Pharmacy Costs: Are You Paying for Value Yet?

December 4, 2017 5:06 pm

As provider organizations face stricter regulations regarding outcomes, it’s time for pharmaceutical companies to be subject to the same scrutiny.

The cost of drugs continues to dominate national media, political debates, and meeting rooms at healthcare organizations. In the past few years, rising prices of pharmaceuticals has prompted discussion about how to better manage this cost, while ultra-laissez-faire pricing practices persist in the United States. Express Scripts reports average pharmaceutical spending at $1,078 per year for commercial members, and almost $3,700 for Medicare. In 2016, the cost of specialty drugs increased by about 13 percent. a

Several political leaders have voiced the need to rein in drug prices, and both Democratic and Republican leaders have suggested that Medicare should negotiate prices with manufacturers. However, there has been no decisive action, and the prospect of regulatory overhaul remains distant. This lack of action on the federal level means that private risk-bearing parties and states must step forward to directly engage with manufacturers to set prices and terms of payment.

Today, we know better than to believe that pharmaceutical pricing is dictated solely by research and development costs required to bring a drug to market. Rather, prices often reflect what the market can bear, especially given the relative price inelasticity of breakthrough medications. This trend is a major departure from those in many developed and emerging nations, whose governments negotiate prices with manufacturers before granting access to those markets. As a result, we see glaring disparities in drug pricing worldwide. As payment for medical services get squeezed almost universally across the healthcare system, it appears that pharmaceutical companies have somehow managed to swim under the wave of payment reform.

It is time for entities on the hook for drug costs to explore how to tie drug payments to value and protect against adverse circumstances, like unexpected unit price hikes or patients not responding to therapies. What is needed is for insurers, pharmacy benefit managers, and financially accountable provider organizations to initiate alternative payment models for medication.

Current Practices in Tying Payment to Value

The equation used to calculate value delivered by pharmaceuticals can be complex and vary by medication. Value may be derived through physical or biometric outcomes, quality-adjusted life-years added, or avoided clinical utilization in the future. Tying payment to this type of value may seem like a new concept, but there are plenty of precedents that can inspire and catalyze a greater movement. b

For example, 2015 was a milestone year for bringing cholesterol-lowering PCSK9 inhibitors to consumers. That year, the U.S. Food and Drug Administration approved Sanofi and Regeneron’s Praluent and Amgen’s Repatha, which are both priced at over $14,000 per year. c With 35 million American adults at high risk of heart disease due to cholesterol levels—and a sizeable population who cannot reach their cholesterol goals using statins—that sticker price is concerning. d

Cigna negotiated directly with the manufacturers to reach a lower price point for Praluent and Repatha, and established further discounts if the reduction in low-density lipoprotein (commonly known as LDL cholesterol) is not consistent with clinical trials. The health plan also committed to following medical and pharmaceutical claims data on customers to assess cardiovascular improvements and the resultant cost reduction in the health system. e

Another health plan, Harvard Pilgrim, has gone one step further with Repatha. Amgen now owes the company a full refund if a customer has a heart attack or stroke after using the drug for at least six months. f

The idea of refund-for-underperformance is more commonplace in other countries. In the UK, drug authorities initially rejected Johnson & Johnson’s Velcade, a treatment for multiple myeloma and mantle cell lymphoma. The drugmaker reacted by agreeing to forgo payment for any patients who did not respond adequately to the drug. In Denmark, customers who are not satisfied with Bayer’s erectile dysfunction drug Levitra also are granted full refunds. g  

Entresto—a heart-failure drug from Novartis listed at $4,560 per year—has been another subject of multiple alternative payment models. Cigna and Aetna both have entered into arrangements with Novartis to peg payments to the improvement in relative health of consumers. Cigna is looking at how the drug reduces hospitalizations related to heart failure, and Aetna’s arrangement is based on whether Entresto can replicate results of clinical trials. h  

Harvard Pilgrim also has negotiated discounts with Novartis if Entresto does not result in a mutually established reduction in hospital admissions. i  The Massachusetts-based insurer, with 1.3 million members, is somewhat of a champion in tying drug payment to value. And the contracts are diverse in nature.

Consider, for example, a contract with upside and downside potential for Lilly’s type 2 diabetes treatment Trulicity. In 2016, Harvard Pilgrim gave Trulicity preferred status and instituted bonuses or deeper discounts depending on how many patients reach their blood sugar targets using Trulicity versus similar drugs. j In another outcomes-based contract, Harvard Pilgrim has established six metrics that determine the effectiveness of Enbrel, a rheumatoid arthritis medication from Amgen. The metrics include adherence, steroid interventions, and dose escalations, and Harvard Pilgrim pays less for the drug if patient scores based on these metrics fall below a certain level. k

Other Resources for Contract Design

Collaborative price-setting is not a simple prospect. Organizations seeking to shift to value can benefit most from looking at the precedents set by others, but they also should take into account other available guidelines and efforts already underway.

McKinsey and Company released some truly forward-thinking guidelines in a February 2011 paper that discusses value-based drug development. l  The authors advise discussing outcome measures several years before a drug is approved for launch. Doing so for more pipeline drugs with multiple stakeholders including patients, manufacturers, providers, and insurers can make it easier to reach agreement on performance metrics related to payment.

Pharmacoeconomics and health economics and outcomes research are important fields worth understanding when exploring value-based payments with drug-makers. These economic studies can estimate cost of a treatment per quality-adjusted life-year added, and they also can provide standards around quantifying opportunity cost: the cost of clinical services and hospitalizations forgone as a result of a medication. Ideally, this kind of research, along with other considerations, such as research and development and manufacturing costs, should directly drive the sticker price of a medication.

The problem, however, is that the entities ultimately footing the bill are not at the table to discuss these issues early on, buy into the methods, and agree on how these variables should come together to set price. When such early collaboration is absent, insurers and drug developers must work together after the launch to reset payment terms, as Aetna, Harvard Pilgrim, and others have done in many cases.

Finally, in the world of accountable care, insurers are not the only ones on the hook for prescription drug prices anymore. Many provider organizations and hospitals also are sharing in the expenses, or assuming full financial risk, and thus have direct incentives to work with insurers on fair pharmaceutical pricing. Insurers and their pharmacy benefit managers can offer leadership by identifying costly drugs prescribed frequently by providers in their networks, and bringing together leaders from those organizations to develop a strategy. This group then can approach representatives from pharmaceutical companies, with patient outcomes and fair pricing at the center of the collective strategy.

Developing alternative payment contracts can be cumbersome. Many methods will be correct, and no method will be perfect. But payment economics is not a perfect science; the daunting nature of a necessary innovation should not deter the health plan community.

Setting a New Status Quo

The healthcare industry is undergoing aggressive payment reform. For several medical procedures, payment is in bundles for episodes of care. The providers delivering treatments are being asked to demonstrate value in order to earn and retain their earnings, and they are being penalized financially for subpar standards and outcomes. Pharmaceutical companies and their products should be subject to the same scrutiny.

Insurers that purchase drugs on behalf of patients should increasingly demand pay-for-value contracts so that these arrangements become the new status quo, rather than a handful of exceptions. Providers can partner with insurers in this effort and relay their expertise on patient outcomes and impact on clinical utilization. Although the shift to pharmaceutical value alone will not solve the phenomenon of rising drug costs, it is a giant step forward.

Ifrad Islam is a healthcare economics professional who has worked with several provider groups and a large health services organization, Worcester, Mass.

Laurence Eng is a healthcare finance and software consultant who has worked with hospitals and health systems of various sizes, Acton, Mass.


a. Express Scripts, “Drug Trend Report 2016.”

b. The examples of value-driven payment models cited in this article represent a collection of the authors’ research and are not meant to promote any particular organization.

c. Anderson, L., “PCSK9: A New Class of Cholesterol Busters,”, Jan. 12, 2017.

d. September Is National Cholesterol Education Month,” Centers for Disease Control and Prevention, Nov. 25, 2013.

e. “Cigna’s Two New Value-Based Contracts With Pharma for Pcsk9 Inhibitor Cholesterol Drugs Tie Financial Terms to Improved Customer Health,” May 11, 2016.

f. Bebinger, M., “Amgen Offers Cholesterol Drug With First Refund Guarantee for Heart Attack or Stroke Sufferers,” WBUR, May 3, 2017.

g. Value-Based Pricing for Pharmaceuticals: Implications of the Shift From Volume to Value,” Deloitte ConvergeHealth, 2012.

h. Humer, C., “Novartis Sets Heart-Drug Price With Two Insurers Based on Health Outcome,” Reuters, Feb. 8, 2016.

i. Teichert, E., “Harvard Pilgrim Scores Discounts on Novartis, Lilly Drugs,” Modern Healthcare, Jun. 28, 2016.

j. Staton, T., “Lilly’s Trulicity Joins Pay-for-Performance Trend With Harvard Pilgrim Deal,” FiercePharma, June 28, 2016.

k. Harvard Pilgrim to Pay for 2 Autoimmune Drugs Based on Outcomes, Value, “ Managed Care. Feb. 23, 2017.

l. Sartori, V., Steinmann, M., Evers, M., and Jantzer, P., Value-Driven Drug Development – Unlocking the Value of Your Pipeline , McKinsey and Co., February 2011.


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