value-based pricing for pharmaceuticals

Short Guide to Value-Based Pricing for Pharmaceuticals

The tug-of-war between patients and drugmakers over medication price isn’t a new fight. As the masses demand a fair and reasonable price, Pharma manufacturers argue for the importance of these prices, looking at how much they invest into drug research and development.

Thankfully, the negotiation between pharma companies and Medicare doesn’t necessitate sacrificing innovation and research in drug development; neither does it mean medications will become cheap. There’s a balance to strike between both parties called value-based pricing.

This piece is a dive into value-based pricing for pharmaceuticals, starting from the basics to the benefits and challenges of this health policy. We will also consider its impact on drug development, among other things. Learning time!

Table of Contents:

Understanding Value-Based Pricing

Value-based pricing is a strategy whereby the value of a good or service or the impact of its non-use drives its price. In the pharmaceutical sector, it means that the value of drugs or the effect of non-use on patients’ health drives the prices of medicines.

The idea mainly serves to manage prescription drug costs, especially branded ones. Typically, pharmaceutical companies decide the price for their products, and governments recognize the need to allow them this freedom. Countries like the United Kingdom, Canada, and Australia are leading in setting value-based pharmaceutical pricing.

What Drives Value-Based Pricing For Pharmaceuticals?

The core principles of value-based pricing include that the price of branded drugs is determined by how much health benefits patients gain from using them. This strategy ensures that patients are not overpaying for a medicine or therapy that is not giving them enough value for that amount.

In understanding value-based pricing, it is essential to acknowledge how it differs from traditional pricing models in the pharmaceutical industry. Typically, pharmaceutical companies decide drug pricing, considering their investment and the cost of production. 

However, the immense need for some medications, like Insulin, makes governments set a cap on their pricing. Most times, it is due to the necessity of the drugs. Other times, it ensures the prices match the value they offer patients.

Benefits of Value-Based Pricing in Pharma Marketing

Now that you understand what value-based drug pricing is and its fuel, the question to ask is about its benefits. The answers to questions about the help of this pricing strategy are numerous. Significantly, it accords a great advantage to all the stakeholders in the healthcare sector, including doctors, pharmacists, and patients.

How Value-Based Pricing Helps Patients

Firstly, we will consider its benefits to the patients, the primary stakeholders in this discussion. After all, they are the ones who pay for these drugs. Value-based drug pricing helps ensure that patients are not paying more costs than the value a particular drug gives them.

It also improves the well-being of the people, as it ensures that essential drugs are cost-effective, reducing the tendency of health insurance providers to charge higher premiums. Health insurance companies may be able to negotiate costs with the pharmaceuticals, but the people who have to pay the price of bearing the impact. 

How Value-Based Pricing Helps Pharmaceutical Companies

The next benefit we will consider relates to the interest of pharmaceutical companies. These companies spend large sums on research and development, with only one out of ten clinical trials succeeding. This fact forces companies to ensure the successful ones bring them enough investment returns.

For these pharmaceutical companies, value-based pricing helps them negotiate a profitable price arrangement with the authorities. By proving the value their drugs provide, they can get the liberty to set reasonably high prices for drugs with great potential. 

They can also increase their sales and, consequently, their market share. This system gives companies the incentives to develop highly beneficial drugs.

How Value-Based Pricing Helps Healthcare Providers

Finally, on a broader scale, we must consider the advantages of value-based pricing for healthcare providers. This group of people has to deal with health outcomes. Therefore, they prefer medications with the highest chances of producing great patient results. They understand that patients may have to pay higher prices for valuable drugs, and they must ensure those drugs are worth their fees.

From these analyses, you realize that value-based drug pricing holds fantastic benefits for all the stakeholders in the system. However, they must ensure that potential challenges are dealt with adequately. We will examine some of these challenges in the next section.

Challenges and Considerations to Value-Based Pricing

Value-based pricing offers immense benefits to the stakeholders in the healthcare system, but it is not without its challenges. We consider four of them:

1. Measuring Value

Firstly, there is the problem of deciding how to define or measure value. Factors like local costs of raw materials and conditions for clinical research often influence medications’ value in the local market. For this reason, it may be hard to measure the value of such a drug or therapy compared to it in another place.

2. Choosing a Fair Price

Secondly, there is a need to decide the best approach to value-based pricing. For pharmaceutical companies, their investment goes beyond the cost of research and development. They take huge risks in developing drugs, and these risks can be complex to quantify when determining the value of the result.

The body assessing the drug’s value may need help adequately compensate for the trouble. Remember, we want a price fair for all the stakeholders while ensuring we don’t discourage innovation.

3. Private or Public Policy-making

There is also the question of whether independent bodies like ICER should make the assessment or whether governments should set up public bodies to deal with it. The evaluation must consider ethical issues like fairness and reliability.

4. Measuring Outcomes

Finally, there is the challenge of how to measure outcomes. Factors like local care standards and economic cooperation from the government influence the results of medication development. It may be challenging to determine how such factors should affect drug prices.

Impact on Drug Development on Value-based Pricing

A primary consideration when discussing value-based pricing is its impact on drug development. Pharmaceutical companies sometimes see attempts to cap the prices of drugs as a slight to the innovative processes that go into developing these drugs. These companies spend a lot of money on research and development. They consider these sums to be investments on which they can gain returns when they get good results.

Nonetheless, value-based pricing can help improve the quality of drugs companies develop. When companies know they can gain enough rewards from discovering highly-valued drugs, they are motivated to invest in research and strive for the best outcomes. The result is a system with more practical and cost-effective medications.

The Role of Health Economics in Prescription Drug Costs

Now, we must address the importance of health economics in determining the value of prescription drugs. To do this efficiently, we must discuss the methodologies and models used in assessing value in pharmaceuticals. They include: 

Cost-Effectiveness Mechanism

This model compares the cost of the new medication to generic drugs in the industry. The company needs to set a high price for the branded medication to provide significant value over a generic drug already in the market. For a branded drug to command a high price, the makers must give it such great value unmatched by others.

Clinical Benefit-Based Assessment

Another model countries and bodies use to determine the value of branded medications is the amount of clinical benefits they provide. It works by weighing the additional health gained from using the drug against the health foregone by not using it. If you deem the latter insufficient to overturn the former, you may decide that the drug is not worth the price.

Pharmaceutical Value Assessment Bodies

Interestingly, it is not only governments and agencies that adopt value-based assessments for drug pricing. Pharmaceutical companies use value assessment bodies like the Institute for Clinical and Economic Review (ICER) to determine appropriate product prices. Examples include Sanofi and Regeneron, which lowered the price of Praluent based on ICER’s analysis.

Implementing Value-Based Pricing

After deciding to implement value-based pricing to manage health economics, the government’s subsequent task is implementation. Governments must follow three key steps to implement a value-based pricing strategy.

  • Assess the comparative effectiveness of the drug. This assessment includes considering whether it satisfies an unmet need or represents an advancement in the treatment options available.
  • Consider the cost of the medication’s research and development, production, and distribution.
  • Determine the most reasonable price, considering the generic competition for the medication.

The implementation processes focus on governments, but pharmaceutical companies can transition to this model following the same steps.

Real-World Case Studies of Pharma Value-based Pricing

A famous example of a company that adopted value-based pricing was the Sanofi and Regeneron example we mentioned earlier. They reduced the price of their cholesterol-lowering drug, Praluent, in response to ICER’s analysis. The impact of this decision is that it improves the company’s reputation for providing value.

Apart from that, Express Scripts, one of the largest pharmacy benefit managers in the United States, provided the drug with exclusive formulary placement. That increased patient’s access to the drug and passed a portion of the rebates it received to consumers. These are examples of what happens when all the stakeholders collectively decide to improve the industry.

Patient Access and Equity in Value-based Pricing

Significantly, value-based pricing increases patients’ medication access and promotes healthcare equity. The primary benefit of value-based pricing for consumers is that it reduces prescription drug costs. 

The impact of this is that it gives more patients access to much-needed medications. With this, we can solve another problem, which is healthcare equity. Some initiatives exist primarily to ensure the affordability of healthcare for all. Such include the Center for Medicare and Medicaid Services (CMS). 

The Future of Value-Based Pricing in the Health Industry

Value-based pricing is gaining more ground as health economics comes under scrutiny. Governments are striving to increase sustainability in the healthcare sector. It is safe to predict that value-based pricing will become increasingly popular in the industry.

Knowing that higher value means higher price, there will be competition to create drugs and therapies for the most pressing health issues. This drive for innovation leads us closer to ensuring that no ailment remains terminal.

Of course, we cannot remove the challenges automatically. We will have to deal with the possibility of companies focusing more on medications that can bring them the highest money over ones that patients need more.

Final Thoughts

Value-based drug pricing is a marketing strategy that ensures patients/end-users get the best value on every spent dime. It’s also a strategy that requires sales marketing synergy and the application of collected data to benefit Pharma businesses and patients. If done right, the Pharmaceutical business can amass an immeasurable level of success that could help overcome the limitations in the availability of quality drugs to patients who can afford them around the world.

With the help of Pharm CRMs, Pharmaceutical companies can now map customers’ journeys to evaluate individual experiences and rationalize the value of their drugs based on the satisfaction and results of their end-users.

Start here!