Value should determine a drug’s price

WHEN YOU LAST PURCHASED A VEHICLE, did you ask the dealership how much your car cost to manufacture? Chances are, you were more interested in the car’s durability and safety features – and you were willing to pay for higher quality.

Look at the pharmaceutical sector, and a completely different set of logic is being applied to pricing. The policy debate that has emerged around reigning in prescription drug costs focuses too much on the research and development invested in creating the treatment, rather than the drug’s effectiveness.

Companies selling costly prescription drugs argue that high prices are required to cover development costs, and critics counter that drug firms overstate these costs and are the recipients of substantial federal research grants. Some policymakers have called for greater transparency around drug company spending on R&D, and for companies to refund the National Institute for Health if they do not meet minimum R&D costs.

Efforts to increase transparency are noble, but the debate as a whole misses the mark when it comes to evaluating how drugs should be priced. The conversation sidesteps questions of value.  Why should patients, hospitals, and insurers pay more for a drug that provides little or no benefits compared to alternative therapies? If this pricing logic were applied to the automobile industry, companies would simply drive up manufacturing costs, rather than create the many safety and quality features that exist today.

While the concept of value-based pricing is simple and logical, achieving it is challenging because value means different things to different people.  Health insurers, drug companies, doctors, and patients will have to work together to determine what constitutes a “valuable” drug, and to evaluate whether treatments for certain conditions should be given priority over others.

One common benchmark has emerged that would provide a starting point for value-based pricing: the cost per quality-adjusted life year, or QALY. This measurement represents the cost of a treatment for each healthy year produced for the patient. At Tufts Medical Center, we maintain a database of thousands of studies that use this metric. The data show, for example, that statins to lower cholesterol for patients with a history of heart disease produce health benefits very inexpensively (less than $10,000 for each QALY gained), while for some new cancer drugs, it costs more than $300,000 for each QALY.

This is not to say that health plans should avoid paying for expensive cancer drugs – but it conveys a sense of how much health is actually obtained for the spending, which can be a point of departure in price negotiations between health insurers and drug companies.

The value-based approach to pricing is increasingly being utilized by nonprofit groups, such as the American College of Cardiology/American Heart Association and the Institute for Clinical and Economic Review, to provide information on the value of drugs and other treatments to physicians, payers, and patients. Other organizations, including the American Society of Clinical Oncologists, are measuring the value of cancer drugs in terms of characteristics, such as the treatment’s benefits and the frequency of severe side-effects.

Pricing prescription drugs based on value would help ensure that expensive therapies are worth their cost, and it would drive pharmaceutical makers to focus on efficiently creating drugs that improve patient health.  As this issue inevitably gets debated in Congress, in state legislatures, and on the campaign trail throughout 2016, the debate needs to focus on value.

In the meantime, more research is needed on how best to estimate a drug’s value, and how agreements between health plans and pharmaceuticals would be structured.

Smarter prescription drug pricing will only be reached by changing the debate and supporting a value-based approach through research and analysis. Given its thriving ecosystem of life science companies, colleges, universities, and hospitals – Massachusetts is poised to lead to way.

Peter J. Neumann and Joshua T. Cohen are director and deputy director, respectively, at the Center for the Evaluation of Value and Risk in Health at the Institute for Clinical Research and Health Policy Studies at Tufts Medical Center. The opinions expressed here are those of the authors and do not necessarily reflect the views of Tufts Medical Center.