Benefits and Compensation

Impact on Life Duration & Quality Drives Drug Value

A prescription drug’s ability to prolong life is a top factor health plans are using when fixing benchmark prices for drug reimbursement, followed by the drug’s ability to improve the patient’s quality of life, health care stakeholders said at an April 15 briefing hosted by the Alliance for Health Reform.

Steven Pearson, MD, MSc, president of the Institute for Clinical and Economic Review, described his non-profit’s value measurement system. It is designed to address what he described as a rapid and often inappropriate growth in drug costs that threatens to crowd out society’s ability to finance other priorities like education, infrastructure, housing and public safety.

The traditional approach to drug pricing — (1) non-interference in the free market gives appropriate final results; (2) prices should follow supply and demand; and (3) research and development costs must be recovered during a period of market exclusivity — allows companies to charge prices that are above a drug’s true value to society, Pearson said.

Compounding the problem is the fact that sick individuals may be willing to be abused on cost to improve a condition that acutely bothers them, while actual payers are working on an aggregate basis to pay and control drug costs, said Leigh Purvis, director of health service research at AARP.

Payers and plans are calculating the value of drugs based on cost-effectiveness, measured by dollar per life year gained. If the drug does not prolong life much, then perhaps payers shouldn’t be spending a lot of money on it, Pearson said. ICER on some level advocates paying not much more than $100,000 per quality-adjusted life year gained, he added.

The second factor in calculating a drug’s value is its impact on quality of life, including allowing patients to pursue life activities. Some drugs that do not prolong life might nevertheless help with quality of life. Other factors are patient preferences, including frequency of dosing and the ability to self-administer instead of being physician-administered.

Examples of Steerage

If a company’s initial list price exceeds a drug’s societal value, as calculated by ICER, that it doesn’t mean automatically that payers should stop paying for it; it means payers should start thinking about other places savings can come from, and what the system can do to manage the condition without the drug, including step therapy and cheaper drug alternatives, Pearson said.

In that vein, the American College of Cardiology and the American Heart Association have been educating physicians when they can use generic routine statins, in an effort to keep physicians from unnecessarily prescribing much higher-cost cholesterol reducing drugs (PCSK9 inhibitors), Pearson said. (According to the New England Journal of Medicine, PCSK9 inhibitors alone could raise the nation’s health insurance premiums by $124 per person per year.)

If a drug’s initial list price meets or falls below ICER’s benchmark, then the payer might: (1) include it in formularies; (2) put it on a first tier with a zero or low co-pay; (3) exclude it from the 340B discount program; (4) increase its FDA exclusivity period; and/or (5) set its Part B coinsurance to a low level.

However, if the price exceeds the benchmark, then the payer might: (1) allow exclusion from formularies or put them on a lower tier; (2) impose step therapy; (3) require the drug maker to cover the cost that exceeds the value-based price; (4) include in 340B program discounts, (5) reduce its FDA exclusivity period.

But ICER is judging value on the long term rather than the short term, because return on investment doesn’t become apparent until the passage of a few years, not a few weeks, Pearson said.

Year-on-year Price Increases

Drug price increases, rather than just initial drug prices, became an issue in 2015 as a result of several incidents in which a company monopolized a generic drug, then hiked the price astronomically, according to John Rother, President & CEO of the National Coalition on Health Care. The drug industry is the only industry that can post year-on-year increases so drastic without getting approval from anyone, unlike other industries such as utilities and insurance, other speakers affirmed.

On the other hand, discounts and rebates lower the price of prescription drugs by as much as 25 percent, and the ICER model is not taking that into account, Robert Dubois of the National Pharmaceutical Council noted.

CVS Health (a major pharmacy benefit manager) found that annual drug inflation in 2014 after rebates was 11.8 percent. Contributing factors, were brand-name inflation and PBM management costs. A significant one-time boost to drug spend was attributable to a new cure for Hepatitis C first approved in 2014, CVS reported, but in 2015 the inflation rate settled down to 5.0 percent.

Other factors that contribute to price system inflation are: (1) orphan drugs, which are highly priced because they treat rare diseases or conditions that few people have; and (2) specialty drugs, which are for difficult health conditions and require special handling, administration and monitoring. Payers control administration of these expensive drugs through prior authorization and limited distribution. Limited distribution allows a drug to be acquired only from distributors that are approved by the health plan or payer. Another control method used by payers is to shorten the maximum duration of a prescription from 90 to 30 days.

Specialty pharmacy can be more effectively managed than regular prescription drugs because PBMs can require detailed substantiation of diagnoses and medication adherence, due to the relatively fewer patients receiving this class of drugs compared to prescription drugs in general, said William Shrank, chief medical officer of CVS Health.

The health plan’s role in identifying patients who would benefit most from a drug is easier than overcoming patient unwillingness and preferences that might drive them away from the health plan’s preferred treatment, Dubois said.


An aligned method of weighing all relevant factors that is accepted by the broadest possible variety of stakeholders (patients, payers, drug makers, government and distributors) will enable the greatest benefit to as many stakeholders as possible. While defining value-based pricing is a must so all players have a common understanding, the method must be sufficiently flexible to allow for innovations that have yet to be developed, the speakers agreed.

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