Paying For The Best Health Outcomes At The Lowest Possible Cost

“Bayer CEO Dr. Marijn Dekkers is happy to have fair Outcomes-Based Pricing”, reported ‘PharmaTimes’ on December 3, 2014.

Dr. Dekkers was quoted saying, “It is okay to be tested on that in the process of price-setting, that is fine, we should only be paid for the value we bring”. However, at the same time he also reminded, “When we have a new drug that is significantly better than the previous drug but the previous drug just went generic, we are compared to the 20% price, not the 100% price”.

I reckon, the above statement of the Bayer CEO sounds quite amazing, if not bizarre, especially considering the legality in the prevailing global pharma patent regime.  Thus, any discontentment in this area, howsoever intense these are, would unlikely to be able to attract any unbiased favorable ear, across the world.

Another aspect of the aggressive patented drug pricing trend, I deliberated in one of my earlier blog posts titled, “An Aggressive New Drug Pricing Trend: What It Means To India?” of October 27, 2014.

What is it really?

As many would know, another common terminology of Outcome-Based Pricing (OBP) is Value-Based-Pricing (VBP). This approach for pricing is basically intended to offering the best value for the money spent in healthcare. It is ‘the costs and consequences of one treatment compared with the costs and consequences of alternative treatments’. For pharmaceutical players, VBP/OBP would mean not charging more than the actual real value of the product offerings.

As we shall find below, this concept is gaining ground now in the developed markets of the world, prompting the pharmaceutical companies generate requisite ‘health outcomes’ data using similar or equivalent products. Cost of incremental value that a product will deliver is of key significance. Some independent organizations such as, the ‘National Institute for Health and Clinical Excellence (NICE)’in the United Kingdom (UK) has taken a leading role in this area.

An evolving scenario:

It would be worthwhile to note that over a period of time, while pricing new pharma products, manufacturers have been traditionally considering the costs of all inputs of various kinds incurred to bring these drugs into the market and thereafter adding hefty mark-ups on those medicines in a non-transparent manner to arrive at the market price.

This absolutely opaque process of patented drugs pricing is increasingly making the stakeholders, such as patients’ groups, payors, including the governments and insurers much concerned about the differential value offerings of these high priced new drugs over the existing ones for commensurate improvement in the actual health outcomes for the patients.

The relevance:

In the past decade, there has been a clear trend in the price negotiation of new and complex pharma based on health outcomes models as the pharma players are coming under increasing pressure from the payors/patients to improve the treatment cost-effectiveness.

In an article published in the Harvard Business Review of October 2013, Michael Porter and Thomas Lee had cautioned, “ In healthcare, the days of business as usual are over…it is time for a fundamentally new strategy. At its core is maximizing value for patients: that is, achieving the best outcomes at the lowest cost.”

They elucidated the relevance of value based pricing, supporting very strongly the idea of paying for “value” in healthcare.

Thus, if this trend were not checked, the healthcare spending would keep going up, as it is happening today globally, impacting access of these drugs to patients significantly due to spiraling cost pressure.

 A recent vindication:

‘Gallup’ in an articles titled, “Cost Still a Barrier Between Americans and Medical Care” published in December 5, 2014, has reported that in U.S., 33% of Americans have put off medical treatment because of cost. Interestingly, more of them put off treatment for serious conditions than non-serious and more with private insurance had put off treatment in 2014 than 2013.

Thus, to address this issue, as we shall see below, various governments either have or in the process of developing regulatory policies to rationalize new drug prices based on the Outcome/Value-Based Pricing (OBP/VBP) Models of different kinds.

In this backdrop, Bayer CEO’s acceptance of OBP/VBP is indeed a welcoming development. This process is undoubtedly one of the most reasonable ways to arrive at a patented drug price.

For a large majority of stakeholders, treatment outcomes and differential value offerings of new medicines are the most critical factors to monitor the value pathway of patients’ medical care, irrespective of types of illnesses.

The move has already commenced: 

Deloitte Center for Health Solutions in a study on Value-Based Pricing for

Pharmaceuticals, has highlighted that unlike the United States, many countries, where the government plays a decisive role in pricing and price negotiations of pharmaceuticals, have focused on reducing costs through value-based pricing agreements.

The article gives examples of Denmark, where Bayer entered into a “no cure, no pay” initiative on Levitra (vardenafil) for erectile dysfunction in 2005.  Patients not satisfied with the treatment were eligible for a refund. Similarly, in 2007, after the National Institute for Health and Clinical Excellence (NICE) of the United Kingdom (UK) initially concluded that Velcade (bortezomib) was too expensive as compared to its estimated benefits to the population, Johnson & Johnson offered to forgo charges for patients who did not have an adequate medication response.

Further, according to the Burrill Report of October 2013, as part of an effort to regain market share for its statin Zocor, which had been losing ground to then Warner Lambert’s Lipitor, Merck had reportedly offered an out of box proposition to consumers and insurers in 1998. Merck’s “Get to Goal” guarantee offered refunds to any takers who failed to reach target cholesterol levels set by their doctors within six months of using Zocor and adjusting their diet.

Could serve the purpose of global pharma too:

The above Burrill Report also states, “The performance-based pricing also serves a simpler purpose for drug makers. It allows them to provide discounts that may be necessary to establish acceptable value in one market without affecting the price for a drug in other markets around the world as a number of payers peg the price they will pay for a drug to what price a specific country may negotiate with the drug maker.”

Following this trend it appears that like Dr. Dekkers, other head honchos of global pharma majors would ultimately be left with no option but to willy-nilly toe this line in most of the countries across the world for their patented products.

This would be necessitated due to increasing product-pricing pressure based on quantification of differential benefits of the new medicines over already existing ones, as would be reflected in the analysis of intensive cost-effectiveness data.

Defining a measure of cost-effectiveness:

One of the several other methods to measure the cost-effectiveness of a new drug, as reported in a case study published by ‘2020 Public Services Trust at the RSA’, is as under:

“The efficiency of new products can be captured through incremental cost-effectiveness ratios (ICER). These are usually based on quality-adjusted life-years (QALY), which are a measure of how many extra months or years of reasonable quality life a patient might gain as a result of treatment, based on average life expectancy. Life expectancy is usually extrapolated from the results of clinical trials whilst the quality adjustment is based on patients’ experiential response to the level of pain, mobility and general mood which are usually expressed as a weighted utility value of between 0 and 1. The final calculation of the ratio is based on the difference in the cost to QALY ratio between the new drug and the standard available treatment. However, to make sense of the ICERs it has been necessary to establish thresholds beyond which drugs are no longer deemed cost-effective.”

As the above case study highlights, “NICE had established a notional upper limit of £20-30,000 per QALY above which a drug will generally not be recommended, although in exceptional circumstances this can be increased as was the case for beta-interferon, where it was raised to £36,000.”

The Indian perspective:

In developing countries such as India, expenditure towards medicines is considered as an investment made by patients to improve their health and productivity at work. Maximizing benefits from such spending will require avoidance of those medicines, which will not be effective together with the use of lowest cost option with comparable value and ‘health outcomes’.

For this reason, as stated above, many countries have started engaging the regulatory authorities to come out with head to head clinical comparison of similar or equivalent drugs keeping ultimate ‘health outcomes’ of patients in mind.

A day may come in India too, when the regulatory authorities will concentrate on ‘outcomes/value-based’ pricing models, both for patented and high price branded generics, where low priced equivalents are available.

However, at this stage it appears, this would take some more time. Till then for ‘health outcomes’ based medical prescriptions, working out ‘Standard Treatment Guidelines (STG)’, especially for those diseases, which are most prevalent in India, should assume high importance.

Standard Treatment Guidelines (STG):

STG is usually defined as systematically developed statements designed to assist practitioners and patients in making decisions about appropriate cost-effective treatment in specific disease areas.

For each disease area, the treatment should include “the name, dosage form, strength, average dose (pediatric and adult), number of doses per day, and number of days of treatment.” STG also includes specific referral criteria from a lower to a higher level of the diagnostic and treatment requirements.

In India, the medical experts have already developed STGs for some disease areas. However, formulation of STGs covering all major disease areas and, more importantly, their effective implementation would ensure cost-effective healthcare benefits to a vast majority of population.

The Ministry of health of the respective states of India should encourage the medical professionals/institutions to lay more emphasis on ‘health-outcomes/value based’ prescription of medicines, ensuring more cost effective treatment for their patients.


The medical practitioners in their part should ideally volunteer to avoid prescribing expensive drugs offering no significant improvement in ‘health outcomes’, against the cheaper equivalents. The Government should initially encourage it through ‘self-regulation’ and if it does not work, stringent regulatory measures must be strictly enforced, within a reasonable time frame.

Be that as it may, it clearly emerges today that in the healthcare arena, effective implementation of ‘Outcomes/Value-Based-Pricing-Models’ would ensure paying for the best health outcomes at the lowest possible cost, especially for those who deserve it the most, not just in India, but across the world too.

By: Tapan J. Ray

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.


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