The debate over prescription drug prices moved center stage after President Biden’s State of the Union address, during which he called upon lawmakers to let Medicare negotiate drug prices and to cap the cost of insulin at $35.
The intention behind both measures is to make prescription drugs more affordable, while enabling drugmakers to maintain a reasonable profit. While most Americans agree that drug prices have become untenable, drugmakers argue that these prices are necessary given the risks involved in researching and developing new treatments. They also say that price negotiations would stifle future innovation.
But allowing Medicare to negotiate with drug companies does not require us to sacrifice the development of new and lifesaving therapies. Nor does it mean that the prices of all drugs would decline. A “grand bargain” is possible through adoption of a value-based pricing model.
How It Would Work
How would value-based purchasing work for prescription drugs? Expensive brand-name drugs that face little competition would undergo rigorous assessment to understand how much value they deliver, meaning how much health and well-being they produce relative to their costs. The federal government’s negotiations for purchasing a particular drug for Medicare beneficiaries would be supported by these assessments. Highly effective therapies would be rewarded with higher prices. The prospect of higher profits would incentivize drug companies to develop drugs that deliver greater value. At the same time, a value-based approach would prevent Medicare from overpaying for drugs that provide little or no improvement in health relative to alternative therapies and free up resources to invest in worthy alternatives.
A value-based approach also would avoid the problems of other drug-pricing reforms considered by Congress in 2021. For example, previous proposals attempted to lower U.S. drug prices by linking the amount Americans pay for drugs to prices paid in other high-income countries. Because the U.S. spends two-and-a-half times more than what our counterparts in the Organisation for Economic Co-operation and Development pay for drugs, tying pricing to these countries is bound to provide some financial relief.
However, the reference-pricing approach has major limitations. Any initial savings would be attenuated if drug companies delayed product launches in lower-priced settings or increased list prices in the countries the U.S. used as references. In addition, prices in other countries are often negotiated based on an assessment of value tied to local costs, local standards of care, and societal preferences. In effect, reference pricing would mean importing other countries’ value assessments.
Value-based pricing would build on broader trends in U.S. health care to address prescription drug costs. Private payers and some state Medicaid programs already turn to value assessments to understand whether new treatments, particularly those with high price tags, are worth the investment. The private, nonprofit Institute for Clinical and Economic Review (ICER) is among the most visible organizations conducting such assessments and driving public deliberations about what constitutes a “fair price.”
The Need for Independent Assessments of Value
If Medicare were to adopt a value-based pricing approach for prescription drugs, the assessments informing negotiations would need to be commissioned from an independent organization. Potentially, ICER could fill that role, perhaps along with other academic institutions. Alternatively, the federal government could establish a separate public body.
In addition, Medicare would need to wrestle with how to measure value. Other countries take various approaches; some focus primarily on the amount of clinical benefit a therapy provides (e.g., Germany), while others are guided by cost-effectiveness analyses (e.g., England). Irrespective of the approach taken, the process would need to be objective, transparent, and inclusive. The participation of multiple stakeholder groups, including patients, clinical experts, payers, and manufacturers, would contribute to an assessment’s credibility.
Some drug companies have embraced value-based pricing, recognizing the benefits of having an external, independent organization certify their drugs are priced fairly. Indeed, some drugmakers have adjusted prices because of ICER’s analyses. A notable example occurred when Sanofi and Regeneron lowered the price of their cholesterol-lowering drug, Praluent, to one that ICER’s analysis suggested was fair. In return, Express Scripts, one of the largest pharmacy benefit managers in the U.S., agreed to provide Praluent with exclusive formulary placement, increase patient access to the drug, and pass along a portion of the rebates it receives to consumers — a win for patients and drugmakers alike.
As debates continue about whether and how Medicare should negotiate drug prices, policymakers should consider value-based pricing. It would provide a foundation for negotiations that is specific to the U.S. context, while avoiding shortcomings of reference pricing and other cost-containment mechanisms. It also would provide drugmakers with the opportunity to justify their pricing strategies, and reward companies that develop high-value products. Most important, it would ensure that Americans do not overpay for ineffective or marginal treatments while facilitating their access to important medications.