Pharmaceutical companies are under pressure to demonstrate the value of their products, in the face of rising healthcare spending and growing concerns about drug prices.

It is no longer enough to show that drugs work as promised. Health plans and other payers now want drug makers to demonstrate improved patient outcomes that justify the price versus established, lower-price therapies.

One pricing model receiving increased attention is value-based pricing (VBP). With selected products, under certain conditions, VBP can deliver the value that healthcare systems, payers and patients seek. The concept of VBP is not new, and healthcare stakeholders are still grappling with what it means and how to implement it.

By following these key tips, pharma companies and payers can unlock the “value” component of VBP:

  • Keep it simple: VBP can be complex, so an emphasis on simplicity should help all parties operationalize and more accurately measure the effectiveness of this approach.
  • Focus on appropriateness of care: Choose the right drugs for the right patients at the right time to provide a better chance of positive health outcomes.
  • Keep transaction costs at reasonable levels: Both pharma companies and payers may have to invest significantly in VBP. Robust cost management can help deliver an affordable cost of treatment.

Setting up for success: when to apply value-based pricing

An unsuccessful VBP program fails all stakeholders: the patient, who may not have access to critical therapies; the pharmaceutical company, which fails to generate sufficient revenue in return for their research and development investment; and the payer, who has invested in the set-up.

The prospects for VBP are promising, but it is not suitable for every type of treatment. Before deciding whether to apply this payment method, there are two essential pre-conditions for therapies:

  • Measurable outcomes: Value can only be calculated where there are measurable outcomes for the population being treated, and these outcomes have, at a minimum, a significant correlation with the product use.
  • No generic alternatives available: If generic versions of the product are already on the market – or soon to be available – the drug is competing with other products on costs rather than outcomes, reducing the relevance of the concept of value.

Drugs that are also more likely to be promising VBP candidates are in competitive therapeutic classes, have sales volumes that are or may be significant, have payers and clinicians concerned about appropriate use and efficacy of the treatment, and have high costs associated with poor patient outcomes, such as increased hospital readmissions. Additionally, given the importance of having reliable outcomes data, a pilot within a specific country or region can give a good indication of the feasibility of VBP for the therapy in question.

Key VBP implementation challenges

Having decided to proceed with VBP, outcomes measurement needs to be agreed upon for the condition and the appropriate use of the therapy. The outcomes need to be measured against what has been published in clinical studies and quality indicator repositories, and is included as part of the drug label. This requires collaboration with healthcare providers to select the outcomes and clearly define inclusion and exclusion criteria for patients.

Once outcomes are defined, the next hurdle is estimating causality between the product and outcome. Medications are tested in randomized, controlled studies that seek to prove safety and efficacy in target-patient populations. The biggest criticism of this approach is that the drugs are not tested in real-world settings that account for compliance, lifestyle and other medical conditions or medications that can impact a patient’s quality of life.

Measuring outcomes: An effective VBP scheme needs timely, accurate data to track the health benefit of therapies. Ideally, the infrastructure to measure outcomes will already be largely in place. If this has to be built however, it can raise costs and implementation complexity. Clinical registries or patient reported outcomes (PROs) are already available in numerous therapeutic areas and geographies. Claims data can also be a remarkably useful resource for measuring or estimating outcomes like mortality, re-admissions or potential adverse drug events (drug-drug or drug-disease).

Regulatory and legal barriers: Many current healthcare payments systems worldwide are not compatible with VBP requirements due to pricing structures and restrictive legislation. For example, many countries around the world set drug prices centrally. Without specific provisions for VBP arrangements, there is no clear route for payers to negotiate separate VBP schemes in such systems. Additionally, some health systems explicitly prohibit payments outside of legally mandated reimbursement systems. Many countries already have some VBP arrangements in place, which can provide guidance for meeting legal requirements.

Value-based pricing has potential to bring value to pharmaceutical companies, payers, patients and providers in advanced health systems. But this can only happen when stakeholders define and measure outcomes effectively, choose appropriate patients and manage costs efficiently.

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