KPMG cover Pricing for Survival

Getting at the value of value-based drug pricing models

Existing ‘pay for performance’ models do not scale up well yet


Everyone agrees: drug pricing is on an unsustainable upward path, and some look to variations on the concept of “value based” or “outcomes based” pricing as a potential solution. These concepts are not new—there has been substantial experience in single-payer systems in Europe with them—and a number of such contracts have received considerable publicity in the past couple years. So, if there’s an identified problem with a potentially attractive solution, what’s not to like?

A new paper from the consulting arm of Big Four accountancy, KPMG, answers that question, and suggests that there are pathways to follow forward to overcome obstacles in the US healthcare system. “While there has been a lot of attention on value-based contracts recently, the reality is that these are mostly pilot programs, and if you look closely at them, they are actually a fancy approach to traditional discounting,” contents Peter Gilmore, principal in the Life Sciences practice. “Most of them involve assessing the success of a therapy to reach a certain endpoint during a year, and then providing a discount based on how far from that endpoint the results were.”

Amy Hunckler

Amy Hunckler

The KPMG paper, “Pricing for Survival,” looks at the current trends in specialty drug pricing, contracting strategies, and the pharma industry response to payer demands. While there are substantial obstacles to overcome, KPMG suggests that pharma companies that engage in these contracting strategies will soon gain a competitive advantage over pharma companies not so engaged. “The commercial market is already reacting to high specialty drug prices by restricting access,” notes Amy Hunckler, managing director, healthcare and life sciences, at the firm, and the report’s co-author. One way or another, payers “want to reduce the total cost of care.”

Where we are now
Some definitions: value-based or outcomes-based contracts are a form of “pay for performance,” trying to reimburse only for the value created by avoiding other healthcare treatments, by reaching a certain level of improvement in patient condition, or for cures. The key is that the pharma company shares in the risk of the therapy’s success.

Some 25 branded drugs are in some form of value-based contracting in the US today, according to data cited by KPMG, but most of these programs “appear to be limited in applicability to disease states with more standardized protocols and dominated by drug therapies with single indications—notably osteoporosis, diabetes and hepatitis C.” The practice is also constrained by payer-provider networks, such as integrated delivery systems.

Peter Gilmore

Peter Gilmore

“The takeaway is that, when it comes to specialty and orphan drugs, outcomes-based pricing simply faces too many barriers at present,” the authors conclude. The operational barriers include the need for extensive data collection and correlation; patient privacy restrictions (including, soon, the General Data Protection Regulation [GDPR] in the EU); governmental pricing regulations; and the added complexity of managing the program, which many payers are reluctant to undertake. To this can be added the simple reality that with the US’ multiple-payer, multiple-provider system, there is little chance of a “standard” outcomes-based scheme. “Imagine a world in which an individual drug is subject to a different outcomes-based pricing model in each country market, with each regional payer, or even with each hospital budget holder,” pose the authors. “The complexity would be mind-boggling for even the most sophisticated pharma players.”

Intermediate steps
These obstacles are daunting, but there is a way forward, says KPMG. A reasonable course of action is for pharma, payers and providers to get accustomed to a variety of intermediate steps, while keeping the goal of real-world evidence (RWE) and true value-based pricing in sight. There are three intermediate steps to consider: indication-specific pricing; combination-therapy pricing; and product-to-patient strategies.

Indication-specific pricing: Today in most of the world, a drug is sold at one price regardless of how it is used (and with off-label prescribing, an even wider range of indications come up). Assuming that different diseases or conditions have different healthcare costs overall, there is justification for charging one price for a drug treatment for one condition, and another price for another condition, or for the same condition but with different patient sub-populations. One approach that has been used in the EU is “weighted-average pricing,” provided that solid population health data are available to estimate the prevalence of various indications or disease states.

The KPMG authors suggest that cancer would be a good disease state to evaluate for indication-specific pricing, since a growing number of oncolytics can be applied to a variety of cancer types. A level of trust needs to be established between pharma and providers: providers would need to ensure that the lower price isn’t applied to the higher-priced condition; conversely, pharma would need to get away from repricing a drug with each newly approved indication.

Combination-therapy pricing: Another basic reality of healthcare today is that for many disease states, a combination of two or more drugs are frequently required. Again, cancer is a good example (and the approach gets a boost from recent research demonstrating the value of drug “cocktails” attacking a tumor aggressively from the outset). The KPMG authors posit the existence of a “backbone drug” for a given condition, which is combined with an “add on” drug. It will take fairly sophisticated algorithms to work out the relative contribution of each drug in a combination to the overall cost of care and, from the pharma perspective, how a combination price is as, or more beneficial than simply trying to get more prescribers to use a certain drug.

Some manufacturers have their own combinations of drugs for certain disease states; the analysis becomes more complicated when drugs from different manufacturers are used in combination. Yet another complication is assessing where in their life cycle each drug in a combination exists: since a drug approaching patent expiry is about to undergo radical price reduction (typically), the combination-pricing scheme might have a limited timespan.

Product-to-patient strategies: This is the term used by KPMG for what are more commonly known as patient support programs. It is now fairly common for specialty drugs to be introduced with a bundle of wraparound or follow-on services, funded by the pharma manufacturer, to ensure the patient and provider can negotiate the prior-authorization process, obtain the drug (which is often available only from a limited number of specialty pharmacies) and receives the follow-on services for diagnostics, side effect management and adherence to therapy.

“Patient support programs have become table stakes in a competitive environment for many drugs, or for addressing idiosyncratic issues of certain therapies,” says Hunckler. “An increased focus on patient value is how manufacturers are responding to market demands for improved outcomes overall.”

Since the cost of the support program is essentially funded by the manufacturer, it can be argued that that cost is folded into the purchase price of the drug, but “payers don’t have a good way to value these support solutions,” says Gilmore. The scale of the support program can vary by the patient and the disease state, but there are few mechanisms to evaluate those cost variations. Overall, the programs foster a “closer connection between the patient, the provider and the payer,” he says—and that gets everyone closer to what a true outcomes-based pricing and contracting program could be.

What is interesting about looking at patient support programs from this perspective is that the nature of the programs is helping to evolve the future model of assessing drug value. Patient support programs, especially those managed by so-called hub services, are designed to collect and analyze patients’ health improvement. Such data collection will be an essential part of RWE-based value pricing.

Hub services have that name because they can coordinate the efforts of diverse providers (the hospital, the clinical lab, the physician and the pharmacy)—and that coordination is itself a challenge to value-based pricing. Directly or indirectly, the programs also involve the manufacturer in patient care, and thus bring the manufacturer into a risk-based approach to managing outcomes.

The main obstacles to applying patient support programs are their complexity, some competition over who ultimately manages patient care, and government regulation. Hunckler notes that the Centers for Medicare and Medicaid Services have been willing to experiment with the regulatory constraints, and there could be more trials in the future.

What to do now
Gilmore and Hunckler say that a limited number of Big Pharma companies are gaining experience in evaluating both these intermediate steps, and the ultimate outcomes-based pricing models to come. More companies need to get involved; the issue is not going to go away. The KPMG report concludes with a list of recommendations for pharma, including:

  • Engage with payers by committing “to a long-term, two-way dialogue … with the goal of refining indication-specific pricing models for mutual benefit.”
  • Develop real-world evidence capabilities, since payers are now considering RWE for formulary placement and utilization management.
  • Conduct population health studies, since both payers and manufacturers need to get a better handle on how patients care for themselves, and what sites of care are impacting outcomes.
  • Lobby for policy change at Congress, specifically to address the barriers created by CMS Best Price rules for alternative pricing models. The authors also give a shout-out to the Economic Strategy of Pharmaceutical Products department of the Italian Medicines Agency (AIFA) as one of the organizations leading academic and public-policy debate on value-based medicine.

There has been something of a stalemate in pricing discussions between payers, who want lower drug prices, and manufacturers, who want to support innovation in drug development. The better discussion to have, say the KPMG authors, is to work on developing transparency for understanding a drug’s value.