitive to the idea that it may be overpaying for medicines, and with value and cost-effectiveness influencing drug pricing policy, all Americans — and, in fact, people around the world — have a stake in making sure that the U.S. gets it right. What does getting it right mean? We assert that taking a societal perspective for quantifying costs and benefits would produce greater value for money while continuing to provide global incentives for innovation.

Assertion 1: Drug prices at launch should be linked to their health and economic value

Evaluating prescription drugs based on both clinical and economic factors is vital to ensure that pharmaceutical prices fully reflect their value to society, and that their value exceeds the value of using those same funds for other types of health care goods and services. Prices above treatment value means Americans are overpaying for some drugs: The cost of the treatment is more than the value of health benefits to patients and broader society such as caregivers and communities.

Pricing below value means that incentives for innovation may not be sufficient to induce optimal R&D investments. To be sure, drug prices do not always need to be set at the full value to society for drug companies to bring medicines to market. For instance, as new branded pharmaceuticals enter the market, prices for existing branded drugs may fall with competition. And when drugs go generic, prices fall further.

Linking drug prices to value is an important starting point, but market dynamics will cause prices to evolve over product lifecycles.

Assertion 2: Getting value-based drug pricing right is nice to have outside the U.S., but vital in the U.S.

Health-technology assessment and value-based pricing (linking drug prices to the health and broader society benefits they bring) have been embraced by many countries around the world. However, many agencies or organizations that conduct HTAs, such as the Institute for Clinical and Economic Review (ICER) in the U.S., the National Institute for Health and Care Excellence (NICE) in the U.K., and the Drug Agency in Canada, focus on health benefits and health system costs from payers’ perspectives, and either do not include other benefits and costs to society or take a narrow societal perspective. Limiting costs and benefits to the payers’ perspective is problematic if not all of the medicine’s value is accounted for.

Value should be measured as the total societal value, but this rarely happens. NICE uses a payer perspective — rather than a societal perspective — and sets a value per quality-adjusted life year (QALY) at around £30,000 ($38,000). That is far below the $100,000 or $150,000 QALY valuation more commonly used in the U.S. and reflects the fact that the U.K.’s National Health Service is a budget-constrained health system. In fact, the U.K.’s own Department of Treasury believes this QALY valuation is too low and sets its own threshold estimate of the consumption value of a QALY at £70,000 (approximately $90,000).

NICE’s narrow, payer-based approach to drug pricing has only a modest impact on the global innovation ecosystem. The U.K. makes up only 2.3% of global pharmaceutical sales, so changes in drug prices there may not materially affect drug company research and development (R&D) investment decisions. In contrast, the U.S. makes up 43% of global pharmaceutical sales, so any changes in U.S. drug pricing policy will have a large impact on R&D decisions and the number of drugs that come to the global market. In short, while U.K. drug pricing may matter a lot in the U.K., U.S. drug pricing policy matters around the globe.

Assertion 3: Quantifying treatment value from a societal perspective is needed

If value-based pricing is needed and it is vital the U.S. gets it right, how should it be accomplished? We believe that using a societal approach to value new drugs and health technologies at launch is a needed first step. We contend that cost-effectiveness analysis from the traditional payer perspective has four major limitations. Specifically, the traditional cost-effectiveness evaluations that are part of HTAs do not quantify:

  • disease severity
  • product lifecycle dynamics
  • broader impacts beyond the patient
  • broader impacts beyond health

By undervaluing the true societal benefits of medicines, this could lead to suboptimal investment decisions that reduce the number of innovations available in the future.

Disease severity is not taken into account in traditional cost-effectiveness analysis (CEA). One of us (J.S.) and colleagues have recommended using generalized and risk-adjusted cost-effectiveness (GRACE) rather than assuming risk neutrality as under traditional CEA. By incorporating risk preferences, “GRACE implies that treatments should be valued more, not just the same, for people with disabilities or severe illness.”

Failure to incorporate pharmaceutical pricing dynamics is highly problematic. Prices for hospitals stays and office visits only rise over time as labor cost, rent, and other inputs rise, while pharmaceutical prices generally fall dramatically after patent expiration. As one of us (M.W.) and colleagues wrote in Health Affairs, “By assuming a drug’s price does not change, traditional CEAs can misrepresent the total drug cost over time. For example, a CEA comparing a new drug to an inexpensive alternative can overstate the new drug’s added cost over its life cycle if it assumes that the drug’s introductory price will persist indefinitely.”

By not accounting for the fact that drug prices fall in the future once low-cost generics enter the market, cost-effectiveness analysis may incorrectly suggest the new drug represents unfavorable value.

Issues around broader societal interests, such as scientific spillovers and equity, should be considered. Darius Lakdawalla and colleagues have written that addressing inequity in health care and reducing disparities in outcomes are priorities for most Americans, so that allocating “resources to therapies or care strategies that increase equity is important to our society, however, and this should be reflected in assessments of value.”

Costs and benefits beyond those directly related to health should also be quantified in all cost-effectiveness analyses. For instance, while new treatments to control migraine may improve an individual’s health, they also may improve an individual’s productivity. New treatments for Duchenne muscular dystrophy may not only lengthen the lives of people living with it but also improve the health and quality of life of their caregivers; and by keeping kids out of wheelchairs treatment may forestall, or avoid, the need for costly home modifications.

Where to go from here?

Health-technology assessments provide signals of the potential value of health care innovations. Bringing a societal perspective to them provides decision-makers with a more comprehensive accounting of the costs and benefits of innovative medicines to promote the efficient allocation of current resources while supporting the optimal rate of innovation, what’s known as dynamic efficiency.

Value-based drug prices should be judged in the context of all societal costs and benefits for patients today and potential patients tomorrow. While there have been earlier initiatives to quantify broader societal value — such as the ISPOR Value Flower and the Second Panel on Cost-Effectiveness in Health and Medicine — in practice, only about one quarter of published cost-effectiveness studies take any societal perspective at all.

Moving from payer to societal value requires four principal advances in value assessment, which include considering: the disease severity and risk aversion; product lifecycle dynamics; the impact on beneficiaries beyond the patient; and the impact on other sectors beyond health.

A forthcoming best practice report we have written with several other colleagues aims to pave a way forward on how to incorporate these four dimensions into more generalized cost-effectiveness analyses for value assessment based on the latest methodological advances. By more comprehensively delineating treatment costs and benefits, policymakers can better evaluate how markets and policy can direct resources to maximize the positive potential impact on society.

Jason Shafrin, Ph.D., is an adjunct professor of health care decision analysis at the Alfred E. Mann School of Pharmacy and Pharmaceutical Sciences at the University of Southern California and a senior managing director at FTI Consulting’s Center for Healthcare Economics and Policy. FTI Consulting provides health economic analyses for health care, life sciences, government, and nongovernmental organizations. Louis P. Garrison, Jr., Ph.D., is professor emeritus in the Comparative Health Outcomes, Policy, and Economics Institute in the School of Pharmacy at the University of Washington and founder and CEO of Global Health Economics, LLC, which provides consulting services to a wide range of life sciences companies as well as governmental and nongovernmental organizations. Melanie D. Whittington, Ph.D., is a senior fellow at the Center for the Evaluation of Value and Risk at Tufts Medical Center and is a principal and founder of Valusphere, which provides companies and organizations, including ICER, with analytic support, advice, and education related to economic evaluations.

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