Using Data to Link Product Value and Price

While the pharmaceutical industry has found itself in a turbulent healthcare marketplace rife with changing regulations, new competitive challenges, and increasing pricing pressures, the end goal for manufacturers remains the same -- product reimbursement and optimal pricing.

These two terms are regularly linked together because reimbursement is influenced by pricing.  In this current cost-conscious environment, governments and other healthcare providers/payers are honing in on the prices of new therapies and denying market access if the data doesn’t justify the proposed price.  In previous columns, I have discussed how economic and clinical data considerations should be incorporated into development and commercialization strategies to clearly communicate the product’s value proposition to market stakeholders.

This month, I add to this discussion by exploring the need for manufacturers to refine their conversations with payers about pricing by articulating the various components of value that go into deriving a particular price.

Historically, the relationship between product value and price has not been clearly defined.  As part of an ongoing struggle to ensure drug availability while staying within specific healthcare budgets, a number of cost-containment measures are being implemented by governments, payers and policy makers in major pharmaceutical markets.  These price control policies are likely here to stay and as they are adopted in other markets, manufacturers will need to reconsider their approach to commercialization and pricing.

Today, it is not simply a question of determining how much payers will pay for drugs.  In talking about the price of a product, manufacturers have to present hard evidence on the value their product creates.  Developing an effective strategy for negotiating with payers requires that manufacturers take action early in the development process to understand the value perceptions and needsof key stakeholders.  This requires a two-way street -- manufacturers must proactively inquire about appropriate comparators, choice of end points, and methods for measuring changes in quality of life, while payers must be willing to discuss this information in their efforts to ensure better health outcomes at lower cost.   

In the past, decisions around pricing and reimbursement for a drug depended almost exclusively on efficacy and safety as well as the price of competing products.  These factors are still critical.  However, there are now a number of additional elements that factor into the process.  Price sensitivity analysis based on the following elements will allow manufacturers to identify the optimal mix of performance characteristics and indications, ultimately ensuring competitive differentiation and superior commercial performance.

It’s in the communication of how a price relates to the value of their product that manufacturers have not invested enough resources

  • How broad and deep is the market need?  Demonstrate that the product addresses an unmet need that is important to payers and other stakeholders.
  • How much of a difference will the product really make to human health?  While somewhat subjective, it is clear that certain areas of unmet need create a greater burden -- emotional, physiological, and financial -- than others.  While important to individual sufferers, certain “lifestyle” drugs may not justify significant price premiums in the same way that treatments for life threatening and painful diseases do. 
  • How can the product be differentiated?  Assess the available competitive set and determine the clinical endpoints that should be built into the clinical trial plan to demonstrate the differentiating clinical benefits.  These include efficacy, safety and product characteristics such as dosing and route of administration. 
  • Is the product more cost-effective than the appropriate comparator?  Incorporate health economics and outcomes research into clinical trials and real-world studies to convince payers that the product is associated with lower long-term costs than the current standard of care or watchful waiting.

There is no denying that manufacturers have built large technical capabilities to perform market research as an input to pricing decisions.  They have also considered “best” and “reference” pricing implications.  It’s in the communication of how a price relates to the value of their product that manufacturers have not invested enough resources.  By focusing negotiation on a specific price point, rather than holding a much broader value discussion, payers and manufacturers are more likely to have an adversarial relationship where both sides feel they must win at the expense of the other.  

Manufacturers’ pricing decisions are not only facing increasing resistance from payers; they are also scrutinized by the press.  For instance, the recent decision of a leading cancer center to exclude a new therapeutic drug because of the limited life extension it offered and its high price has sparked conversation around the value of some cancer drugs and the financial strains they impose on patients.  Aspatients continue to emergeasimportant decision makers in healthcare, there is even greater demand for manufacturers to justify requests for premium pricing and to demonstrate that the price reflects the degree to which a product meets patients’ needs.  Here, better communication strategies and linking broader data components to the actual price places manufacturers in a better position during negotiations or in the presence of public scrutiny.  

As I highlighted above, pricing and reimbursement decisions are often linked to one another, especially in the United States where pharmaceutical manufacturers engage in confidential rebate arrangements with payers in exchange for preferential formulary positioning.  In the past, products with only modest clinical benefits and no supporting economic arguments have forced manufacturers to offer payers financial incentives in the form of rebates to gain market access.  However, offering rebates alone does not guarantee success, and in some cases can be perceived by payers as a sign of a product’s weak value proposition.  If an organization’s commercial strategy is exclusively based on rebates, how are they really differentiating themselves from the competition?  More importantly, competing solely on price does not represent a sustainable business strategymoving forward, as the competition can always undercut price, leading to bottom-line pricing and lower margins.

For example, in Germany and the UK, pricing determination depends heavily on choosing the appropriate (and most economical) comparators and then demonstrating a reasonable cost-per-QALY

Unfortunately, changing payer perceptions of rebate offerings represents only one of the many challenges to manufacturers’ current market access approach.  For example, in Germany and the UK, pricing determination depends heavily on choosing the appropriate (and most economical) comparators and then demonstrating a reasonable cost-per-QALY.  Amidst growing concerns that other markets will adopt similar barriers to reimbursement, more innovativeapproaches to gaining market access must be taken to navigate these unsettling waters.  So it is not surprising that an increasing number of pharmaceutical companies are establishing working agreements with payers to provide some form of risk sharing or price protection as new drugs are accepted into formularies.  As I’ll discuss in next month’s column, risk sharing schemes can be quite complex and difficult to implement, but when executed properly, and for the right reasons, they provide manufacturers with a competitive advantage for therapies defined by strong economic and clinical value.

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Payers' Forum Europe

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