Over the summer I wrote two blogs focusing on the problems with the current Pharmaceutical Price Regulation Scheme (PPRS) – which I argue is bad for patients, the NHS and pharmaceutical companies – and some of the challenges which will need to be addressed in getting value from value-based pricing. The blogs generated an unprecedented reaction. Much of the feedback was positive, although some was fiercely negative. This is an issue which provokes strong feelings. Interestingly, the blog on the PPRS attracted more comment, perhaps suggesting that some with an interest in drugs pricing are more concerned with debating the past than they are with shaping the future.
Reflecting on the blogs, it seems to me that there are three main challenges. Firstly, many manufacturers think that pricing policy plays an important part in industrial policy. My argument is that pricing has proved to be an increasingly ineffectual mechanism for bolstering the UK’s attractiveness to a globalised industry (hence the plethora of other initiatives intended to prove the UK is a good place to invest in). However, it is understandable that industry should want a better understanding of how the Government intends to make the UK an appealing place for life sciences companies to do business, as well as some reassurance that the Government recognises that there is more to R&D than simply delivering new drugs to market. I will return to how this might be achieved on another occasion.
Secondly, value-based pricing will only be truly effective if we have a definition of what value is, can measure it and can then price it accordingly. We shouldn’t necessarily assume that value-based pricing will lead to lower overall prices or costs, but to be effective it will need to distribute them differently. This is not an easy task. There are many methodological challenges to measuring value in drugs which – at the point of the process – will only have been used in clinical trials, which are somewhat different from the real world. There is also the problem that, in any normal market, price is not static. It is affected by volume and vice versa. However, the supply of drugs is far from a normal market.
Thirdly, the timetable for transitioning to a value-based pricing system is absurdly unambitious. Even if Andrew Lansley’s plan is implemented un-amended (and we know that doesn’t always happen), new molecular entities would be subject to value-based pricing from 2014. That means that drugs licensed before this date would continue to be priced using the existing system (through a successor PPRS). The transition to a value-based pricing system could take as long as 20 years. This is more evolutionary than revolutionary.
Getting value from volume
Since Marx’s Labour theory of value, no-one really takes the view that manufactured commodities have any intrinsic value. Rather, their value is determined by a market – and crucially, by the point where supply and demand intersect. This is the point of market equilibrium, where the price is determined by a combination of whether a seller is able to sell another marginal unit and make a profit, and whether the consumer is willing to pay above this for marginal extra utility. At equilibrium, everyone is happy: the seller manufactures only what is demanded, a price is set and the market clears. The volume of a market is therefore critical in setting its price.
Of course no market is perfect (which is where much of market theory falls down). But the supply of prescription drugs, particularly in the UK, is further from perfect than most. Left to its own devices, the pharmaceutical market would be in complete market failure. First, there are huge externalities on both the supply- and demand-side. The domestic pharma industry contributes tax receipts; consumers would never fully price ‘innovation’ into their purchasing price; and the purchasers (NHS) are divorced from the demand-side (patients). Second, the markets for branded pharmaceuticals are closed off by patent rules, so they wouldn’t get to equilibrium even if the externalities were absent. Third, the NHS is effectively a monopoly purchaser. This situation confers advantages, but one of them is not market equilibrium. Faced with a monopoly supplier, a monopoly purchaser and huge externalities, governments and manufacturers ‘fix’ the market with price-control mechanisms, like the PPRS.
To date, however, the PPRS has failed to effectively link volume and price. It allows little scope for pricing to flex according to volume (there is some scope for flexible pricing, but this is predicated on changes in the evidence on efficacy rather than on volume. Equally, Patient Access Schemes provide a mechanism for rebates, but these have tended to operate on an individual patient basis rather than according to volume). Furthermore, relatively low levels of usage (by international standards) of many categories of newer drugs do not give manufacturers the confidence to prospectively reduce prices for anticipated volumes.
So value-based pricing is yet another attempt to fix the market, by ensuring that the price paid for a pharmaceutical is the same as its ‘value’. It is meant to be a step away from the PPRS and a step towards a fully-functioning market. But in trying to determine a ‘value’ as a static concept, it ignores the market forces which it is trying to harness. Currently discussions around value-based pricing are centred on how ‘value’ is determined. This assumes that there is some intrinsic ‘value’ to a pharmaceutical. So we’re back to Marx, which is possibly where this Government does not want to be.
There will be some ‘value’ in pharmaceuticals which the NHS market won’t identify. These are the externalities, which need to be identified and offset, often outside the pricing system (see my first point about industrial policy). But the other aspect of ‘value’ is what the market should identify: if people need drugs in greater volumes, and if suppliers are willing to supply them in greater volumes, then the perfect market would deliver a lower price. If that’s how the perfect market works, then value-based pricing needs to work to deliver it.
The Department of Health is resistant to crude price-volume agreements for a number of reasons. It is difficult to determine what an appropriate volume might be when you don’t know either the size of the market (how many patients clinicians would wish to prescribe the drug for) or an appropriate market share (if there is more than one competing drug in a class which, over time, usually happens). Attempts to address this are fraught with difficulty. Clinicians resent being told which drug from a class to use, as often they will have different benefits and drawbacks. Equally such an approach is hardly consistent with patient choice.
Yet something needs to be done to mimic the price-volume dynamic you would normally expect to see in a market. Otherwise we will witness the unlikely scenario of Andrew Lansley adopting Marxist theory and – more importantly but less amusingly – we will miss out on the opportunity to get value from volume.
My suggestion is this. Manufacturers could be encouraged to offer retrospective rebates (when the level of volume achieved can be observed, and is no longer a matter of speculation). Such rebates would have to be provided on the basis of commercial confidentiality, so as to avoid adversely affecting international prices (unless this occurs, there will be a disincentive for manufacturers to offer flexibility).
The challenge with this approach is that it is difficult to know how to distribute rebates to the many different providers of healthcare who might have prescribed the drug. A solution could be either for the rebate to be paid centrally and then used to support the spread of new technology and practices in the disease area from which it is generated. By focusing on the disease, rather than the particular intervention, the focus would be on improving the entire pathway. So, for example, rebates from cancer drugs could be used to fund molecular diagnostic testing (which will be critical to the next generation of treatment), efforts to improve active treatment rates for cancer, or even the extension of awareness and early diagnosis initiatives.
There would be much detail to work out, but the appeal of this approach is that the value generated from using one technology could be applied to supporting other forms of innovation, creating a virtuous circle. Value would be returned to both the purchaser (the NHS) and the consumer (the patient). This could be supported by incentives on both providers and commissioners (through the quality premium and mechanisms such as CQUINs) to adopt new technologies, as well as transparency to ensure accountability for those who do not.
Putting volume in value
There is also an opportunity to accelerate the transition to value-based pricing, which might otherwise take generations. Industry has expressed concern about a disconnect between value-based pricing for new drugs and a successor to the PPRS for existing drugs, and it has a point. January 2014 is an entirely arbitrary point which has relevance only in that it represents the end of the existing PPRS. There will be no intrinsic difference between a drug which gains marketing authorisation in December 2013 and one which gets its licence a month later.
The Department of Health should use this to its advantage, by offering manufacturers of existing drugs to ‘opt in’ to value-based pricing. This offer should be extended to all those drugs which received a negative NICE appraisal (the Cancer Drugs Fund drugs would be a good starting point), as well as those which have never been appraised by NICE (this category still accounts for a high level of NHS expenditure). Those that accept the offer will be able to obtain a value-based price. Future PPRS price cuts could then be focused on those that do not.
This approach could satisfy both sides, with industry avoiding an artificial disconnect between the pricing regime for drugs licensed before 2013 and those licensed after, and the Department of Health getting to put some additional volume into its much-trumpeted system of pricing value.
There is a reason why drugs pricing has failed to move on from the (I would argue) flawed approach of the PPRS – the whole issue is fiendishly complex and the unintended problems cause by change can be every bit as significant as the intended benefits. However, the decision to open up pricing policy creates an opportunity which should not be ignored. If we get it right, we should be able to get some more value from volume, whilst also putting greater volume into value.