The value frameworks approach emerged in response to the rising oncology drug prices. According to Schnipper & Bastian (2016), the goal of these frameworks is to develop a system for valuing medical therapies that is defined by the benefits and costs (physical and financial toxicity) of the therapy on patients. However, while U.S. value frameworks have been proposed as a method to analyze and identify value in new cancer drugs, they are still limited in their ability to impact the cost of new drugs. Rising oncology drug prices contribute to increased financial pressure and can have a negative impact on patient behavior because studies have shown that patients are price sensitive (Wong, et al., 2010). Currently, most US value
frameworks are price takers. These price taking frameworks don’t attempt to directly affect the price of new drugs. Instead, they take the price offered by pharmaceutical companies and compare it to the projected clinical benefit to arrive at a value output. Treatment decisions are evaluated by presenting different value outputs and identifying the most appropriate option for the patient. While this process may affect the price of future drugs, that is not the intended goal
35 at this time. This section will examine whether it is possible for frameworks to directly impact the price of new oncology drugs. Both increased interest from policymakers and the rise of value-based contracts point to an opportunity to integrate the U.S. frameworks approach to performance-based pricing (PBP).
The idea of performance-based pricing is rooted in the idea that the price set is “fair” as the seller is paid based on the actual performance of its product or service (Shapiro, 2002). However, this arrangement is difficult to achieve because the traditional relationship between a buyer and seller is defined by a zero-sum game where one’s gain is the other’s loss. The
appropriate use of performance-based pricing can transform pricing into a win-win situation for both buy and seller. According to Harvard professor Benson Shapiro (2002), there are three primary advantages to performance-based pricing. The first is the alignment of the buyer’s and the seller’s goals. The second advantage to performance-based pricing is that it provides insurance to both the seller and buyer. It creates a greater sense of fairness by protecting the seller from undercharging the buyer and preventing the buyer from overpaying at the individual and institutional level. The third and final advantage is the most important because it forces the buyer and seller to deal with each other’s limitations, objectives and tradeoffs. In doing so, there is a greater appreciation of each other’s position and increased communication between the buyer and seller. As a practice, performance-based pricing is growing because of its economic logic, its ability to foster buyer/seller communication, and its successful implementation across different industries.
When examining the impact of performance-based pricing on the pharmaceutical
industry, it is important to understand the payer’s perspective. According to Stanley et al. (2012), payers are looking for more ways to control costs through formulary coverage restriction,
36 prescription medication distribution programs, and tiered consumer cost-sharing. Due to the payer’s bargaining power, manufacturers are trying to avoid losing product differentiation and market share in an environment that is putting increasing pressure on the price, the
reimbursement of, and the access to pharmaceuticals (Stanley et al., 2012). Performance-based pricing enables pharmaceutical companies to validate the value proposition of their medication and redistribute the risk between payer and manufacturers. As a result, these types of agreements have been in use for years with an increased prevalence in recent years as European countries have utilized this strategy to reduce pharmaceutical drug costs in response to budgetary pressures (Stanley et al., 2012).
Although performance-based pricing has been implemented in the pharmaceutical industry, there are still questions about how to apply the insights from those successes to oncology drugs. Health care in the United States presents a unique set of challenges due to the third-party reimbursement structure, the information asymmetry between physicians and patients, and the lack of consensus when determining clinical endpoints. Carlson et al. (2010) conducted a ten-year review (1998-2009) of performance-based health outcomes reimbursement schemes for medical technology, which one can use to lend insight on oncology drug pricing. Their analysis defined performance-based health outcomes reimbursement schemes as
agreements between healthcare payers and medical product manufacturers in which the price, level or nature of reimbursement are tied to future measures of clinical or intermediate endpoints ultimately related to patient quality or quality of life (Carlson et al., 2010).
As shown in Figure 5, the authors divided the schemes into two categories: conditional coverage, which includes conditional treatment continuation, and performance-linked
37 Figure 5. Performance-based Health Outcome Reimbursement Schemes
Note: Reprinted from Linking payment to health outcomes: A taxonomy and examination of performance- based reimbursement schemes between healthcare payers and manufacturers. Carlson et al. Copyright 2010.
These three types of pricing agreements are the most applicable for oncology drug development. Conditional treatment continuation is where continuation of coverage is based upon meeting short-term treatment goals. Advantages to the payer include minimizing their long-term cost exposure and improving the product’s cost-effectiveness by discontinuing treatment when there is a lack of benefit. These advantages are even greater when the manufacturer bears some of the cost of treatment initiation. Outcomes guarantees consist of agreements where manufacturers provided rebates, refunds, or price adjustments if their product did not meet certain performance goals. In pattern or process of care, the reimbursement is tied to the impact on clinical decision- making or practice patterns. The performance-linked reimbursement schemes are most utilized when manufacturers have sufficient confidence in their product that they are willing to accept a lower reimbursement if certain goals are not met. Both the manufacturer and the payer can take