Introduction

The pharmaceutical industry has produced wondrous scientific advances, but the progress has come at a cost. US prescription drug spending has increased faster in most recent years than other categories of health and now comprises roughly one-sixth of total health expenditures. Rising costs strain already stretched public budgets. Increasing patient out-of-pocket spending for deductibles and coinsurance has created financial difficulties for many individuals and their families, particularly among the sickest patients. The dueling trends of scientific breakthroughs and ever-rising spending present enduring challenges. On its own, rising spending would not be so concerning, but evidence suggests that drug prices often do not reflect the benefits they provide. Thus, there is an imperative to measure the value of prescription drugs and incorporate such measures into drug pricing policies.

The Prescription Drug Market

This chapter describes how prescription drug markets deviate from “normal” competitive markets. On the demand side, there is considerable uncertainty in disease prognosis and treatment effects; buyers have much less information than sellers; consumers usually do not pay directly for their prescriptions but rather have health insurance, which protects them from a drug’s full price; and physicians and insurers play a major role in consumer choices. On the supply side, firms are heavily regulated, subject to laws requiring that drugs undergo extensive testing before entering the marketplace. Monopolies are a system feature, designed to incentivize companies to invest in expensive and risky drug discovery by providing the prospect of a big payoff if the investment succeeds. Patents and market exclusivity restrict competition and provide drug developers considerable pricing power. The challenge for policymakers is how to achieve reasonable or fair drug prices in light of these market distortions.

The Path Forward

Factors interfering with market-based alignment of drug prices and value make explicit value assessment necessary. The widely used quality-adjusted life year serves as a starting point because it accounts for both quality and length of life. Cost estimates could improve by accounting for drug price changes accompanying the loss of market exclusivity. Consistent use of a societal perspective when relevant would also improve value assessments. Prices should sometimes reflect government contributions to development, although such adjustments make the most sense when government facilitates late-stage research. The Institute for Clinical and Economic Review, a private group with a leading role in US value assessment, should make its analyses transparent and defer to payers regarding judgements about value. Finally, payers should embrace value-based pricing. They may not always get the lowest prices, but aligning price and value will mean society expends its resources efficiently and improves the population’s overall health.

Measuring the Value of Prescription Drugs

This chapter recounts the evolution of methods to put a value on health benefits, a step crucial to appropriately pricing drugs. Early efforts valued life based on a worker’s productive output. “Willingness-to-pay” methods use surveys and examine real-world purchasing decisions to value life beyond productivity considerations. Cost-effectiveness analysis sidesteps explicitly pricing life by instead measuring an intervention’s cost per unit of health gained. A common currency for benefits called the quality-adjusted life year (QALY) facilitates cost-effectiveness ratio comparisons across diseases. Although controversial, the QALY packs information about longevity and quality of life, making it popular. Next, this chapter explains that economists down-weight (“discount”) future costs and benefits as less important than near term impacts. Finally, it explores the question of perspective—that is, whether an analysis should, for example, reflect only costs and benefits pertinent to health system payers or whether it should take a broader, “societal” perspective.

Measuring Drug Value

As healthcare costs increased around the world in recent decades, countries incorporated health technology assessment (HTA) into their decisions about which new technologies to pay for and how much they should pay. This chapter describes approaches for drug value assessment that are part of the HTA procedures in these countries, highlighting England and Wales’ National Institute for Health and Care Excellence, perhaps the world’s most visible HTA body. We then describe efforts since the 1980s to introduce HTA in the United States, including Oregon’s Medicaid experiment and the federally funded Office of Technology Assessment. The chapter explores the roots of resistance to these efforts, including the notion of American exceptionalism—the belief that personal and economic freedom is paramount and deep resistance to the idea of healthcare rationing. The resistance, explained at least partly by these factors, ultimately led to a scaling back of HTA in the United States.

Do Drugs for Special Populations Warrant Higher Prices?

Despite its widespread acceptance, cost-effectiveness analysis, which examines an intervention’s incremental cost per unit of health gained, can run up against intuition in the context of drug coverage for conditions affecting special populations. In particular, the “rule of rescue” (i.e., spending more for populations perceived to be in immediate and great peril) may be justified for certain conditions. Examples include rare diseases and the “orphan drugs” used to treat them; cancer, with its attendant societal dread; and pediatric conditions, which are often inherited and severe. Cell and gene therapies may also challenge traditional value assessment, given their high manufacturing costs and potential for one-time, curative treatment. Health technology assessment (HTA) bodies worldwide have made exceptions for these populations by comparing cost-effectiveness ratios to higher (less stringent) benchmarks and by incorporating additional value considerations. Still, evaluating these higher-priced therapies remains a challenge for HTA and society.

Institute for Clinical and Economic Review

Although its origins date to 2006, the Institute for Clinical and Economic Review (ICER) gained prominence around 2015 when it focused its health technology assessment (HTA) efforts on a new highly effective, though expensive, treatment for hepatitis C. ICER, a small, private organization, seemed to fill a void in the United States because it offered a systematic value assessment approach and made its analyses publicly accessible. Drawing inspiration from England and Wales’ HTA body, ICER has used the quality-adjusted life year (QALY) and cost-effectiveness analysis. That decision gives ICER a powerful approach applicable to a wide range of technologies, but it has also spurred controversy. The organization has responded to criticisms by revising its “value framework.” Changes include separation of budget impact analysis from value determinations, introduction of other value measures beyond the QALY, increasing consideration of contextual elements, and adoption of a “societal perspective” where data support it.

Aligning Prices With Value

Value-based pricing aims to optimize incentives for pharmaceutical companies making drug development investment decisions. To promote alignment of prices and value, this chapter recommends that Medicare, Medicaid, and commercial insurers build value assessment into their coverage decisions. Before doing so, it explores alternatives that purport to make this alignment unnecessary. The first, cost-recovery pricing, reimburses drug companies for only their costs, rather than for value. While cost-recovery prices can be low, they reward high internal costs rather than better drugs. Prizes and subscription plans pay a lump sum, rather than paying for each treated patient, but they still require value assessment to set the size of the prize or subscription fee. Radical alternatives suggest having the government develop new drugs. Whether the government would be effective remains unknown. Nonetheless, it would, like private companies, have to prioritize investments, requiring something like value assessment to do so.

Improving Value Measurement

Value assessment is becoming more prominent in the United States, but challenges remain. First, should assessments include only impacts pertinent to payers or take a broader, “societal” perspective? Second, should quality adjusted life years (QALYs) be used to measure benefits? Critics complain that QALYs discriminate against people with health conditions and fail to capture aspects of health. Third, should assessments account for drug price reductions anticipated to accompany patent expirations? Prices do not always follow the expected pattern, but assuming they will not can lead to an overstatement of a drug’s true long-term cost. Fourth, how should data gaps be addressed? Outcome-based risk sharing agreements let payers and drug companies amend pricing decisions as additional data become available. Finally, who should conduct value assessments? Government agencies do so in many other countries, but that seems unlikely in the United States. For now, the Institute for Clinical and Economic Review, a private organization, has stepped into this role.

Other US Value Assessment Frameworks

The Institute for Clinical and Economic Review (ICER) is not the only organization that has attempted to bring value assessment to the United States to address high pharmaceutical prices. With the federal government’s continued reluctance to embrace formal value assessment during the 2010s, other organizations introduced their own approaches. These groups included medical societies with a history of evidence-based clinical guideline development. Examples include the American Society of Clinical Oncology, National Comprehensive Cancer Network, and the American College of Cardiology/American Heart Association. Memorial Sloan Kettering Cancer Centre weighed in with its online “DrugAbacus” tool. This chapter argues that these other frameworks have serious limitations, including a focus on a single clinical area, use of arbitrary scoring systems, and a lack of transparency. ICER has therefore emerged as the dominant framework for assessment of drug pricing and coverage policy.