Gilbert Benavidez is a Policy Analyst with Boston University’s School of Public Health. He tweets at @GBinsolidarity Research for this piece was supported by the Laura and John Arnold Foundation.
The vast majority of American voters want Congress to focus on reducing drug prices. One avenue growing in popularity, even in the absence of congressional action, is to tie the price of a drug to the good it provides to patients. There are several approaches, as well as some limitations.
Outcome-Based Pricing contracts (OBPCs) work via a reimbursement scheme: When a drug doesn’t work as well as expected, the payer is refunded a portion of the drug’s price. Outcome-based pricing has garnered press with exciting and novel drugs like Spark’s Luxturna (Voretigene neparvovec) or Amgen’s Repatha (Evolocumab). Research from Nazareth et al. suggests that a moderate amount of outcome-based contract growth should be expected in the United States.
In a February 2018 report, the Pharmaceutical Research and Manufacturers of America (PhRMA) working with the consulting firm Avalere, argued that outcome-based contracts have the potential to both improve patient outcomes by broadening access to innovative medicines and reducing their cost to payers. The report provided a formulary analysis of 2015-2017 Silver level Marketplace plans that showed plans with OBPCs had 28% lower copayments compared to plans with traditional contracts (Figure 4 of the report). The report also found that 38% of payers with OBPCs had improved patient outcomes, 33% experienced cost savings, and 70% of health plans report they have favorable attitudes toward outcome-based contracts.
On the other hand, Kaltenboeck and Bach of Sloan Kettering’s Drug Pricing Lab argued that prices of drugs currently offered through outcomes-based contracts, like Amgen’s with Harvard Pilgrim for Repatha, have “…nothing to do with the benefits of the drug.” Separately, Harvard researchers Seeley and Kesselheim wrote: “There is no evidence to date that the rebates will result in lower drug prices…” They speculate that the rebate may be factored into the pre-rebate price. This conclusion leads naturally to another option:
Value-Based Pricing (VBP) ties the price of a drug to the value it provides for the population for whom it is indicated. The Institute for Clinical and Economic Review (ICER) is one independent body that estimates VBPs with standard cost-effectiveness calculations that produce a price for which a drug would yield a quality adjusted life year for typical thresholds, like $150,000. (In separate steps, ICER also takes into consideration budget impact, as well as other benefits, disadvantages, and ethical and contextual factors, all deliberated in an open, public process.)
Kaltenboeck and Bach compared the effective price of Repatha in the Amgen-Harvard Pilgrim OBPC with the (ICER) estimates for the drug’s value and found that Harvard Pilgrim’s price is substantially higher ($14,100 vs. $2,200-5,000).
$2,300-$3,400 per year if used to treat all patients who meet trial eligibility criteria and $4,500-$8,000 per year if used to treat higher-risk patients.
As a result of this, Regeneron and Sanofi offered to lower Praluent’s cost to be in line with the valuation if payers, like Express Scripts, approved treatments for patients more quickly and with fewer barriers. Notably, Amgen stood by Repatha’s price as is. This decision, as I wrote last week, resulted in the drug being strategically cut from Express Script’s formulary in favor of Praluent.
Indication-Specific Pricing (ISP) is a further application of value-based pricing. ISP contracts acknowledge that the same drug may provide different benefits for different diseases. For example, Tarceva (Erlotinib) is used to treat non-small-cell lung cancer and pancreatic cancer. However, effectiveness for the two indications is very different, as the median survival gain when treating the former is 3.4 months but only 1.4 weeks for the latter. Under indication-specific pricing, the price for the drug would be sensitive to its effectiveness for each disease it treats, in theory linking the indication-based usage of the drug to the ascertained value.
CVS Caremark has adopted an indication-based model for drugs for some conditions like Hepatitis C (Hep C). This model informs what is included in its formulary. As I wrote last week, manufacturers are incentivized to lower prices of drugs, like those for Hep C, during negotiation with CVS, lest they be left out of formulary in favor of a more clinically effective and cost appropriate drug for the Hep C indication.
Though ISP contracts have potential, Pearson, et al. acknowledge barriers to implementation. One is that the Medicaid best price rule may cause interference. Essentially, Medicaid pays the lowest price on the market for any particular drug. If a certain indication for a drug substantially lowers that drug’s price, the best price rule necessitates that Medicaid pay that price for the drug. Sachs, et al. explain that companies could get around this by entering contracts with a weighted average price, rather than different prices for indications. Alternatively, companies can also engage in “product differentiation,” which is essentially turning one drug into two. The two drugs can be used for two different indications, shedding best-price rule interference.
Another issue for ISPs is that the indication for each prescription may not be known by pharmacies because clinicians are not always required to provide it on prescriptions. Even when indication is known, it must be verified so that payers are sure they’re paying for the right indication. Because of this, the authors raised the concern that “few payers currently have the data capabilities to implement ISP models that require patient-level information.” They wrote that these issues can be addressed by utilizing claims data and improved data systems.
Chandra and Garthwaite wrote in the New England Journal of Medicine that in some instances ISP contracts can expand access, by lowering the price of drugs for some indications. However, ISP contracts could also increase prices for high-value indications. Drugs for a certain indication that were once accessible may turn out not to be.
Innovative contracting/pricing approaches like OBPCs, VBPs, and ISPs appear to be growing, potentially addressing the public’s desire for action on drug prices. But they’re still new and have not been adequately studied formally to assess if they reduce prices relative to the counterfactual prices that would have existed in their absence.
Studying them is a challenge because the majority of these contracts exist in the private-market, often away from the eyes of the public. In terms of crafting informed policy, as Kaltenboeck and Bach aptly wrote, “’trust us’ can hardly be considered the foundation for good public policy.”