Indication-Based Pricing: A Utopian Ideal?

The potential benefits of moving to a variable pricing model based on indication are manifold, but is the US healthcare system ready?

Drug pricing is an area of policy that sometimes leaves those outside the boardroom scratching their heads as to how companies arrived at their decisions. Those that seek a simpler, more value-based model are increasingly looking to indication-based pricing as a potentially simple solution – where the market price of a drug is linked to its effectiveness in a specific indication. After all, why should a drug that is very effective in colon cancer and only marginally effective in pancreatic cancer, for example, come with a one-size-fits-all price tag?

While the concept of indication-based pricing makes perfect sense, the convoluted nature of the US ecosystem means any change would not be simple to make, says Soeren Mattke, Senior Scientist at the public policy research institute RAND Corporation. “In Europe, manufacturers tend to negotiate with one centralised agency about price and restrictions. But in the US you have to negotiate with a multitude of public and private peers. It's basically a door-to-door fight where you hash it out with every insurer, pharmacy benefit manager or whoever.” 

For Steven Pearson, Founder and President of the influential ICER – Institute for Clinical and Economic Review – the availability of data is another sticking point to any move towards indication pricing. “Right now, very few systems can track the drug from manufacturer to patient, so it is very hard to know, in many cases, what a drug is being used for. It passes through many different channels, so it is not so straight-forward. If you don't have the data, you can't really get started.”  

The human element cannot always be trusted either, adds Mattke. “US healthcare is a very entrepreneurial system, so there is always a concern that people will be overcharged. It is not a huge stretch to imagine physicians charging for a higher-cost indication even if it was used in a lower-cost one. It is not out of the question that that would happen.” For indication-based pricing to really take hold in the US market, governmental schemes would need to adapt, says Pearson. “Medicaid programs are guaranteed the lowest price in the market for many drugs. The way the system is now, if you have an indication-specific price that is used for a high-value indication 90% of the time but is used for a low-value indication 10% of the time, Medicaid would get the lower price for the drug no matter how it was used. That's why manufacturers can't split the price and make it a huge gap, because it would mean that the users of Medicaid –a large chunk in some cases – would be guaranteed the lowest price.”

Given the many challenges, what does the future hold for indication-based pricing? For Mattke, it offers payers a valuable bargaining chip in negotiations. “If you have a drug that's marginally effective or only effective in a subset of patients, without a discount payers will put that drug in a very bad position in the formulary. It’ll be fifth-line, after all else has failed, and come with a lot of co-pays, paperwork and hassle because it is not a very good drug. But if you accept the lower price in exchange for a more favourable formulary position, in principle it could help both sides, most especially the patients it may help.”

While we may not see indication-based pricing for a while, that the topic is under discussion is a significant step forward for US healthcare, says Pearson. “Indication-specific pricing in some sense forces manufacturers and payers to talk about value and its linkage to price in a very concrete way, and that's new for the US system. It’s not so new in Europe but it's very new to the US system. I think that it is healthy and will grow as payers and manufacturers get more comfortable having that kind of explicit conversation about value.”

Bill Dreitlein, Director of Pharmaceutical Policy, ICER, will be engaging in a panel discussion on indication-based pricing at the Data, Evidence and Access Summit 2017 event in November.    



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