Does the drug industry need a new pricing model?


Various approaches have been taken to try to balance the rising costs of new medicines with tightening healthcare budgets, but few have proved effective long-term. Advances in drug development are bringing cures closer, but creative thinking, true 'risk sharing' and active industry-government dialog are needed to overcome the hurdles in this complex arena.

Over the last few years, prescription drug pricing has been hotly debated. The launch of Sovaldi one year ago brought a virtual cure for Hepatitis C, but has also stirred a lot of emotion around drug cost. Payers in the US and Europe have strongly criticised Gilead for its hefty price per pill, despite the drug's curative properties and long-term savings opportunities. Ironically, it was not the value that was contested, but the budget impact due to the high need for treatment. Some are calling for a new pricing model as they feel that the price per pill is no longer appropriate for situations like the one for Sovaldi. Let's examine the options.

Drug pricing under pressure

Drug pricing challenges did not merely emerge after the Sovaldi launch; they have been a topic of debate between governments and the industry for decades. The unique characteristics of this industry, with payments made mostly by large private or public payers, huge upfront time investments in research and development and limited patent protection periods create a very complex setting. In addition, rapidly rising healthcare costs and economic recession have caused additional budget pressures.

Financial toxicity

In the US, oncology drug costs ignited the medical profession, resulting in the use of the phrase 'financial toxicity' as co-payments for patients can cause significant financial distress, particularly for those on Medicare. The American Society of Clinical Oncology (ASCO), the American Heart Association (AHA) and other medical communities have started to consider cost in the determination of clinical treatment guidelines, although thus far mainly in cases with little clinical differentiation and high cost differences.

European reforms

In Europe, major healthcare systems have gone through substantial reform, as a recession and Euro crisis have created a need for fiscal austerity measures. In Germany, the AMNOG price control system was introduced, while France tightened head-to-head clinical evidence requirements and introduced 'medico-economic' requirements as an additional review process for innovative and high cost drugs. In England, three years of debate about Value Based Pricing ended after complicated discussions over the measurement of societal value of new drugs.

Technology advances

Pharma companies have been criticised for offering relatively small improvements. Sovaldi has shown a problem at the other end of the spectrum, where the value proposition is so strong, and resulting demand so high, that the immediate budget impact is causing payer challenges.

Personalised medicine

Today's pharma pipeline holds an unprecedented number of biotechnology speciality drugs, aimed at providing survival benefits or symptom relief for a large number of conditions with smaller patient populations, often with biomarker tests to determine patient qualification. Drugs like ALK-inhibitor Xalkori (crizotinib), which is only indicated for the 4 per cent of non-small cell lung cancer (NSCLC) patients with an ALK gene mutation, offer improvements for a relatively small patient population at a consequentially high cost per patient. With many more of these innovations coming to the market, strong improvements in patient outcomes can be expected, but these will have drug budget implications. Some drugs may extend life, changing a disease to a chronic condition, as Gleevec did for Chronic Myeloid Leukemia (CML). Others, such as Sovaldi and Harvoni for Hepatitis C, may represent an opportunity for a cure after eight or 12 weeks of treatment.

"What would be a reasonable cost for an instant cure for a cancer, Ebola, or other devastating condition?"


Value of a cure

What would be a reasonable cost for an instant cure for a cancer, Ebola, or other devastating condition? If a single pill or procedure could cure CML, would it be worth the equivalent of 20 years of treatment, or $1.5 million? Rationally speaking, it might be worth it, but it would certainly provoke 'interesting' discussions. A more likely focus over the next few years will be on an effective treatment for Ebola. In autumn 2014, the fear of this disease had a strong impact on the US stock market. Ironically, a treatment found sooner rather than later may contain or eradicate the disease and, unless it is used prophylactically, eliminate its market.

Alternative pricing structures?

So, it could be beneficial to use alternative means of paying for effective drug treatments, particularly where long-term patient outcomes are not known precisely at drug launch. Could Gilead have charged for each Hepatitis C cure? How would that have changed the competitive landscape? What would have been the impact on Medicaid pricing? These are complex questions that need answering.

Innovative pricing and risk sharing

Innovative pricing mechanisms, such as risk sharing, outcomes-based contracting and managed entry agreements, have occasionally been used, but they have not made dramatic inroads. Most of these occur in Europe and Australia, but they are usually no more than simple discount arrangements.

Few deals represent real 'risk sharing', but a good example is the one for Yervoy (ipilimumab) for melanoma in Australia, where long-term overall survival benefits are monitored through a registry as part of the arrangement. High prevalence of melanoma is likely to be the reason for the Australian government to engage in this deal. Administrative and data-gathering requirements are often insurmountable hurdles for these initiatives.


Pay-per-cure type arrangements would take the innovation in pricing mechanisms a few steps further. Whether a lifetime supply of Gleevec at one fixed CML treatment price, or payment per cure for Hepatitis C, a fixed price independent of the number of pills used with a 'no cure no pay' mechanism has strong merits. It may be challenging to define what survival length constitutes a de facto cure, but this could be negotiated on a case-by-case basis.


Unfortunately, there are many hurdles to more innovative pricing arrangements. In the US, best price mechanisms and mandatory Medicaid discounts are used to bring favourable pricing for government programmes, but they also practically limit the industry's ability to make deals, as the very best available price needs to be applied automatically to the whole Medicaid population. In most markets outside the US, formal rules are established to determine pricing (per specific pack size, dosage strength etc) under which drugs can be reimbursed. Also, international price referencing and parallel trade implications need to be considered.


For both US and international markets, the competitive aspect is the most complex one to address. What if, after a successful deal, a number two drug in the category appears on the market? Can you structure a deal that is competitive and fair? Would there be room for a second drug if the first one locks in all patients? What about treatment failures?


For every great idea there are objections. We should not focus on the objections, but merely be aware of them as we look for different ways to price drugs. However, the implication of the existing hurdles is that there needs to be constructive dialogue between governments and industry.

About the author:

Ed Schoonveld is a Managing Principal at ZS in New York City and is the leader of the firm's Market Access and Pricing practice. In this role, he provides strategic consulting and research solutions to healthcare industry clients. He is considered one of the world's leading experts on global pharmaceutical pricing and market access and has unparalleled experience as head of global market access and pricing functions at Wyeth, Lilly and Bristol-Myers Squibb, and as a consulting leader at Cambridge/IMS and other organisations. He is also the author of the newly updated book 'The Price of Global Health'.

Have your say: What is the right way forward to ensure patients get the drugs they need?

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13 January, 2015