Value-Based Pricing: The Role of Outcomes Data in Pricing Models

Data about escalating prices for cancer drugs laid the groundwork for the panel that followed, where Michael E. Chernew, PhD, Harvard health economist and co-editor-in-chief of The American Journal of Managed Care, outlined how changing the paradigm will require a different kind of shopping.
Published Online: January 29, 2014
Michael E. Chernew, PhD; Cliff Goodman, PhD; Jeffrey D. Dunn, PharmD, MBA; Kirby Eng, RPh
Data about escalating prices for cancer drugs laid the groundwork for the panel that followed, where Michael E. Chernew, PhD, Harvard health economist and co-editor-in-chief of The American Journal of Managed Care, outlined how changing the paradigm will require a different kind of shopping. Cliff Goodman, PhD, chaired the panel, which featured Jeffrey D. Dunn, PharmD, MBA, and Kirby Eng, RPh.
Having just heard a provocative take on how research design is driving up drug prices, Cliff Goodman, PhD, opened by asking Michael E. Chernew, PhD, whether anything he had heard offered hope for the concept of value-based pricing: the principle that says healthcare costs should be tied to their effectiveness, and drugs that offer little value should be reimbursed in a way that either pushes them out of the market or forces their makers to cut the price.

Goodman asked Chernew how the market would react to some of the ideas from the previous talk. Chernew said the answer was complicated, because it depends on “who’s doing the shopping, what they are shopping on, and how effective is that shopping.”

Chernew said Massachusetts’ healthcare reform experience, which is considered a prototype for what will come under the Affordable Care Act (ACA), has shown that “when you made the providers bear risk for medical care, they shopped unbelievably well. They changed a little bit of practice patterns, but boy, they sent people to the lowest cost providers, because now when they spent extra money to send a person to an expensive provider, that was coming out of their profit.”

Enforcement came not from individual doctors, but from practice groups that figured out low-cost structures. This is trickier in oncology, Chernew said, because the “death panel” notion makes it politically more difficult to deny therapies.

However, he said, if some expensive drugs with marginal benefit relative to their cost are placed on a “fourth-tier formulary” where they are rarely prescribed, the market forces will take over.

But, Goodman asked, “Is it the patient who’s doing the shopping or the oncologist?”

Echoing Scott Ramsey, MD, from the prior talk, Chernew said it depends on how one spreads the risk. A pure patientcentered model—with no provider risk—would allow out-of-pocket costs to drive all care. Conversely, bundled payments can put too much burden on the doctors. “What we’re trying to do now—exactly what Scott said—is we’re spreading the risk so both are doing shopping in very particular ways.” Chernew said pricing models have to allow for innovation, or it won’t happen.

Goodman then turned to Kirby Eng, RPh, who, as director of oncology pharmacy management at CVS Caremark, would know whether being a big player in the market helps create leverage. According to Eng, it creates surprisingly little. What’s helping more are competing therapies within individual forms of cancer, because that allows market forces to work.

Jeffrey D. Dunn, PharmD, MBA, was asked to explain how his firm, VRx, tries to control costs. He described VRx as a combination of a traditional pharmacy benefits manager (PBM) and a negotiator with third-party administrators, that also offers medication therapy management. Dunn said he agreed with Ramsey’s assessment that economics needs to find its way back into outcomes research. “This concept of value-based pricing or cost-effectiveness—whatever you call it—is not a new concept. I think part of the challenge is that what the FDA requires of pharmaceutical companies is not what we, as payers, need and it’s not what providers need. There’s a total disconnect there.”

He added: “I really think the payment reform concept is going to be crucial, and the risk concept … is going to be crucial, because right now it’s really the payers that hold the risk, and to some extent, the patients because they’re paying copays, and providers a little bit….

“At the end of the day, we’re the ones paying for the drugs,” Dunn said. It’s time to find a risk-sharing role for drug companies, because payers are in a position where it’s hard to deny coverage based on marginal effectiveness. “If we say no right now, we’re going to be on the front page of the newspaper and we’re going to be killed, but if we could get help (in risk sharing), then we’re going to be in a much better situation.”

By its nature, oncology care presents a tougher management challenge than, say, diabetes care. But costs are rising to the point where payers will have little choice but to limit options.

“We’re going to pick 3 or 4 drugs based on value, and we’re not going to reimburse for other drugs. We’ve done that in RA—rheumatoid arthritis—and we’ve done that in multiple sclerosis,” Dunn said. With oncology, “It’s much harder; we can’t say no right now, like I said, but that’s where we need the help with the providers and other folks to say no, and if we can say no and only cover certain drugs, then it will give us different leverage.”

“So, oncology drugs are really expensive,” Goodman said, “but they’re kind of getting a free ride right now, right?”

Said Dunn, “They have.”

Chernew said that before patients heard, “no,” they would hear, “yes, but,” that exception processes would exist, and there would be hurdles to get drugs off formularies. Gaining the ability to say “no” will be essential to establishing leverage in setting drug prices, but who gets to say it and how remain unsettled.

Patients might not have enough information. Physicians seem to be the ones to say no, but “Most physicians didn’t get into medicine to say no in particular areas. So, we are struggling,” Chernew said. An educated patient like Amy Berman is rare.

Dunn agreed. “The role of insurance, just by definition, is not to pay for experiments. At the same time, we don’t want to just say no just for saying no.… We want to say yes to appropriate utilization.”

Goodman asked Eng to weigh in on how a large pharmacy could shape the landscape.

“We are under extraordinary pressure by our clients—again, health plans as well as employers—to start looking at ways to start bending that trend. That’s across all specialty therapies,” Eng said.

It’s going to be up to every stakeholder to create change, because no 1 player can act alone. “This cannot be done in a silo or a vacuum,” he said, and “Pharma has to be involved.”

“I think this is going to be anywhere from the next 2 to 5 years, and I think, again, it’s going to be driven a little bit by the patients themselves and then as an extension of that, the employers, because it’s estimated that specialty trends in general are going to double our PMPM (per patient, per month) pharmacy spend in the next 4 years.”

Goodman asked each expert to look ahead: If, in 10 years, costs have flattened, what will have been done right?

“My fear is that in 10 years, we could probably give these exact same talks and nothing will have changed,” Dunn said. “We need to figure out how we take advantage of biosimilars and generics. Right now we are totally unprepared, as payers, to deal with those.”

Eng said, assuming healthcare reform takes hold, he would like to see consumers evaluate cancer care the way they compare other products.

Chernew concluded, “The answer is we pushed risks down to providers and to patients to get the market to shop better. That’s what we have done, through some combination of this risk notion. We’ve made groups accountable.... What I believe will probably happen, if we do things right, is through aspects of personalized medicine and some of the things we saw (today), we will see markets for some of these drugs shrink.

“That will necessitate higher price for particular drugs, but the goal in economics is not to focus on the price per dose; it’s to focus on the value you get in your insurance premium.” EBO
Recommended Articles
The narrow health insurance networks that have become more common under the Affordable Care Act can reduce patient spending by as much as a third, according to research from MIT.
Maine is one of twenty-three states nationally to stay away from Medicaid Expansion.
Does $50,000 per quality-adjusted life year (QALY) hold value in today's age of high-priced specialty drugs? The authors evaluate this yardstick and recommend changes that could aid cost-effectiveness decisions.
The economy's lackluster recovery eroded wages and left millions chronically unemployed. It also offered significant relief from the fiscal distress of U.S. health spending. Now, spending fueled by the improving economy and the healthcare reform law's insurance and Medicaid expansions are likely to turn that around.