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A New Model for Pricing Drugs of Uncertain Efficacy

Article · December 13, 2018

The United States spends too much on health care and gets too little in return.1 While this disparity is well known, it is less clear what to do about it. Value-based reimbursement — also known as pay-for-performance — has risen to the top of the health policy agenda as we seek ways to improve quality without substantial additional spending.2 The ultimate goal is to better align incentives between payers and providers.

We are making progress with physician and hospital services — albeit in fits and starts.3 Medicare implemented value-based payment for hospitals a few years ago, with reimbursement based in part on how well the hospital performed in three areas: process of care, patient satisfaction, and mortality. Medicare’s separate readmission policy financially penalizes hospitals for excessive readmissions of patients who entered the hospital with heart failure, pneumonia, or a heart attack. While there is controversy about Medicare’s policies, the move toward value-based payment continues.4,5

We have not seen similar progress in pharmaceuticals. For decades, manufacturers and insurers in the United States have relied on a price-per-dose model — the pharmaceutical analog to fee-for-service.6 Such a model limits access to innovative but expensive therapies and distorts the decisions of physicians and patients. The resulting formulary policies discourage good adherence, thereby rendering treatment less effective in practice.7

Value-based pharmaceutical pricing offers a solution, although it must overcome some fundamental challenges. One of the biggest: manufacturers and payers often disagree about a new drug’s efficacy. While clinical trial evidence provides a useful indicator of a drug’s efficacy at the time of launch when prices are set, clinical trials can provide only imperfect information about a new drug’s long-term efficacy. This shortcoming is particularly obvious in the case of first-in-class therapies that lack similar drugs to act as benchmarks. First-in-class drugs made up 36% of all new drugs approved by the FDA in 2015 and 2016.8,9 In 2017, 74% of the drugs in the development pipeline, and more than half in phase III trials, were potentially first-in-class drugs.10

As with value-based reimbursement for physicians and hospitals, tying pharmaceutical reimbursement to patient outcomes is an obvious solution.11 However, third-party pharmacy benefit managers introduce some unique challenges. For example, value-based pricing requires monitoring patient outcomes, which third-party benefit managers may not know, and which may manifest long after a beneficiary has changed health plans. In addition, many newer drugs have value because they mitigate side effects, diminish pain, or improve mobility. Accurately tracking such complex clinical outcomes could overwhelm third-party benefit managers, who already measure prescription drug utilization and adherence but have limited access to comprehensive clinical outcome data.12 No wonder outcomes-based contracts have been slow to gain momentum in the pharmacy arena.

We propose a different approach that ties prices to value but removes the need to monitor efficacy in each patient. In this way, our approach captures a key market response: allowing prices to change with new information about value.13,14

Our three-part pricing (TPP) model creates a tiered system, with prices varying over fixed time intervals. Manufacturers would agree to launch a drug with a low price, with a potentially significant increase after a prespecified window to observe performance. This upfront assurance removes the incentive for the manufacturer to price as high as possible initially and for the payer to develop restrictive formulary policies to limit access. More rapid initial uptake allows all stakeholders to learn more quickly about the drug’s longer-term real-world efficacy.

In a second period, the price adjusts based on the newly emergent evidence. Better performing drugs earn significantly higher prices — high enough to reward the innovator for its investment. After a suitable period of higher prices to reward the innovator, the price declines in a third period to ensure long-term access. Overall, society benefits from this détente between payers and manufacturers. Information accumulates faster, and prices are more responsive to the new information. Manufacturers make larger profits if their drugs exceed expectations, but society spends less when drugs don’t work so well — just as we would expect a market to work.

The Case of Cholesterol-Lowering Drugs

To show how three-part pricing might work, we consider an important new class of cardiovascular drugs, proprotein convertase subtilisin/kexin type 9 (PCSK9) inhibitors. Introduced in 2015, 12 years after the discovery that PCSK9 could be a target for modulating low-density lipoprotein cholesterol (LDL-C) levels, PCSK9 inhibitors could potentially benefit millions of patients who cannot manage their LDL-C using statins and other medications alone. A series of clinical trials supported the approvals of evolocumab (Repatha®; Amgen) and alirocumab (Praluent®; sanofi/Regeneron). Evolocumab was evaluated in six phase III trials with more than 28,000 participants, where it reduced LDL cholesterol levels by 23%–75% in patients with hypercholesteremia treated for a duration of 12–52 weeks.15 Alirocumab was evaluated in over 23,000 participants in twelve phase III trials, where it reduced LDL cholesterol levels by 23%–75% in studies lasting 24–52 weeks.

The initial labels for evolocumab and alirocumab were somewhat narrow, covering patients with familial hypercholesterolemia or those who required additional lowering of LDL-C beyond standard of care.6,16 In 2017, the use of evolocumab was expanded to include adult patients with established cardiovascular disease who were at risk of myocardial infarction, stroke, and coronary revascularization; an expansion of alirocumab’s label is expected soon.17–19 Initial list prices for both drugs exceeded $14,000 per year.

Immediately upon launch, payers raised concerns about the overall costs of these drugs — with some projecting annual spending in the range of $50 billion to $100 billion. CVS executives noted at the time, “In the debate about cost and efficacy, PCSK9 inhibitors may be the biggest challenge yet.”20

Despite their potential benefits, PCSK9 inhibitors have seen slow uptake. The Institute for Clinical and Economic Review (ICER) in 2015 predicted use could reach 2.5 million patients per year within 5 years, representing annual revenues somewhere in the neighborhood of $22.5 billion (assuming revenues of about $9,000 per patient per year), but the reality appears dramatically lower.21 Global revenues for the class were well under $1 billion in 2017.

The poor uptake has been directly linked to coverage restrictions by payers: only half of patients initially prescribed PCSK9 inhibitors in their first year of availability received coverage approval from payers, and one-third of approved prescriptions were not filled due to high patient copayments.22

Much of the controversy surrounds long-term efficacy.12 The FOURIER clinical trial, which resulted in expansion of the evolocumab label, did not fully resolve uncertainty about its long-term survival benefits given the short (26-month) median follow-up.23 Efforts to address slow uptake have been piloted by payers such as Cigna and Harvard Pilgrim who have entered into outcome-based refund agreements with manufacturers; however, there is no evidence that these have led to higher uptake or made the drugs more cost-effective, in part because the results remain confidential.11,24

A Better Pricing Model to Accelerate Learning

The current state of affairs leaves everyone worse off. Slower adoption of PCSK9 inhibitors results in worse clinical outcomes for patients and limits the rate at which evidence about real-world outcomes can be collected.22

This, in turn, hinders future negotiations to improve access to this therapy. Even substantial manufacturer discounts may not address the dilemma, especially if the drugs’ long-term effectiveness is better than observed in clinical trials. Cardiovascular risk increases with the length of exposure to high LDL-C, and cost-effectiveness improves in real-world populations with higher baseline risk.25,26

We propose a three-part pricing schedule to address the significant unmet need, high-budget impact, and uncertainty about long-term effectiveness of PCSK9 inhibitors.27 Compared to the status quo of price-per-dose, where prices are set high at launch until patent expiration, the pricing schedule under three-part pricing has three phases during the drug’s exclusivity period:

  • Phase 1: Evaluation.  During the Evaluation Phase, the price is set low, with minimal copayments and access restrictions,28 to encourage adoption and develop real-world evidence rapidly;
  • Phase 2: Reward.  In the Reward Phase, prices are set based on the effectiveness established in the Evaluation Phase, which rewards manufacturers for their innovation;
  • Phase 3: Access.  And in the Access Phase, prices are reduced to facilitate widespread adoption.

Figure 1 illustrates the status quo for PCSK9 inhibitors, starting from 2016 until expected exclusivity expiration in 2030. It shows a constant annual price (for a monthly or bimonthly dosing regimen) of $9,598 from 2016 until generic competition reduces the price to $2,181 in 2030. The former is based on an assumed 34% discount to the list price, equal to the industry-wide average discount estimate, and the latter on an expected 85% reduction in price when exclusivity is lost. (Based on oral generics launched between 2011 and 2013, prices fell by 74% within 8 months and 90% within 2.5 years. Although not small molecule drugs, PCSK9i drugs would be subject to biosimilar entry at patent expiration.)29,30 In our modeling of three-part pricing, we assume a 3-year Evaluation Phase* during which the drug is priced at 50% off list price to encourage rapid adoption. (*Although we assume 3 years in this example, phase lengths may vary; for medicines with less uncertainty, shorter Evaluation Phases may be sufficient.) Pricing in the 7-year Reward Phase depends on the drug’s performance during the Evaluation Phase in terms of reduced myocardial infarction and stroke risk and is calibrated to give the same cost per event avoided (a composite of both events) under three different efficacy scenarios.

The price in the Access Phase is set at $3,635 (75% off the list price), to ensure the total cash flow to the manufacturer over the exclusivity period (2016–2030) is equal in both three-part pricing and status-quo scenarios when the drug demonstrates expected efficacy, using a 3% discount rate.

Three-Part Pricing of PCSK9 Inhibitors

Figure 1. Click To Enlarge.

Based on our calibration, Reward Phase prices are $5,281 when the drug’s efficacy is low, $11,761 when expected, and $18,982 when high. Efficacy here is defined based on the reduction in risk of myocardial infarction (MI) and stroke observed in the pivotal FOURIER trial.23 We classify a drug as meeting expected efficacy criteria when the risk reduction of MI ranges from 0.660 to 0.795 (median 0.730) or the risk reduction of stroke ranges from 0.735 to 0.845 (median 0.790). If the drug demonstrates better real-world risk reduction, we classify it as high efficacy. We classify a drug as low efficacy when the real-world risk reduction for MI ranges from 0.795 to 1.000 (median 0.86) or for stroke from 0.845 to 1.00 (median 0.90).

The Three-Part Pricing Model

We compare the results of three-part pricing with the status-quo pricing using the Future Elderly Model (FEM), an economic demographic microsimulation model, to estimate the health benefits of PCSK9 inhibitors among Americans aged 51 and older for each efficacy scenario. The FEM uses initial demographic characteristics and health conditions for each individual to project their medical spending, health conditions and behaviors, disability status, and quality of life. The model has been developed over time with support from the National Institute on Aging, the Department of Labor, the MacArthur Foundation, and the Centers for Medicare and Medicaid Services to study health care innovation in a wide variety of contexts.31–33 Of particular note, the model has been used to study the benefits of innovation in heart failure treatment, statin use, and reduction in cardiovascular risk factors.34–36

We first identify the population eligible for PCSK9 inhibitors based on the FDA label and inclusion criteria for the pivotal FOURIER trial: those with familial hypercholesterolemia (LDL-C above 190 mg/dl) plus those with an existing cardiovascular condition and LDL-C of at least 70mg/dL while receiving cholesterol-lowering therapy. We do not assume that everyone is treated initially, consistent with the data observed to date, and we allow uptake to change once the real-world experience becomes available. Specifically, we estimate that uptake will rise gradually during the first two phases of three-part pricing, reaching about 5% of eligible patients treated annually within 6 years of launch. During the Access Phase, we assume that uptake adjusts based on efficacy data: under low efficacy, uptake gradually decreases to 2.5% of the eligible patient population, and under high efficacy, uptake increases to 10% of the eligible population. A detailed discussion of our methods can be found in a technical appendix.

The FOURIER trial demonstrated reduced incidence of myocardial infarction and stroke, both of which are simulated in the FEM. We simulate the entire population aged 51 years and older from 2016 onward, accumulating information about individuals’ health conditions (including incident disease cases) and total drug spending in each year — taking into account the disease risk reduction among those receiving treatment and the price of treatment, which reflects the annual per-patient cost of PCSK9 inhibitors.

Spending on PCSK9 Inhibitors

Figure 2 shows the present discounted value of spending on PCSK9 inhibitors from 2016 to 2030 under different scenarios. Three-part pricing produces benefits for manufacturers, patients, and payers compared to the status quo. Under the status quo, spending varies modestly with efficacy, ranging from a low of $64.3 billion to a high of $84.4 billion over 14 years. Spending with three-part pricing varies more widely, from $34.7 billion to $114.7 billion. (These figures refer to total discounted spending over 14 years; for comparison, annual spending on hepatitis C drugs in the US peaked at $18.8 billion in 2015.) Importantly, if PCSK9 inhibitors exhibit low real-world efficacy, three-part pricing avoids $30 billion in spending relative to the status quo. If the drug performs as expected based on clinical trials, three-part pricing generates comparable discounted cash flow but delivers revenues sooner, enabling more immediate investment in further R&D. If real-world effectiveness is better than the clinical trials predict, spending is higher under three-part pricing, reflecting the higher uptake in the high-efficacy scenario with three-part pricing relative to the status quo.

Discounted Total Revenues Under Different Efficacy Scenerarios - Three-Part Pricing vs Status Quo Drug Pricing

Figure 2. Click To Enlarge.

Cost per Event Avoided

The ultimate question, however, is how much health benefit we get for the PCSK9 inhibitor spending shown in Figure 2. In Figure 3, we examine the key metric for evaluation of PCSK9 inhibitors, “cost per event avoided.” Three-part pricing lowers the cost per event avoided under both low and expected efficacy scenarios, and results in comparable cost per event avoided under high efficacy. In this way, three-part pricing leaves society better off in terms of value per dollar spent, relative to status-quo pricing. (We do not model cost-effectiveness in our model, given ongoing discussion about appropriate thresholds for different patient populations, but rather we assume a generic discount to the list price to frame our price setting under status-quo pricing and associated spending on PCSK9 inhibitors.)

Cost per Event Under Different Efficacy Scenarios for PCSK9 Inhibitors - Three-Part Pricing vs Status Quo Drug Pricing

Figure 3. Click To Enlarge.


The status quo encourages high launch prices and access barriers that frustrate patients and providers. We propose a tiered pricing approach — three-part pricing, or TPP — that offers several advantages of complex contracts that require monitoring of each patient. If the drug’s real-world efficacy is better than in trials, more patients are treated, with the same cost per event avoided as the status quo. However, if real-world efficacy is worse than expected, payers spend less on the drug (by about $30 billion), with a 50% lower cost per event avoided than under the status quo. Therefore, a pre-negotiated TPP price schedule would accelerate access and real-world evidence development at lower cost to society.

Many practical issues would need to be resolved to implement a TPP model. Long-term agreements between payers, manufacturers, and pharmacy benefit managers would be required, in which future drug prices depend on the accumulation of several years of data gathered in real-world settings across different payers and providers. Collection of clinical outcomes during the Evaluation Phase could be hindered by challenges such as reporting issues, adherence to therapy, and data-sharing challenges among providers, payers, and manufacturers. Payer or provider consortiums could address some of these challenges, by collecting clinical outcomes in a systematic way, and employing an independent research lab to evaluate long-term efficacy according to a pre-specified analytic plan approved in advance. Analysis methods used in existing clinical trials could provide a starting point for those plans. Provisions would need to be in place to discontinue coverage if the drug demonstrates extra-low efficacy or more adverse events than predicted; post-marketing surveillance to track such outcomes would also be needed. Such details have already been worked out in private agreements with plans like Harvard Pilgrim and Cigna, so these concerns are unlikely to be prohibitive.

Risk exposure concerns would also need to be addressed. Three-part pricing shifts some efficacy risk to manufacturers, and it exposes payers to higher drug spending if the drug’s effectiveness exceeds expectations. Hence, manufacturers may not accept the deal unless they are confident about their drug’s performance, and payers may not want to risk greater spending even if the drug performs as expected. While both uncertainties exist in the status quo, TPP’s design is conditional on the parties accepting higher risk exposure.

Finally — and of most concern — a longer-term agreement such as three-part pricing may weaken product competition and reduce benefits if another innovative therapy enters the market and provides greater value for money. Specifically, if a follow-on PCSK9 inhibitor enters the market during the Reward Phase, it would presumably compete on the (higher) Reward-Phase price without having had to undergo the low Evaluation-Phase price, because the first product has already established long-term efficacy during its Evaluation Phase. The broader implications of three-part pricing for market competition and innovation are therefore complex and require specific contractual arrangements to address. Fortunately, as drug development pipelines are well known in advance to all parties, most of these situations should be foreseeable, and can therefore be incorporated into contracts.

The main benefit of three-part pricing to the manufacturer is the risk reduction that results when revenues are accelerated. To maintain this benefit, TPP contracts must be specified to substantially narrow the possibilities for dropping the current drug in favor of a new entrant. For example, switching to a new PCSK9 inhibitor with similar performance in clinical trials could be ruled out with a provision that requires the payer to pay the entire expected bonus to the original manufacturer before adding the new drug to its formulary. (Note that a payer might favor such a clause as it allows for a slightly longer Reward Phase, which might help with payer cashflow constraints.) This is a specific example of the more general risk-sharing mechanism at work here — by lowering risk to the manufacturer, the payer can obtain lower prices. On the other hand, there should be no contractual provisions preventing a payer from adding a new entrant from a different class or a vastly improved PCSK9 inhibitor. These new entrants would be candidates for new TPP agreements.

But even if the payer resists contractual stipulations such as those above, the issue may be of minimal concern because, relative to the status quo, manufacturer profits are moderately lower in the Evaluation Phase but are much higher in the Reward Phase. If a new competitor enters during the Evaluation or Access phases and the payer “defects,” the initial manufacturer may still be better off relative to the status quo, and can “punish” the payer by raising prices to the market level during the Access Phase. That is, the net effect of payer defection will be higher profits for the manufacturer with increased spending by the payer. On the other hand, if the point at which the new drug enters is near or during the Access Phase, then the new entrant must set a price close to the access price, and market competition will start from a much lower price point. Note also that a new class of drugs introduced during the Access Phase will have to compete with that access pricing, which will lower costs to the payer across different classes of drugs (and thus across greater expanses of time).

This scenario does highlight that TPP contracts will strongly reduce the incentives for manufacturers to introduce “me too” drugs, with the expected price benefits of “me too” competition able to be contracted from the outset. This is likely more efficient, but there are circumstances where it might curtail innovation. In any case, specific contractual provisions would be required to ensure the theoretical benefits of three-part pricing are realized by all parties.

Pay-for-performance has been difficult to achieve in the pharmaceutical sector, primarily because manufacturers have little incentive to launch at a low price to encourage use as more evidence is collected about real-world, long-term effectiveness. We propose a three-part price schedule that could provide access at a lower price while the drug undergoes further evaluation in a real-world setting and limit the period during which the innovator is rewarded in proportion to the clinical benefits delivered by a new therapy. The result is better access while still rewarding innovators. While three-part pricing is not a panacea, in the case of PCSK9 inhibitors it offers lower cost per event avoided and distributes risk between manufactures and payers based on the drug’s performance. As such, it provides a promising alternative to existing payment models for high-cost chronic therapies.


Disclosures: This research was supported by the National Institute on Aging of the National Institutes of Health under award number P30AG024968, which funds the Roybal Center for Health Policy Simulation at the University of Southern California. The content is solely the responsibility of the authors and does not necessarily represent the official views of the National Institutes of Health. Amgen provided additional support through an unrestricted grant to the University of Southern California and had no input into this publication.

Dr. Pani is scientific advisor to EDRA-LSWR Publishing Company Italy, Inpeco SA Total Lab Automation Company Switzerland, NCT-NeuroCog USA, Acadia USA, Ferrer Spain, Johnson & Johnson USA, Otsuka USA, Pharma Mar Spain, Pfizer Global USA, and Takeda USA. Dr. Goldman is a consultant to Precision Health Economics, a health care consultancy providing services to the life sciences industry, and he owns equity in its parent company. Dr. Van Nuys has served as a consultant to Precision Health Economics.


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