New Marketplace
A Payer’s Perspective on Drug Pricing (09:08)

“Like all of you, I want to make sure that we have access to high-impact drugs, whether they are expensive or not,” says Michael Sherman, Senior Vice President and Chief Medical Officer for Harvard Pilgrim Health Care. “When we need them, when I need them, when a member of my family needs them, we want them to be available.”

At Harvard Pilgrim, Sherman is accountable for managing the quality and value of almost $3 billion in spend, covering everything the payer’s members need. “If we don’t do a good job of that, premiums go up and people have to pay more,” Sherman says.

Access and affordability aren’t the only issues, says Sherman. There is a third pillar: innovation funding. Drug research is risky, and if there isn’t an appropriate return on investment for that risk, “capital won’t flow there, and we won’t have the next layer of innovation and future advancements that will help prolong our lives and improve the level of care delivered,” he says.

It’s important to think about those issues, but in the near term, if payers pay for drugs that don’t provide value and don’t think about the cost as well as the benefit, insurance premiums or cost shares increase.

Recently, some high-cost drugs have come to market for unmet need, with little or no competition, and their data have sometimes been questionable, says Sherman. “That’s creating a lot of confusion because despite FDA approval, many of the payers are restricting these drugs and a lot of people assume, which is not unreasonable, that if the FDA approves a drug it should be covered by the payer,” he says. “They think it’s about greed, profit, something other than lack of evidence.”

High-impact, high-cost therapies like CART-T have come to market, with more on the horizon, and these drugs are in the mid– to high–six figures, says Sherman. Similarly, gene therapies are likely to be life changing but costly. How can a payer cover these?

“Aligning incentives is a much better way to go than being perceived as an entity that’s responsible for saying no,” says Sherman. So Harvard Pilgrim now engages in outcomes-based payment agreements with pharma companies.

This solution isn’t perfect. There is competition, and a need for drugs whose worth varies depending on individual response — where they work in some people and are worth it, but not in others. But Sherman believes outcomes-based agreements can be leveraged as a tactic to tackle the high cost of drugs.

Sherman expresses concern about recently introduced high-cost drugs for unmet need with seemingly no limit on pricing, unit cost increases for individual drugs in the thousands of percentages, and old drugs with no pricing constraints in place. Meanwhile, other countries with similar per-capital GDPs to the United States are paying a lot less for the same drugs. Sherman also points to a lack of transparency around drug pricing. “Pharma companies may have a thoughtful process,” he says, “but it’s not really clear to the rest of us.”

“We estimate about a third of recent premium increases are related to drugs,” explains Sherman. “Our data [at Harvard Pilgrim] show that $1 out of every $4 are being spent on drugs, including medical and pharmacy benefit, and the year-over-year increase for the specialty pharmacy is 20%. These are causing a lot of concerns over balancing access and affordability.”

“We get that this is complicated. You want to make drugs available for unmet need,” says Sherman. “There are some people who might benefit, maybe marginally, but it might help keep them alive until the next drug comes out. And some conditions are so rare we will never see a well-done clinical trial. And we don’t want ethically to restrict drugs to those individuals.”

How can we balance all of these moving parts? “For these new drugs that are high impact, unmet need, but where there is imperfect data, or far from imperfect but extremely limited data, let’s agree that the FDA should approve them, and let’s even agree that payers should pay for them,” Sherman proposes. “It’s not a radical idea,” he says.

  • Require drug manufacturers to engage in a value-based agreement, in return for FDA approval.
  • Require payers to pay for drugs where they work — but agree that they don’t have to pay where the drugs don’t work.
  • Require drug manufacturers to price at an objective third-party level. “You could look at ICER [Institute for Clinical and Economic Review], which has value frameworks, you can look to other developed countries for their averages, but something that is not a blank check,” says Sherman.

Drug manufacturers are unsure what payers will cover because policies differ — in many cases, coverage isn’t just about evidence, but it’s also about political considerations. Outcomes-based agreements would change that. As for patients, “the most important people in the discussion,” they would have coverage.

Sherman leaves the audience with a few questions:

  • Should outcomes-based payment agreements be enacted through regulatory action, or should they be voluntary?
  • How do we think about the challenges of operationalizing outcomes-based agreements?
  • What is the mechanism (rebate, deferred payment, etc.)?

“There are lot of questions that we need to talk about, but I think this is an idea that we can make work,” he says.

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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