More than Dollars and Cents: Prescription Drug Pricing and Value

Policy solutions need to consider both the considerable value and significant budgetary challenges presented by high-priced prescription drugs.

The rising cost of prescription drugs has been the subject of many recent headlines. However, a narrow focus on increased costs for the health care system alone, as opposed to the treatment’s underlying benefits, fails to capture how innovative therapies may offer patients considerable value relative to existing therapies. 

For instance, a relatively new – but more expensive – class of hepatitis C treatments offers substantial clinical benefits, and therefore a valuable return when measured by the quality-adjusted life years gained. The same is true for many other emerging innovative therapies, including certain cancer treatments and gene therapies for rare diseases. The key question regarding the value of a treatment is whether the higher cost is justified by an increase in clinical benefits, compared to existing treatments.

However, that is a different question than how to pay for an expensive new treatment. High-value treatments may well pose challenges to health care budgets, as was the case with the emergence of the new hepatitis C treatments. The fragmented nature of the US health care system makes this even more difficult, since the offsetting cost savings from improved treatment may not be realized for some time after treatment. As patients transition across payers and payer types, the payer who covers an initial treatment may not be the same one that realizes the benefits down the road. This can create disincentives for coverage. 

To help address this pricing challenge, new payment mechanisms are being considered. One such innovative approach is the use of drug “mortgages,” where a steep initial cost for a “one and done” treatment is amortized over many years. In this case, the benefits of such arrangements will likely be dependent on the therapeutic setting and type of payer. Another new approach is the growing interest in using outcome-based contracts, where manufacturers and payers negotiate payments and refunds that are closely tied to the benefits derived from the treatment. These arrangements can provide payers with greater predictability in the face of new treatments with uncertain outcomes. 

Developing new models will require continued discussions between the different stakeholders, including manufacturers and regulators. ■

Noam Kirson, Managing Principal