Value-Based Pharmaceutical Pricing
Deloitte Insights video
To transition from volume-based models to value-based pricing, companies must start with the basics. Watch this episode of Deloitte Insights to learn more.
Paul Keckley, Executive Director of the Deloitte Center for Health Solutions, Deloitte LLP
Scott Evangelista, Principal and National Commercial Leader of the Life Sciences Practice, Deloitte Consulting LLP
Sean O’Grady (Sean): Hello and welcome to Insights where today we will be discussing value-based pharmaceutical pricing, and how it differs from traditional volume-based models. For this conversation, we are welcoming back Paul Keckley, Executive Director of the Deloitte Center for Health Care Solutions, and Scott Evangelista, Principal and National Commercial Leader of the Life Sciences Practice within Deloitte Consulting LLP. Scott, we will begin with you, and I would like you to set this up for us. So what exactly is value-based pricing?
Scott Evangelista (Scott): You know, a good analogy of it would be along the lines of whether you pay somebody to cut your grass or whether you pay somebody to keep it green. You are paying for an outcome as opposed to the consumption of a volume of medicine. So, if I sold you 30 pills, you would buy 30 pills at a price per pill, but wouldn’t you rather buy a cure for a disease or the control of the disease. So, value-based is when you price the utilization of something and the outcome of it as opposed to the consumption of it.
Sean: You agree with that Paul?
Paul Keckley (Paul): Yeah, but it is a word we use in health care now as much as we use quality. It means something different to everybody. The real question is “How do you measure it?” You have defined it and then how do you measure it, over what period of time? If a pill keeps me alive three months longer, but it costs five times more, what is the math, what is the calculus? So that is really what is really underneath the debate about value-based pricing: How do you do it, not whether we should do it… how you do it?
Sean: So, with that in mind, do you believe that this is a sustainable long-term strategy for pharma organizations?
Paul: I do, for two reasons. One, they have no other option because, as Scott well knows, they are in a cycle of being commoditized. So, increasingly, there is pressure on their pricing to the point where many of these companies say I just cannot afford to produce it any more. Other countries get the same compound at substantially lower price than the U.S. does. The second reason is the market demands value now. Everywhere you go, whether it is in the retailing industry, manufacturing of other — even our cars, everything is being framed as a value-based purchase now. So, this is not unique to the pharma or bio industry. This is a systemic change in the way markets in the U.S. are buying.
Sean: And Scott, I could see you were smiling during Paul’s answer.
Scott: It is hard to say whether or not something is sustainable because it is not yet really defined. As Paul said earlier, there is no agreement on what value means. So, the way in which life sciences companies, medical device companies understand what value is, it might be incremental improvement over something that exists, whereas a provider says, “Well if improvement is there, that might be interesting, but can I see the improvement in clinical outcome or not?” What is an improvement to a patient versus a payor? We are really at the very early stages of figuring out what are the right methods, what are the right measures, how are we going to cooperate because you cannot do this independently. There have to be agreements between the life sciences company, the provider community, the payor community to wrap around this notion of value.
Sean: Well, that was going to be my next question -- If we are debating value here, how is this being debated in the marketplace?
Scott: In as many ways as you can imagine, right. Some people value choice. I want the right to be able to take the expensive one or the inexpensive one. It should be my choice. Payors are saying, “Wait a minute, you cannot have a choice without a financial consequence,” which has been our history. Patients for the longest time have had fairly broad choices with almost no financial consequence to the choice. Again, the debate is going to rage on, and for providers, there has not been data; data is the other issue to this, right. There has not been sufficient data and information available to be able to measure by anybody’s definition, the contribution of a technology to an overall outcome. Is it because you took pill A versus pill B? Or, is it because you modified your diet while you were taking pill A, and all the other things that might have happened along the course of being treated for a disease? It is very complicated.
Paul: Let us not forget that the consumer has no concept of cost. So, the equation about value involves some relationship between cost and price and a result. Cost has been disguised in this industry. It is very difficult to know what it cost a company to produce a product. It goes through the distribution cycle and ends up in your pill cabinet. So, it is not a concept. I think Scott is exactly right. It is an early discussion in an industry that has operated in a completely different framework now for its history in the U.S. Now, the U.S. has moved to value. All you have to do is to drive down highways and see the retail establishments that seem to be growing. It is a value-based economy. Now, we have this sector having to figure out how to align with that, and it is going to be bumpy. It is not going to be easy, and it starts with a complete vacuum in what consumers understand cost to be.
Sean: Let us just talk about a little bit about bumpy because earlier when I asked you about the long-term sustainability of this model, you did not flinch. You said yes, this is where the organizations have to go. Do you see bumps? Do you see drawbacks to implementing this model, and if so, what are they?
Paul: Well, the status quo is easier on the pocket books of those that benefit from the status quo. So, doctors and hospitals and health insurance plans benefit from no change. If they can, for instance, just keep ratcheting down medical device, biopharma companies on their pricing, the gaps --the margins --accrue to the benefits of others. So, how do you get doctors to think differently about the pills they prescribe? How do you get health plans to build in their models, a value-based agreement between a pharmaceutical company, a provider, the health plan, and the consumer? Should the consumer share in those savings? So, we are treading on turf that is very uncharted for the incumbents in the industry. The second one is we then have to figure out a regulatory framework to deal with it, which we don’t.
Scott: The regulations in this will be very complicated. Actually, as much as we want to pay people for outcomes, there are regulations that prevent pharmaceutical companies, for instance, from discussing outcomes. As much as we want to get creative about value-based pricing, for instance, there are constructs out there where if you take a drug and it does not work, the pharmaceutical company does not get paid for that. But if that gets fed into a best-price calculation back into the federal government, then there are substantial financial penalties because it will look like a discount. So, the policy is lagging the appetite, if you will. So, that policy is going to be a big issue.
Paul: I will just add the third challenge will be the metrics and the data. We actually have to collect enough data over a period of time to refine these models. So, at the early stage, it typically takes in an industry about five to seven years before you refine a model, and think of us just at the starting line. So, it is not going to happen overnight. We are going to be doing a lot of testing of this. I simply don’t think that the clock is going to turn back to everyone is selling on an average wholesale basis, and it is volume, times price, equal what the pharma company gets. I don’t think that is sustainable.
Sean: I think that is going to be my last question for the two of you because it sounds like the crystal ball is a little cloudy, just based on what we have been speaking about here. So, that in mind, the next two to three years, where do you see this model developing, and how do you think it might be taken in the marketplace?
Scott: I think it is cloudy on one hand. So, make no mistake -- the competitive dynamics around health care in general, pharmaceutical and life sciences in specific, is such that this is inevitable. It will happen. How it happens will evolve. There are number of companies today that are in pretty well-defined experiments--so, life sciences companies with health care payors to do the research necessary to find the subpopulations to be able to define the metrics, to be able to assess what the outcomes are, and price them accordingly. So, people are starting to work in this model, but it will take time to refine; it will take time to evolve.
Paul: I would add that we know it will probably not be at Level 1 on the formulary in the generic world, and we know that it is going to be very difficult at Level 4, with the specialty pharma, with all of those. In specialty pharmas, one percent of the pills, if you will, is 17 percent of the spend. These are those things that work for a few people, but they are very expensive. It is going to be in Level 2 and 3. These branded drugs where there is very strong evidence about efficacy and effectiveness that we are going to figure out models to equate that to value. We will get to the specialty pharma at some point. It is just not going to happen right away.
Sean: You said before on this program, if you can measure it, you can improve it. So, it sounds like there is going to be quite a bit of measurement going forward. Gentlemen, thank you both. Okay, we have been discussing value-based pharmaceutical pricing with Paul Keckley, Executive Director of the Deloitte Center for Health Care Solutions, and Scott Evangelista, Principal and National Commercial Leader of the Life Sciences Practice for Deloitte Consulting LLP. If you would like to learn more about Paul, Scott, or any of the topics discussed on today’s broadcast, you can find that information on our website. Its Deloitte.com/insightsus. For all the good folks here at Insights, I am Sean O’Grady. We will see you next time.
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