Value-based pricing in pharmaceuticals: Hype or Hope?

in Healthcare, Industry insights, 30.01.2017

In the face of stagnant healthcare budgets and ever-growing demand for care, pharmaceutical companies are under severe pressure to demonstrate the value of their products. Value-based pricing has exciting potential to help improve patient outcomes – and at an affordable cost.

External challenges are forcing pharmaceutical companies to change business models from sales push to a more value-based approach. US President-elect Donald Trump’s comments during his press-conference on 11 January that the sector is “getting away with murder” and that there’s “very little bidding on drugs” sent drugs stocks into a nose-dive. Shortly afterwards, the US Congress decided to start to deconstruct Obamacare.

Clearly, the US drug market, still the most important in the world, is facing substantial change and it’s not alone. Other markets are being forced to adapt as fiscally constrained Western economies have less room to grow healthcare spending and as both public and political pressure increases. In Switzerland, public talks on drug pricing are also becoming more frequent. Traditionally a high price country, Switzerland ranks on per capita spent on healthcare among the top three.

Why focus on pricing?

The portion of spending on drugs has been historically about 10 percent of total healthcare expense in Switzerland. Does it make sense to focus the discussion on a comparatively small item on the whole healthcare bill? In a broader context, the pricing debate is a key element in the attempt to manage and constrain healthcare cost in a health system. And pricing is extremely relevant to the strategic direction of therapies: patient outcomes.

Therapies need to demonstrate greater value

Following a strategy of pursuing drug effectiveness and maximizing sales volumes is no longer a sustainable business model for all pharmaceutical companies – pressure is increasing to justify the price by proving more positive outcomes. Value-based healthcare is defined as the health gains (outcomes) created for patients per unit cost by healthcare interventions. The concept of value-based pricing (VBP) has been around for some time, but healthcare stakeholders are still grappling with what it means from a practical implementation perspective.

A value-based pricing strategy is complex to design. And not all products are suitable for VBP. However, changing the pricing paradigm impacts the entire value chain in the life science industry; from research organizations, to manufacturing, marketing and sales organizations but also practitioners and payers. By opening up the entire clinical supply chain, from R&D to patient sign-off, it’s possible to create value opportunities that could be used to fund innovation and provide enhanced services in silos currently being neglected.

Value-based pricing in action

While the theory is relatively simple, putting it into practice is a significant endeavor. Defining relevant outcomes and measuring them are just two very difficult areas in putting value-based pricing into practice. Not to mention the incompatibility of many healthcare systems with the concept of value-based pricing. To find out how it is being used, read about Novartis’ heart drug Entresto in our white paper.

Hype or hope? Is the time right to tackle the topic now?

With the President-elect in the US calling for price reform, and the unrelenting drive for cost efficiency coming from commissioning agencies such as insurance companies or national health services – there’s no time to lose. The life sciences industry will need to think about the breadth of services it can offer and how it can be an important stakeholder in the healthcare ecosystem – and not just sitting on the sidelines. Moreover, establishing a sustainable model that contributes to real patient outcomes will generate the financial and operational headroom for investment and innovation.

Read about how Novartis is using VBP for its heart drug Entresto and find out more about the barriers to implementation and pragmatic ways to achieve successful and wide-spread adoption of VBP in KPMG’s recent white paper Value-based Pricing in Pharmaceuticals.

 

 

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