by Ian Perrin 5th March, 2019
5 min read

Outcomes-based pricing for medicines: a solution to the tug of war?

The Government this week announced that it will trial new outcomes-based pricing for antibiotics. Specifically in the battle against AMR. It is time to look at innovative pricing models. And to ask if they can end the tug of war over price between industry and government.

There is a paradox in the relationship between the pharmaceutical industry and the Government in relation to medicine pricing. The typical story is that the Government turns to industry for solutions, be they medicinal or otherwise, to overcome the challenges of an ageing population and the increasing prevalence of chronic conditions. However, its ever-squeezed budgets lead to demands for lower or controlled prices for medicines. In response, industry justifies their list pricing by highlighting that this funds the R&D required to help government and the NHS improve the ever more complex care and treatment required by the population (after all, the process for taking a drug from concept to market can last over 15 years). What happens in the end? As in most negotiations, there’s either a compromise or one party gives way.

A solution to this has long been sought, but progress has been slow and the situation around Vertex’s Orkambi shows that a break in the deadlock in pricing negotiations is never guaranteed. The question begs: does the process have to be so arduous?

One potential solution that is commonly cited in this debate is outcomes-based pricing, sometimes referred to as value-based pricing. It’s not a new concept. It was first introduced to the UK Government by the now-dissolved Office of Fair Trading in 2007. But it is one that has increasingly become a consideration in recent pricing debates.

What is it?

Outcomes-based pricing allows for the price to not only be determined by the number of medicines purchased. This could be by the NHS or other payers. Price can be determined by the impact that that treatment has on patients’ lives. This valuation will include both the direct and indirect burden of the disease. For instance, side effects and workforce implications, as well as hard to define benefits such as quality of life.

What is the benefit?

The principle benefit for government is that it would have a better and broader understanding of a medicine’s cost-effectiveness. And therefore, the actual value. And thus a tighter grip on the price it pays. It has also been argued, by Cancer Research UK in this February 2019 report on outcomes-based pricing for cancer drugs, that access to treatment could be accelerated – a win for all parties. It has been suggested that this process will better align the Government’s objectives with those of the pharmaceutical industry. In theory, this should lead to standards of care rising.

For industry, the benefit of value-based pricing is plentiful. The process by which prices are set will be more predictable and more transparent. This is because prices will be set to clearer criteria. It will be easier to justify the prices demanded for its products. Pharmaceutical companies will be rewarded for providing ground-breaking medicines. The medicines which provide real value to the NHS and to patients. Lastly, it has been suggested that the approval process could be accelerated meaning medicines may come to market more easily. This would be a continuation of recent NICE reforms to speed up a single technology appraisal. Allowing the fast track appraisal processes via the introduction of a new technical report stage.

How far have we progressed?

The move towards value-based pricing has been slow. It was introduced to the UK Government in 2007 and firmed up for pharmaceutical pricing in the 2009 Pharmaceutical Pricing Regulation Scheme (PPRS). In 2013, NICE adopted new terms of reference for implementing value-based assessments; these terms of reference included a broader definition of value for pharmaceuticals. Incorporating the burden of the illness but also societal benefits in assessments.

The Government put its plans for implementing a value-based pricing system on hold in 2015. However, just last month, as part of its antimicrobial resistance 5-year plan, the Government announced that it would be trialling value-based pricing to overcome the market failure for antibiotics.

What is needed to make it work?

One reason that outcomes-based contracts have been slow to take off is that defining success is not straightforward in many therapy areas. These contracts have thus far been limited to treatments, such as Amgen’s Repatha® (evolocumab) in the US, where both the potential is huge and the measure of success is simple. In most areas, linking up the real-world evidence with outcomes from a specific treatment is not an easy task.

Additionally, for outcomes-based contracts to succeed in the UK, the NICE health technology appraisal process will need to reflect this move in guidance around the evidence that it requires. Many health stakeholders make the mistake of thinking NICE can implement reforms unilaterally, when in fact NICE follow a process and DHSC need to be the ones to set the direction for NICE to go ahead and implement – with the right resource and expertise to do so.

Outcomes-based contracts may well provide the solution to the age-old tug of war between the pharmaceutical industry and government. However, if it’s going to move from a tested concept to industry standard, then significant work is going to have to be done. An informed process, with collaborative working between stakeholders including the ABPI, industry leaders and government, needs to be initiated sooner rather than later.

GK Strategy are experts in health policy and market access and can help you navigate the complex landscape of the health medicines approval environment. Our team are experts that have worked across health markets, from big pharmaceutical clients to NHS trusts and social care providers. For more information, or to discuss opportunities for you to pursue value-based contracts, please get in touch below.


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