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DRUGS ARE GETTING COSTLY- IS VALUE BASED REIMBURSEMENT THE ANSWER?

Do you want to be in a world without patent protection for innovative drugs?


While it is a commonly accepted notion that increasing drug prices in US is a real problem and we might need to consider other models of drug pricing and probably the negotiation models practiced in other countries, I still believe that the nature of US drug market is the key driver behind its disproportionately high share of the modern innovations in medicinal drugs developed in the world. In the absence of such encouraging marketplace for drug manufacturers as we see in the US, many of modern medicines would not have been here to begin with. The US provides a free market system for new or innovative drug companies to develop novel therapies and maximize their returns by doing so. Had they known that government is going to negotiate or control the prices of their hard work, they would have had only little motivation to invest in such development work, resulting in a potential lack of key drugs to treat several serious conditions.

Moral Hazard + Monopoly: A bad combination


Increasing drug prices driven by the patent induced monopoly is still a problem for the society. With patent protection, the US provides an artificial monopoly to drug manufacturers. In addition, the fact that the costs of drugs are not directly borne by the “customer” is causing a moral hazard. The combination of monopoly and moral hazard is a serious problem. Both these factors could drive the prices up.


Are PBMs Effective?


PBMs are really in the business of addressing the issues collectively caused by these monopoly and moral hazard. However, I do not believe PBM’s add much value here when it comes to reducing the high drug costs resulting from moral hazard and monopoly. PBMs control drug access and utilization for their clients (insurers and employers). PBMs negotiate with manufacturers address the costs and at the same time, tries to be a gate keeper for patients who needs medications. Is gate keeping a solution for moral hazard? Does negotiations with a monopoly effective? If drug prices are still going up, can we say the current PBMs model is working out? Is PBM’s current model does not really solve the issue, what is the next option?


How about paying for value?

Value based pricing is a good concept, but value has different meanings to the stakeholders in this drug “business” (example: a patient versus a payer). In a free market, value and price (and thus costs and profits) naturally balances out. If this is not balancing out naturally, that means there is some other force in play that is causing the issue. Guaranteeing of drug outcomes or a certain level of value by a manufacturer probably is a valid solution to the problem of increasing drug costs. Drug companies who get the government patent protection (and thus monopoly power in market), is ought to provide a guarantee for their drug’s value in return. This still does not solve the problem of moral hazard.


Value does not come without problems.


Administering value-based pricing comes with its own challenges and it will shake up the working of current drug value chain. Let’s look at the pharmaceutical downstream value chain. There are several stakeholders involved in the movement of drug and money from manufacturer to the

patient. Unlike any other consumer goods, drug and money flows through different channels in this system. Branded drugs are distributed to pharmacies and healthcare system under a fee for service model. The drugs are sold at or below cost to pharmacies by wholesalers and later gets a rebate from manufacturers to cover the gap and make a profit. Drugs are also sold at different prices to different type of customers (this concept is called class of trade pricing). Manufacturer’s rebates to wholesalers depend on what class of trade (customer type) purchased the drug from the wholesaler. As you can imagine, the administration of class of trade pricing is complex. Bringing in another condition for the costs/price decision of drug (value-based pricing) will make the administration of the rebates (and hence the money flow in the value chain) even more complex.


How complex is it going to get?

Pharmaceutical value chain is one of the most complex value chains I have come across. Value based pricing means the rebates or costs for drugs will vary depending on class of trade and/or the value delivered. Value also will change depending on indication the drug is prescribed to treat. Off-label prescribing will make it even more difficult. These additional complexities are going to change the dynamics and functioning of the value chain. Such a change could also provide stage for innovation in the industry. We could see more new firms in the value chain servicing the additional needs to address and manage the complexities. There will also be an increased demand for outcomes reporting back to manufacturers, payers and providers. There could also be a need for an oversight for value determination and price calculations based on value. All these come with additional cost to the system.


Who will pay for this?


Someone must pay for that additional costs as well. Nonetheless, value-based price guarantee will address the problems induced by monopoly during patent protection to some extent. Like many other things in life, the devil is in the details. The industry needs to accommodate the total costs considering all these factors while calculating savings. And even more importantly, we still need a solution for the moral hazard problem.







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