Editor’s Desk

Pushback on value-based pricing for drugs

Peter Wehrwein

Remember those Mastercard commercials that ended with the tagline “priceless”?

The Institute for Clinical and Economic Review (ICER) in Boston and Memorial Sloan Kettering’s DrugAbacus take the exact opposite view. They are assigning prices to drugs based on equations and processes that weigh a variety of factors to arrive at their value.

ICER is revising its methodology but the current iteration starts with comparative clinical effectiveness and then also factors in the long-term costs (including avoided costs) to the health care system and “contextual factors,” such as whether the drug under consideration is the only acceptable treatment for severe disease. ICER also, notably, sets a cost-effectiveness threshold for drugs of $100,000 to $150,000 per QALY.

ICER is set up a little like the FDA, with staff supplying the expertise and outside committees applying judgment. DrugAbacus is a more modest effort that features a nifty online tool that allows the user to select a numerical value in eight domains (efficacy, tolerability, novelty, research and development costs, rarity, population burden, unmet need, and prognosis) and then an algorithm kicks in and comes up with a price. But its creator, Peter Bach, MD, is an excellent public speaker and writer who is emerging as a strong public voice on all kinds of drug pricing issues, including the proposed changes to the way CMS pays for Part B drugs.

One of the basic objections to value-based pricing involves where the value-deciding power will reside. ICER and DrugAbacus are nice and clear and transparent about their methods, but they are a far cry from vesting, say, a government agency with value-deciding power. During a lively Aspen Institute panel discussion on drug pricing this summer (Ezekiel Emanuel was on the panel, thus the liveliness) Ken Davis, MD, president and CEO of the Mount Sinai Health System in New York City, talked about the National Institute for Health and Care Excellence (NICE), the British organization that decides which drugs will be available through the National Health Service, this way:

I look at some of the things that NICE writes and I think, ‘God, those guys don’t have any nuance.’ I mean, where is the database for some of those conclusions? They just are not the experts that are really necessary to tell you what the quality really is.

Better methods, more inputs and letting private organizations like ICER and DrugAbacus merely suggest prices might deal with this complaint.

But there are more fundamental objections to value-based pricing that Davis touched upon and that David Blumenthal, MD, the president of the Commonwealth Fund, outlined in a recently published commentary.

There is a compelling superficial logic to value-based pricing, Blumenthal wrote. But health care depends on inexpensive drugs like penicillin. If pencillin were to be priced based on all the costs that timely treatment with antibiotics can prevent, it would be unaffordable.

In Aspen, Davis talked about the polio vaccine in the same context:

Imagine if we had modeled a polio vaccine that way. In fact, when I was in second grade I got the polio vaccine free. Imagine what would have happened if somebody had said let’s figure out the downstream costs, we’re going to save the health care system with the polio vaccine. I’m sure my parents couldn’t have afforded it.

Consider, Blumenthal wrote, the humble toothbrush. What would its price be if avoided dental bills were factored in? And how about the airline tickets for a memorable family vacation? Maybe ICER could come up with an answer to Mastercard’s pricelessness, but they would still be pricey indeed.

Blumenthal doesn’t entirely reject value-based pricing but makes a plea for eyes wide open and what we might be getting into:

But, if we go in the direction of setting prices according to value, we should be clear that we are not mimicking the functioning of the competitive markets that we so celebrate in capitalist economies. We are creating a very different, socially constructed yardstick that is appropriate primarily in the absence of effective markets, and that could result in profits that vastly exceed anything that companies would make under normal market conditions.

I spoke with Steve Pearson, MD, the president and founder of ICER, about these objections to value-based pricing. Affordability and value are two different things, he explained, and that’s why ICER has built into its process another layer of calculations of a drug’s impact on health care budgets. Value calculations might also be completely recalibrated when a drug (or a vaccine) has significant public health impact, he noted. Based on value calculations and QALYs, the price of a truly effective treatment for Alzheimer’s disease would be astronomical, but it could be adjusted downward because, in some sense, its value is too high.