The US healthcare market: product pricing strategy and the “value proposition”

The US healthcare environment has changed rapidly and now resembles the EU market, where product pricing is scrutinised. This is largely due to the paradigm shift in the product approval landscape, which once focused on primary care products and now focuses on more speciality products. How will this affect American pharma manufacturers? Kent Rogers discusses.

In January 2014, additional provisions of the Patient Privacy & Affordable Care Act (PPACA) will be enacted having the potential to change the face of how pharmaceutical & medical device manufacturers research, develop, promote and price their products in the future. These new elements of the legislation are intended to improve the quality of healthcare for patients and reduce overall costs associated with healthcare by providing coordinated patient care (Accountable Care Organizations) and converting individuals who qualify among the approximate 48 million un-insured Americans into an insurance benefit (Healthcare Exchange or Medicaid). 1

“The concept of competition breeding a competitive price environment has been lost on the healthcare segment…”

In many ways, these changes are just the beginning in a series of efforts to develop a healthcare system that is focused on improving costs while emphasizing improvements in the quality of healthcare products and the delivery of healthcare to patients. The concept of improving costs while improving healthcare has proved to be a contradiction in terms for the US healthcare industry. The concept of competition breeding a competitive price environment has been lost on the healthcare segment with many specialty products now approaching six figure price tags. The question for both sides of the industry (payer and manufacturer) is at what point will this trend break? How high can prices go before payers simply refuse to cover a product that offers a true clinical advance?

Healthcare as a business model?

The physician audience perspective is rooted in the clinical value associated with a product – and for good reason. The healthcare providers are on the front lines of patient care through interactions with the patients that often include detailed accounts of personal history. For that reason, a newly approved product that offers a QD (once per day) dosing regimen vs. currently available products being prescribed TID (3 times / day) may be perceived as having a significant impact on patient adherence to therapy from a physician’s perspective.

The challenge is determining whether or not the new chemical entity is an advance in efficacy or if the improvement in adherence is the basis for that efficacy. These may seem like a nuance to the outside observer, but to the payer audience, answers to these questions represent opportunities to implement cost-saving methodologies that can translate well into millions every year on drug spend.

If you stop to consider the relationship between payer, physician and manufacturer, it’s unlike any other model in business. The payer is not actually purchasing the product a manufacturer produces; the payer is simply paying for the product – hence the truncated moniker. The physician is also not purchasing the product, but merely recommending the product. In either case, neither party is profiting from the purchase or sale of a product, so what is the motivation for each player – the health of the patient (customer) involved in the transaction. The exception to this is in the so-called “buy and bill” model where the product is purchased by a treating healthcare provider and administered in an office setting.2

Ultimately, the goal for the physician is to improve the health and welfare of his patient while the goal of the payer is to balance the equation of containing rising healthcare costs and allowing coverage for advances in treatment. These goals are not mutually exclusive but have the potential to be contradictory in the face of true innovation. The key is to prove value.

What’s the value proposition?

The four key categories which demonstrate product value include the following; clinical advancement (dosing, mode of delivery), improved efficacy, improved safety or addressing an unmet medical need. A product which can prove one or more of these value components has a real shot at success and with the stakes running in excess of $1 billion in research and development costs, there is little room for error.3

Throughout the past twenty years, many of the blockbuster products treating conditions, such as, high-cholesterol, diabetes, asthma or depression and anxiety disorders offered improvements in safety or efficacy. The question of whether the value of that improvement was incremental or significant, in terms of, the patient and overall costs to the healthcare system was determined by the physician and payer. There may be a shift in what constituent is involved in this decision making moving forward.

“How high can prices go before payers simply refuse to cover a product that offers a true clinical advance?”

Today, several organizations are engaged in an effort to develop a sophisticated analysis of the value of pharmaceuticals. The Kaiser Family Foundation is among the most well known, as well as, Oregon Health & Science University.4 In addition, the more progressive payers have been data mining invaluable utilization figures to develop tools, programs and analysis, which can be marketed to constituents across the healthcare continuum, including the manufacturer. Unfortunately, the emphasis has historically been placed on providing a value equation post-FDA approval.

Considering the well-controlled nature of clinical trial designs which include randomization, double-blinds, and placebo controls, it may be impossible to accurately predict the value proposition of a product beyond efficacy until the product is exposed to the population at large. Drug-drug interactions, co-morbidities, overdose, poor adherence and persistency are among the myriad factors that can cloud this value proposition.

Therefore, it is imperative that manufacturers engage in that effort prior to product approval vs. years post-approval when an impending patent expiration or new competitors may reduce the return on investment in that pharmacoeconomic research.

How is value determined?

The most common approach considered in health economics is proving a cost-offset as a result of treatment initiation with a product or device. A reduction in the utilization of the healthcare system (tests, surgery, ER visits, complications, side effects, etc.) is the easiest and cleanest way to prove value, but the math has to work. In other words, if a product can reduce hospital re-admissions by 10 % over 12 months, does that equal or exceed the amount spent on the product in the same period?

Another approach is to determine the cost efficiency of a product. How many patients have to be treated, and at what cost, before the desired result is achieved, also known as NNT (the number needed to treat)?5 It may take 6 months of treatment with 10 patients to find the 4 patients achieving the desired result. If this is an improvement over an existing product which takes 11 months of treatment with 10 patients to find the 5 patients achieving the desired result, there may be value. Again, the math has to work.

“…the pharmaceutical and medical device industry has a unique challenge compared to other industries – the third-party payer.”

Even if a product cannot prove a cost offset or even cost efficiency in the near term post-approval, a manufacturer will need to convince the payer of the predictability of spend on a product so a payer’s actuaries can include this in the coming fiscal projections for their organization. This can be achieved by providing the payer a perspective on the commercial opportunity for a product or how aggressively the product will be promoted in the market.

Whether a product can prove a cost-offset or cost efficiency argument, there is little room for doubt that the environment in the US healthcare industry today demands pharmaceutical and medical device advancements which provide a value proposition, as well as, improved healthcare for the patient.

What role does price play in value?

There are a number of factors to consider when determining the price of any product but the pharmaceutical and medical device industry has a unique challenge compared to other industries – the third-party payer. As mentioned previously, the goal of the payer is cost-containment vs. a profit driven model. In fact, publicly traded insurance companies utilize a measure known as Medical Loss Ratio instead of profit margin to measure their success.6 In fact, PPACA now requires insurance companies to spend at least 80% or 85% of premium dollars on medical care and if they fail to meet these standards, the insurance companies will be required to provide a rebate to their customers.

Given this cost-containment emphasis, the launch price of a drug can strike fear in the hearts of payers. If a new drug offering improved efficacy over existing products in a highly prevalent disease state is launched with a premium price, payers will be quick to pressure the manufacturer for rebates in exchange for coverage, regardless of the efficacy equation. On the other hand, if a new product addressing an un-met medical need for an orphan disease state indication launches with a six-figure price tag, payers may allow coverage for the product but will impose significant restrictions on its authorization.

In either case, the price of that drug is determined by the manufacturer in the US market vs. the third-party payer determining the price, as in the EU model. If you consider the business manufacturer’s challenge to produce profits quickly to recoup the R&D investment, establish revenue growth and provide funding for pipeline or acquisition assets vital to the growth of the company, the price of the drug is the one of the only levers they can truly control.

If a price is too high it will be offensive, too low and it diminishes the inherent value of the product. Determining the optimal price of a product is more of an art than a science, but it can make all the difference. Consider examples like Makena® (hydroxyprogesterone caproate injection) or PROVENGE® (sipuleucel-T). Both of these product launches were hindered by a pricing strategy that limited the success of the brand. The efficacy of the product was overshadowed by the pricing strategy.

“Determining the optimal price of a product is more of an art than a science…”

With price tags for specialty pharmaceuticals typically in the thousands for a 30-day supply, payers have now turned their focus to containing costs in therapy areas that have long-been considered off-limits. Debilitating, life-threatening disease states are no longer the untouchables they once were from the prying ambitions of pharmacy and medical directors to curb rising healthcare costs.

What the future holds

Predicting where our healthcare industry will evolve in the coming decade or more is futile, but hope abounds for improvements in healthcare technology, drug delivery, and addressing unmet medical conditions. These advancements may come at a premium price but that will be challenged by the most significant change this country will experience starting in 2014 – a payer that is growing exponentially in size and influence, and is among the most scrutinizing – the US government.

The Congressional Budget Office estimates 30 million un-insured individuals will migrate into a State / Federal Healthcare Exchange or a State Medicaid program. That could lead to the federal and state government beneficiaries representing nearly 50% of the US population. With the largest payer being the government, the US model may mirror Europe sooner than we expect.

That could mean the price of a pharmaceutical product or medical device will be determined by the government prior to approval vs. how it works today. The implications for that development require another article. Stay tuned.


1. US Census Bureau of Statistics, 2012

2. While this exception does provide the opportunity for profit from the sale of this product to a patient, that is frowned upon by government sponsored programs which addressed pricing practices in Section 303(c) of the Medicare Modernization Act of 2003 (MMA).

3. Matthew Herper. “The Truly Staggering Cost of Inventing New Drugs,” (10 February 2012).


5. Laupacis A, Sackett DL, Roberts RS (1988). “An assessment of clinically useful measures of the consequences of treatment“. N. Engl. J. Med. 318 (26): 1728–33.

6. Harvey Rubin, Dictionary of Insurance Terms, 4th Ed. Baron’s Educational Series, 2000




About the author:

Kent Roger’s career spans over 20 years in the pharmaceutical industry with both large and small manufacturers, including Carter Wallace, Schering Plough Corporation and the Merck-Schering Plough joint venture. Most recently, he served as the Vice President of Managed Markets at Acorda Therapeutics for five years where he was responsible for building out the market access, contracting, channel strategy and patient services for the company. His background and experience includes; primary care and specialty sales, contracting with private and public payers, hospitals and integrated health systems, federal markets, teaching institutions, product pricing, business development, health economics / outcomes research, channel strategy and patient support services. Kent has had direct involvement in over a dozen product launches in multiple therapy areas including, neurology, oncology, cardiology, allergy, immunology and central nervous system disorders. He has a B.S. in Business Management from Indiana University and an MBA from Emory University’s Goizueta School of Business.

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