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How Do You Define a Drug’s Value? (09:44)

How do you define the value of a drug? Is it always a multiple of years of life saved? And is value-based contracting reasonable for a NASA-like model of drug development?

Most experts align with what Michael Porter has said, which is to think about value as quality divided by cost, explains Michael Sherman, Harvard Pilgrim Health Care’s Senior Vice President and Chief Medical Officer. Cost is something we can measure, and we should consider the total cost of all care for a condition rather than the cost of drugs in a vacuum. Harvard Pilgrim spends 25% of their dollar on drugs. But, says Sherman, “if there are more drugs that keep people out of the hospital, extend life, etc., maybe it should be 30%.”

The numerator, quality, is more amorphous, says Sherman, but there are ways to measure quality of life. As long as a drug offsets costs and improves quality of life, philosophically, that drug is of value.

On a more practical level, organizations like the Institute for Clinical and Economic Review (ICER) examine cost offsets and quality improvements and convert these into quality-adjusted life year numbers. Generally, if a drug is $150,000 per quality-adjusted life year or less, ICER views it as high value. Most drugs don’t fall under that, but the ICER data is still helpful. Payers will look at the numbers closely, according to Sherman, and a bargain is emerging where if pharma companies price a drug at fair market value based on ICER, insurers will not implement artificial constraints beyond wanting the drug to be used appropriately per the label.

As for value-based contracting, Amitabh Chandra, Director of Health Policy at Harvard Kenney School of Government, says that this practice is working well right now, especially in areas of medicine where drugs have substitutes and we can play them against each other. But increasingly, Chandra believes we will see a raft of innovation for orphan diseases, such as a cure for a particular type of cystic fibrosis rather than cystic fibrosis as a whole. “In that kind of world, it’s going to be impossible to walk away from some of those cures. And in that world, I don’t know what we’re going to do.” We don’t have a financing system where premiums or taxes can increase as cures arrive. Something else will need to get cut to pay for those cures, like public school or police funding — or patients will have to go without that cure.

While value-based pricing can work, Chandra expresses concern over monopolists taking advantage of value-based contracting. “You can already charge the monopoly price. Why would you enter into a value-based pricing contract? You might if you think you could charge even more than that initial monopoly price.”

Value-based contracting is part of the toolkit, but it’s not the entire solution for delivering value, adds Sherman. If a payer enters into an agreement with Amgen for the cholesterol-lowering drug Repatha, for example, and approves Repatha only where a less expensive, more cost-effective drug has failed, but then the patient has a heart attack and Amgen refunds the payer, then that “seems better than the alternative,” says Sherman. “[Value-based contracting] makes intuitive sense, and can help us reallocate dollars to where the drugs are effective.”

Payers are also beginning to engage in agreements where the pharma company is willing to go at risk for the total cost of care. Sherman explains that “they’re making the argument that our drug not only is effective, but it’ll also create greater cost offsets and these patients will be less expensive on those and other drugs.”

Addressing Chandra’s concern about monopolists, Sherman says he’s seeing greater willingness from pharmaceutical companies to price fairly, potentially due to fear of regulation — now that all 50 states have transparency bills — and the pressure to enter into agreements for drugs that cost $1 million or more.

But in the Amgen Repatha case, the incidents of cardiovascular events in trials is at 4 or 5%, counters Aaron Kesselheim, Associate Professor of Medicine at Harvard — meaning a price decrease of about 4 or 5%. “What stops the pharmaceutical company from just offering a price 4 or 5% higher?” he asks. “And the price that they’re already offering, even if you drop that by 5%, it doesn’t meet the ICER value-based price.”

“When we look at agreements, we try to avoid that kind of gaming,” Sherman answers. “We sometimes ask, ‘What’s your best offer?’ without an outcomes-based component.” It’s a balancing act. “That’s why I think for some of these drugs for unmet need, we need to require both an outcomes-based component and going at a price level tied to some outside third party so they don’t do exactly that.”

That objective third party could be ICER, which is emerging as a standard. It’s not the only game in town, but it is the most visible, and payers and increasingly pharma companies are cooperating with ICER. “I’m less focused on what the entity is and more on the need for it to be an objective third party,” says Sherman. “If it’s a pharma company, they’re suspect; if they’re a payer, they’re equally suspect.”

From the NEJM Catalyst event Navigating Payment Reform for Providers, Payers, and Pharma, held at Harvard Business School, November 2, 2017.

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