The Price of Everything and the Value of Nothing

What is value and how do we prove it? Economist Dr Jason Shafrin talks prices, politics and the problem of monopolies.

Once a topic only for pharma insiders, drug pricing has become a hot button issue across the world, as healthcare systems already strained by demographic shifts and funding issues struggle to cope with the eye-popping prices of some new innovative medicines.

In the US, healthcare has risen steadily up the list of issues that people care about, routinely making the top five top issues during the 2016 Presidential election alongside the economy, terrorism and foreign policy. When politicians discussed healthcare, high drug prices always came up, attracting criticism from nearly all candidates.

“We have seen a lot of public anger and focus on drug prices over the past year in particular,” says Dr Jason Shafrin, Senior Research Economist at Precision Health Economics. “Firstly, there have been a number of high-profile drugs where the prices have been fairly high, some of which are innovative new products but some are generic or long-established products where the cost has increased sharply. In addition, in the US, the share of patients with high deductible plans – where they have to pay for everything out-of-pocket until it reaches a certain threshold – has increased, exposing patients to more of the drug cost. These elements have come together to create this increased focus on drug prices.”

Proof of value

Shafrin is also Director of Research for the Innovation and Value Initiative (, a coalition of providers, payers, patient advocates, scientists, researchers and others dedicated to preserving innovation and enhancing value across the healthcare system.

“When it comes to pricing, the focus has to be on value,” he says. “We cannot pay high prices just because a company has invested in R&D and created a new drug. From an economist’s perspective, there has to be a trade-off between the desire for low prices in the short term – so that people can have access to the drugs they need now – and the desire for high prices to reward innovation and incentivize future investment. We should only pay high prices for drugs that deliver really high value to the patients, not just incremental advances over existing treatments. In the past, companies just set the price, but now they have to justify it through its value to patients, payers and society in general.”

As an economist, Shafrin outlines the problem facing both pharma companies and payers. “In markets where there is plenty of competition, prices remain low and the market works well. The problems come when there is a single product in a disease area or for a specific group of patients. With such a monopoly, often times there will not be a functioning market, so how do you determine the price of a medicine? Again, it all comes down to proving its value.”

The jury is still out on whether, and in what way, the US might follow Europe and Canada in focusing on cost-effectiveness modeling, he says. “Europe is ahead of the US in terms of cost effectiveness and also performance or outcome-based agreements between pharma companies and payers. This is, in part, because it’s easier to get everyone to decide if you have a centralized system, whereas, here in the US, you have to negotiate with every insurer separately.”

In the US, however, there is a clear industry-wide move towards greater focus on cost-effectiveness modeling – and it’s here to stay, says Shafrin. “There is a lively debate ongoing not about whether we need to use cost-effectiveness but how we do it, and how the results of these analyses are used to inform decisions by patients, providers, payers, policymakers and others. Some people believe we need a kind of centralized process in the US for setting drug prices as in Europe, where a central body does the cost-effectiveness analysis and looks at the cost per QALY. There are several groups – such as ICER– that are already engaged in this kind of clinical and economic research. However, other people have a different approach, a more market-based system where different payers – from Medicare to Medicaid to the commercial insurers – decide separately how they want to calculate the value of a medicine.”

The element of choice

And, as always, the devil is in the details. “How do you measure value? Maybe there might be a treatment for multiple sclerosis, for example, that also confers a significant reduction in the caregiver burden, but should we include that value component in the analysis? Choice is also very important here in the US. With cancer, for example, some patients might prefer the most efficacious treatment while others might prefer one with fewer side effects. A system that identifies the most cost-effective medicine and mandates that a physician must prescribe it – and a patient accept it – could be very problematic, especially when you think that the drug will probably work better for some sub-populations than others.”

Risk-sharing or outcome-based agreements between manufacturer and payer are also becoming more common, says Shafrin. “Between 1993 and 2013, we have seen about one performance-based agreement per year on average.” In recent years, however, there has been more interest from all stakeholders in these outcome-based pricing agreements. “The idea that payers only pay for drugs that actually work is very appealing, not just to insurers but to some pharmaceutical leaders too. Novartis CEO Joseph  Jimenez has spoken about the need for value-based pricing. Despite the theoretical benefits of value-based pricing, practitioners must address the challenges presented by the additional administrative burden, as well as data collection and analysis needs. Yet, there is definitely more pressure on payers to make sure they justify the value of the medicines they pay for and outcomes-based pricing models can be very useful.”

Future gazing

Looking forward five years, where does Shafrin believe the industry will be? “I don’t think 100% of drugs will be on performance-based contracts but this is the movement of travel. We may not see such agreements for clear breakthroughs, at one end of the spectrum, or really low-cost drugs at the other, but, over time, we will see more value/performance-based agreements. At the moment, clinical trials focus on clinical endpoints for regulatory approval but, if everyone starts to care more about value and patient outcomes, then companies will be called upon to measure these and other factors not only directly in clinical trials but also through real-world data analysis.”

At this time, there is not enough evidence to know what models might evolve, he says. “We do not yet know how well these agreements are working, what their success rate is. Those statistics are only just starting to come in now, so we haven’t yet been able to draw out the learnings. We have learned from previous models but the sample size is very small, so the next two to three years are vitally important ones, as we find out what works and what doesn’t.”

What is not clear is whether such agreements will actually reduce the drugs bill. “It is unclear whether total pharmaceutical spend will go up or down. However, what is clear is that the sticker price of new medicines will get a lot of attention. Precision medicines are a good case in point; by generating significant benefits for a smaller share of patients, the value and corresponding price is likely to be high. Although cost per treatment may increase, overall healthcare spending may fall by avoiding treatment of patients for whom the treatment is unlikely to work. Furthermore, medical costs for these patients may go down as patient outcomes improve. It’s a win-win for all, companies, patients, payers as a drug that is more targeted is much more valuable.”

The increased focus on healthcare costs should not be confined to drugs alone, says Shafrin. “We need to focus too on the non-drug side of healthcare; the Centers for Medicare and Medicaid Services aim to tie value to their reimbursement of providers – such as physicians and hospitals– by 2018. Clearly, as we move in the direction of measuring value, how we do it is going to evolve over time.”

To find a path forwards, everyone must work together, he says. “This is driving force behind the Innovation and Value Initiative; we need to bring together life science companies, payers, providers, and patient advocates. We cannot have a situation where insurers talk only to pharmaceutical companies, and leave patients, physicians and providers out. We don’t want a system where physicians are unable to choose the right treatment for the patients; we don’t want bureaucrats picking treatments for patients. Only by bringing everyone to the table and listening to the different opinions and viewpoints can we craft agreements that really deliver.”

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