3053_DrugPricingModel_BlogAt a time when drug company CEOs are questioned in Congress and polarized U.S. Democrats and Republicans appear to unite in an intent to act on drug pricing, the industry needs to be very concerned. U.S. politicians and academics are exploring ways to satisfy public thirst for lower drug cost. The biggest danger in today’s Twitter world is the appeal of seemingly simple solutions such as a single-payer system, international price index, ICER and, recently, a three-part pricing model.

As the primary election campaigns are gearing up, politicians will seek good sound bites that appeal to the public. Whether practical execution is feasible is less important if it withstands the debate in a townhall meeting. While robust discussion and a search for solutions is very healthy, half-baked suggestions in authoritative journals are simply dangerous fodder for Twitter-zealous politicians.

An Academic Solution: The Three-Part Pricing Model

The three-part pricing model solution was recently proposed in a New England Journal of Medicine article. The academically oriented authors suggest a price calculation method, which sets a lower price at launch, a higher price as more evidence comes forward, and a lower price (again) as the treatment volume increases. While the philosophy of linking pricing to evidence is attractive, the approach has a plethora of practical problems and serious concerns. Here are my three main concerns with this approach:

1. It’s based on the wrong premise. The approach is entirely based on the PCSK9 class example—a relatively poor market uptake relative to initial expectations— and a premise that its success was undermined by doubts over long-term efficacy. That is highly debatable. The bigger problem for PCSK9s was probably the narrow population for which the medical community saw value of the treatment considering existing options. Certainly U.S. managed care organizations and pharmacy benefit managers are much more concerned about short-term cost than about long-term outcomes. Capitalizing on public concerns over drug pricing, payers could comfortably build on the medical community’s views and impose tough restrictions without strong objections from practicing physicians.

2. It’s overly complex and impractical. Second, a calculation of the three price points would be hugely complex and make it very hard for the pharmaceutical industry to forecast in support of rational investment decisions. While concerns exist over market mechanisms in drug pricing, the drug development process is very competitive and based on a somewhat predictable market opportunity. A system as proposed may seriously jeopardize this and further increase the risk of pharmaceutical investments. The article does not specify who would make the pricing decisions and how, but it would probably have to be a government agency.

3. It ignores competitive aspects. The approach does not take market competition into consideration. Second and third entries in a drug class add value in terms of stepwise improvements, additional treatment options for specific patient needs and maintaining a healthy competitive environment. The proposed approach complicates payer coverage decision-making tremendously. As drugs achieve their second pricing tier, payers will likely assume that newer, cheaper entries will have the same long-term claim and favor those. Also, it will raise substantial entry hurdles for new drugs that compete with existing blockbusters that are in the third pricing tier, as payers know that their bill will become substantially higher with drug adoption while not necessarily extracting higher patient value. Competition requires a level playing field. The proposed solutions distort that further rather than addressing existing concerns.

Drug cost has become a serious point of concern for the medical community due to what some physicians describe as “financial toxicity” with their patients. As such, it’s understandable that the New England Journal of Medicine is paying attention to the topic. However, the weight of its reputation also has implications in terms of social responsibility to thoroughly vet non-medical contributions. It may be wise to audit this part of the peer review process for robustness.


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Topics: Big Pharma, Drug pricing, Patients, payers, value and access, pharma drug pricing, value based healthcare, new england journal of medicine, three-part pricing model, market competition