Unleashing value: The changing payment landscape for the US pharmaceutical industry

Health Research Institute

May 2012

Unleashing valueThe changing payment landscape for the US pharmaceutical industry

Table of contents

The heart of the matter 2

Makers of brand-name pharmaceuticals are competing over a shrinking piece of the prescription drug pie.

An in-depth discussion 4

Several forces are changing the way pharmaceutical companies and other health organizations engage with one another and how they attach value to medications.The impetus for defining value 6The new arbiters of value 11How imprisoned value is unleashed 16

What this means for your business 24

Pharmaceutical companies and payers need to speed their moves toward creating, and reliably demonstrating, better outcomes for patients. Fresh evidence is needed to secure limited formulary slots 25Move from transaction to collaboration to build trust 27between payers and pharma

May 2012

The heart of the matter

Makers of brand-name pharmaceuticals are competing over a shrinking piece of the prescription drug pie.

3 The heart of the matter

demonstrate a comparative clinical benefit to be considered for formulary placement, the key to securing large numbers of paying customers.

Industry leaders are looking outside for help. Half of pharmaceutical executives surveyed report that they will enter into a new strategic alliance or joint venture in the next 12 months to gather and analyze outcomes data.1 Insurers, meanwhile, view their relationship with drug manufacturers as more transac-tional than collaborative, yet expect to experiment with multiple new payment and contracting models in the next three years.

This transformation will result in new operating models for an industry already in the midst of restructuring. (Please refer to Pharma 2020: The vision for a discussion of operating models.) Pharmaceutical companies will need to aggressively adapt — or risk their long-term viability.

For this report, HRI surveyed 100 health plans and pharmaceutical benefits managers and interviewed 20 execu-tives across the payer, pharmaceutical, public policy, and government areas.

Five major forces are dramatically altering the industry’s revenue models and creating new notions of value. First, the drug industry has made a “big bet” on high-priced biologics. Second, health insurers are moving away from unit-priced payment to outcomes-based pay, starting with medical procedures. Third, insurers and hospitals have accumulated large amounts of real-world drug effectiveness data to mine. Fourth, health plans and employers have discovered that their medical costs increase when patients don’t take their medications properly or at all. And fifth, the push toward information transpar-ency is spreading into drug options and influencing consumer choices.

As a whole, these forces are hastening the arrival of an outcomes-based world in which the value of a drug tracks much more closely with its impact on patient health. However, significant barriers remain, particularly between drug manufacturers and insurers.

Historically health plans relied on the availability of generics, guidance from the Food and Drug Administration, and physician opinion as the primary influencers for formulary placements. However, a new survey by PwC’s Health Research Institute (HRI) finds high expectations of comparative clinical evidence — 60% of insurers strongly agree that drug makers must

1 Clinical Informatics Survey. PwC Health Research Institute, 2011.

An in-depth discussion

Several forces are changing the way pharmaceutical companies and other health organizations engage with one another and how they attach value to medications.

5 An in-depth discussion

Among the findings:

• Insurers are not confident in pharma formulary submissions. Just 5% of respondents in the HRI survey indicated they are very confident in the economic data provided by the drug industry when making coverage and formulary placement decisions. Only 7% are very confident in the information to evaluate a drug’s comparative effectiveness.

• The availability of generics, physi-cians’ expert opinion, and regula-tory guidance are the three most influential factors in formulary decisions by private insurers.

• Among insurer respondents, 60% strongly agreed that pharma must demonstrate a significant clinical benefit compared to current branded and generic treatments to be considered for formulary placement. Forty-five percent (45%) agreed that a clear cost savings argument was necessary.

• Novel payment and contracting models, such as those based on patient outcomes, are in nascent form but represent a way forward. Only 16% of health plans use this approach today, although 37% expect to support one or more alter-native payment models in the next three years.

• Lack of data infrastructure and concern about increased negoti-ating complexity are the top two barriers in implementing novel contracting strategies.

Executive summary

Companies in the pharmaceutical and life sciences sector face a funda-mental challenge in the United States: demonstrating the fully realized value of their therapies in the face of intense competition from generics and rising total medical costs.

Branded pharmaceutical companies spend about $50 billion per year in drug development. And while the next-generation therapies are more targeted, they’re also more expensive. Health plans and providers, mean-while, are becoming more sophisti-cated buyers and focusing on total cost of care, quality outcomes, and how drugs influence that.

Relationships among health insurers and pharmaceutical companies are as unsettled today as they’ve ever been. To determine insurers’ views on topics such as quality of evidence submissions, contracting strategies, and relationships with pharmaceutical companies, HRI conducted interviews and surveyed US health insurers and pharmaceutical benefits managers (PBMs). One theme that emerged from the research is a broad consensus that drug manufacturers and health plans need to accelerate efforts to deliver better outcomes for patients.

This report explores possible paths for pharmaceutical companies to unlock value, improve clinical and economic evidence, and build trust with other health organizations and pharmaceu-tical companies.

6 PwC Health Research Institute | Unleashing value

The impetus for defining value

Historically drug manufacturers have operated independently, under a unit-pricing model, where they price and discount drugs on volume sold. In this arrangement, the relationship among pharma, health insurers, and patients stops at the point of sale.

Five major forces are gathering pace and will likely transform this model in the United States. In this new environment, health plans and health systems may demand that a drug first demonstrate significantly more clinical benefit than existing treat-ment options, sometimes over a long period. Additionally, insurers and hospitals alike want to see how a drug reduces the total cost of care, reduces unnecessary or ineffective treatments, or improves quality of life. New ways to quantify these changes will impact how drugs are researched, marketed, manufactured, and priced.

Specialty and biologic drugs are 1% of total prescription volume for private insurers but account for 17% of total prescription spending.3

Most new biologics, such as those used to treat rheumatoid arthritis or cancer, are significantly more expensive for patients than previously available drugs. The average biologic sales price in 2008 was $16,425 per year, 20 times greater than the average price of traditional pharmaceuticals.4

“It’s the specialty pharmaceuticals that have employers nervous about their ability to control costs,” says Veronica Goff, vice president at the National Business Group on Health, a large-employer membership organization.

Force #1: The industry has made its big future bet in biologics, where targeted patient populations and high prices pose new dilemmas for purchasers about value.

Biologics, frequently referred to as specialty pharmaceuticals, have steadily become a larger share of FDA-approved drugs (Figure 1) and represent the majority of products in the drug pipeline. Datamonitor, a market research firm, estimates sales of “monoclonal antibodies,” which are the largest subset of biologics, will increase by 8.9% annually through 2015 compared with 0.8% decrease per year for small molecules.2

Small molecule

0%

20%

40%

60%

80%

100%

1990

Biologic

1992

67%

33%

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012*

Source: HRI analysis and Drugs@FDA Database* As of February 2012

Figure 1: Biologics as a share of total FDA approvals are steadily increasing

2 Datamonitor, PharmaVitae Explorer, February 2011; company-reported information.

3 IMS Institute for Healthcare Informatics, “The Use of Medicines in the United States: Review of 2010,” April 2011.

4 Robert J. Shapiro, Karan Singh, and Megha Mukim, “The Potential American Market for Generic Biological Treatments and the Associated Cost Savings,” Nature Biotechnology (2008): 1-18.


hospitals allocate resources, including hospital-administered and prescrip-tion drug products.

While bundled payments won’t directly affect the cost of a hospital-supplied drug, they will change how hospitals and health plans weigh various therapy options. The new delivery models are also contrib-uting to health plans’ desire to track outcomes, which can be used to evaluate therapeutic effectiveness for a given cost.

“For the first time, bundled payments and ACO-like models are giving phar-maceutical companies the chance to position their drugs as having a quality component related to the performance metrics,” says Robert W. Dubois, MD PhD, chief science officer for the National Pharmaceutical Council, a policy research organization funded by large pharmaceutical companies.

Among payers in HRI’s survey, 16% said they have outcomes-based contracting arrangements with pharmaceutical companies. Of those that do not, about one-third expect to execute them within three years. See Figure 2.

Force #3: Providers and payers are demanding more data about how well drugs work.

Traditionally providers relied on their own medical training and input from experts including drug company

To put this in perspective, the National Institutes of Health reports that about 6,000 rare diseases affect approximately 30 million Americans each year.5 Even at a modest annual estimate of $15,000 per person for biologics targeting rare diseases, the annual bill for rare diseases would amount to a staggering $450 billion, nearly half of the global pharmaceu-tical market of $990 billion in 2012.6

Force #2: Health plans and the federal government are moving away from unit-based payment models and toward outcomes-based payment, which will start to affect prescribing patterns.

The shift to rewarding outcomes in the US delivery system will affect consumer and prescriber medica-tion preferences. The Affordable Care Act, passed in March 2010, offers multiple incentives to shift away from Medicare’s fee-for-service reimbursement to performance-based payment. The new models base provider payments on demon-strating savings and meeting quality metrics in integrated delivery models, such as bundled payment programs and accountable care organizations (ACOs).7

Bundled payments reward hospitals for finding cost savings and coordi-nating care. At least three of the four existing models include Part B drugs in the bundle. The models affect how

Figure 2: Proportion of health insurers and plans that have implemented or will implement novel contracting models within three years

Bundled payments

Outcomes-based payments

Risk-sharing agreements

31%

11%

37%

16%

31%

13%

Source: PwC HRI payer value survey 2012

Now (% Yes)

Within 3 years (% Yes)

5 http://rarediseases.info.nih.gov/files/Rare_Diseases_FAQs.pdf

6 IMS Health, IMAP

7 Medicare ACOs and Shared Savings Models, PwC Health Research Institute, 2010.

representatives to determine treat-ment courses. For their part, insurers relied on physician opinion and FDA guidance as primary sources when determining formulary design.

But the focus of decision making has shifted as new data become avail-able from electronic medical records, mobile health, medical devices, and insurance claims. Additionally, ACOs and Medicare shared savings programs are encouraging providers to think more like payers that oversee members’ total health.


have a formal clinical informatics system in place, most often in big pharma. Clinical informatics systems seek to analyze population health data.

For a given drug product, drug manufacturers have begun to submit health economic studies along with clinical findings to health plans and PBMs. However, these studies do not always have enough robust data or high-quality analysis for formulary committees to gauge a drug’s compar-ative cost-effectiveness. In an analysis of formulary submissions over a four-year period, one study found that less than half contained economic studies analyzing the drug’s effects on total cost of care.8

In the past, health plans relied on their own claims data to gauge effec-tiveness. They also looked favorably on solutions that slow down or reduce overall cost burden. Moving forward, insurers (Figure 3 below) are looking for ways to determine “real-world” clinical and cost effectiveness after a product has launched.

In the HRI survey, 78% of health plans agreed that, to be considered for formulary placement, a drug manu-facturer must demonstrate a clear cost savings. Eighty-two percent (82%) said that drug manufacturers must demon-strate a clear relative clinical benefit compared with current treatments to be considered for formulary placement.

Pharmaceutical companies are responding to the growing demand for evidence. HRI’s recent clinical informatics survey found that 35% of pharma and life sciences companies

8 Fernando Colmenero et al., “Quality of Clinical and Economic Evidence in Dossier Formulary Submissions,” The American Journal of Managed Care 13, no. 7 (2007): 401-7.

Figure 3: Insurer expectations of clinical and cost evidence from pharma for formulary placement

1%


Strongly Disagree

Strongly Agree

A clear cost savings

A clear relative clinical benefit

3% 16% 33% 45%

60%22%12%2%1%

Eighty-two percent said that drug manufacturers must demonstrate a clear relative clinical benefit compared with current treatments to be considered for formulary placement.


Drug nonadherence costs the health system an estimated $290 billion annually.9 Nonadherence is a bigger challenge for those with chronic conditions, such as heart disease, stroke, or diabetes, which require complex daily drug regimens. Chronic conditions account for eight of the top 10 diseases by prescrip-tion volume and 90% of the top 10 drugs by prescription volume. Hypertension and asthma, the top two diseases by prescription volume, account for 36% of top 10 volume.10

Force #4: Health plans and employers realize they are losing money on patients who do not take their medications properly.

Although prescription drug expendi-tures are estimated at 10% of total US medical spending (Figure 4), highly innovative drugs are an outsized factor in controlling healthcare costs. But partly because prescriptions are such a common component of US healthcare, their misuse can have an opposite effect on healthcare costs.

For example, if an individual does not adhere to a treatment schedule, medical costs can dramatically increase as a result of emergency room visits and subsequent hospitalizations. Adherence is an old problem—but a larger crop of specialty drugs for chal-lenging diseases raises the financial and therapeutic stakes. Insurers in particular are testing new monitoring tools to tackle this familiar challenge.

“We have an adherence program based on a drug volatility index developed from claims data that helps us iden-tify potential patients in need,” says Winston Wong, PharmD, associate vice president of pharmacy management at the nonprofit insurer CareFirst.

The adherence program uses claims data to seek out patients who have had difficulty following a prescribed course of action. A third party follows up with education and counseling to help the patient follow the drug regimen.

Figure 4: What’s in a number? Data about total US prescription drug spending

24%10%

19% 45%

21% 60%

Drugs are 24% of total health spending for all privately insured individuals under age 65 with a chronic condition.

Out of pocket Private insurers

31%

Medicare, Medicaid, CHIP

Drugs are 60% of total health spending for all privately insured individuals under age 65 with multiple sclerosis.

Drugs are 21% of total health spending for all privately insured individuals under age 65.

Retail prescription drugs are 10% of total health spending.

HRI analysis of sources: 2010 US National Health Expenditures and IMS Institute for Healthcare Informatics

2010 US National Health Expenditures

IMS Institute for Healthcare Informatics

5%

Other

9 “NEHI Research Shows Patient Medication Nonadherence Costs Health Care System $290 Billion Annually,” New England Healthcare Institute, last modified August 11, 2009, http://www.nehi.net/news/press_releases/110/nehi_research_shows_patient_medication_nonadherence_costs_health_care_system_290_billion.

10 Agency for Healthcare Research and Quality, Medical Expenditure Panel Survey Component Data, “Number of Events for Selected Conditions by Type of Service: United States, 2009,” table 2, 2009.

10 PwC Health Research Institute | Unleasing value

Even though drug benefit costs repre-sent a comparatively small part of total employer health coverage, health plans and employers are beginning to connect the effects of nonadherence with total per-patient medical costs. As a result, the once-private topic of medication adherence is gaining a foothold in the workplace.

In the past, patient noncompliance resulted in deteriorating health for the patient but few, if any, signifi-cant financial penalties. Yet large employers, 82% of which are self-insured,11 have taken note of the total cost to their businesses when workers with chronic conditions don’t follow the prescribed course of therapy.

In one case, Pitney Bowes, following evidence-based protocols, crafted a benefits package to increase adher-ence among its diabetic employees by adjusting drug copayments to reward adherence and providing educational materials and telephone check-ins with nurses. A three-year study12 showed a return on investment of $1.33 per dollar spent and a 6.5% improvement in adherence rates over a control group.

As the largest purchaser of health-care services in the United States, the

about what clinical trials they’re participating in and what drugs they’re taking. “Patients just need the right tools.”

Insurgent start-ups and nonprofit institutions are increasing patient engagement by bringing clarity and transparency to previously murky information and creating new forums. Mobile “apps” are available for all kinds of health information, from remote cardiac device monitoring and glucose level measures to nutrition and exercise trackers.

In line with other public reporting trends in healthcare, pricing for services and pharmaceuticals is expected to become more transparent. Pricing, quality, and performance are all attributes reviewed by a variety of consumer-friendly sites provided by government and private institutions. One such site allows a consumer to compare prices on any prescription medication in his or her area or by mail order. Armed with the informa-tion, patients are emerging as choosier shoppers.

Transparency represents a sea change where health decisions are trans-ferred from the doctor or insurer to the patient. With patients at the helm of their health decisions, drug manu-facturers’ discounts may carry less weight in formulary design. Rather, quality and outcomes become larger considerations in health plan and PBM formulary models as patients demand better outcomes, thereby shifting the reimbursement criteria.

Centers for Medicare and Medicaid Services (CMS) also considers medica-tion adherence a large priority.13 CMS includes multiple quality measures in plan ratings for its Part D prescrip-tion drug coverage, such as adherence levels for oral diabetes drugs.

Force #5: Increased transparency of health information is empowering patients to make better decisions about therapeutics.

Consider the state of personal investing just 20 years ago. Lack of information, access, technology, and technical skill prevented the average American from trading and investing in stocks without the help of a profes-sional stockbroker. Now the data, real-time knowledge, and technology are in the hands of individuals who can act independently. The same movement is occurring in healthcare, accelerated in part by social media.

“This notion that healthcare is too complex for consumers to under-stand is a fallacy,” says James Heywood, co-founder and chairman of PatientsLikeMe.com, a social media site where patients share experiences

11 Agency for Healthcare Research and Quality, Medical Expenditure Panel Survey Component Data, “Percent of private-sector establishments that offer health insurance that self-insure at least one plan by firm size and selected characteristics: United States, 2010,” table I.A.2.a, 2010.

12 Niteesh K. Choudhry, Meredith B. Rosenthal, and Arnold Milstein, “Assessing the Evidence for Value-Based Insurance Design,” Health Affairs 29, no. 11 (2010): 1988-1994.

13 “2013 Advance Notice,” Centers for Medicare and Medicaid, last modified February 17, 2012, http://www.cms.gov/MedicareAdvtgSpecRateStats/Downloads/Advance2013.pdf.


The new arbiters of value

New arbiters of drug value are emerging in the public and private sectors, and they increasingly have the metrics and the tools to raise expectations of drug value. In the private sector, the arbiters are health insurance companies and integrated provider networks with defined populations and ACO-like structures. Integrated providers in the United States are assuming traditional roles of the insurer — and the associated risks. For both parties, the value mantra is increasingly about reducing variation and waste across the health system.

In Europe, determining value based on outcomes and effectiveness of drugs was initiated through regula-tory channels, most famously through Britain’s 13-year-old National Institute for Health and Clinical Excellence (NICE). The organization makes reimbursement recommendations for England and Wales (see sidebar).

Because the US health system is comparatively decentralized and represents a combination of public and private purchasers, the shift to determining a drug’s value based on outcomes and effectiveness is occur-ring in fits and starts. Large private health plans are developing sophisti-cated effectiveness analysis capabili-ties, similar to NICE, that are changing

how drugs are valued. The US govern-ment, meanwhile, is building up its capabilities, having allocated $500 million a year starting in 2014 — four times NICE’s budget — to comparative effectiveness research.

Private: More prescribers become payers and look for value

Consider Kaiser Permanente. The nation’s largest private payer-provider organization relies on its integrated information systems to track drug usage and prescriber patterns by age, dosage, and other patient factors.14, 15 Intelligent forecasting of drug cost inflation and shortages is a strategic asset in controlling pharmaceutical spending.

In parallel, Kaiser aggregates data to develop its own consensus guidelines. Multidisciplinary boards of pharma-cists, physicians, and other practitio-ners examine available evidence for new drugs, treatment regimens, or off-label uses as new clinical scenarios arise. When needed, a separate Drug Information Services group conducts more in-depth studies.

14 Levine, S., D. Campen, M. Millares, and a. Barrueta. 2000. “Kaiser Permanente’s prescription drug benefit.” Health Affairs 19 (2) (March 1): 185-190.

15 Monroe, C Douglas, Lori Potter, Mirta Millares, Anthony Barrueta, and Richard Wagner. 2006. “Kaiser Permanente’s Evaluation And Management Of Biotech Drugs: Assessing, Measuring, And Affecting Use.” Health Affairs 25 (5): 1340-1346. doi:10.1377/hlthaff.25.5.1340.


Kaiser’s knowledge advantage is in its long-standing information systems that can quickly convey outcomes data to doctors and nurses. The entire process fixates on which drugs work best on which patients.

Kaiser’s 15,000 employed physicians get much of their information about drug effectiveness from within, not drug manufacturers. Now consider how many more physicians are in similar relationships. Nearly three-fourths of doctors surveyed by HRI have partnered with hospitals through employment, joint ventures, or directorships, and 58% said they want to move toward an even closer financial relationship with hospitals. Nearly one-quarter said they already work primarily in hospital practice settings.16

Many of these hospital systems are looking more like Kaiser, pursuing reimbursement contracts as ACOs or participating in bundled payment programs in which the cost of drugs is included as part of the total payment.

As ACOs get more of a foothold, phar-maceutical manufacturers will likely see these provider-led organizations scrutinize drug costs more closely. Furthermore, there’s an increased recognition among insurers of the role ACO-like organizations may play as they take on more risk.

Health plans and PBMs are conducting their own studies on safety, outcomes, and value of drugs using hospital partnerships and their own claims data. Health plans are working with physicians to agree on consistent treatment pathways. For instance, a plan may start with oncology treat-ment programs and build consensus with its network of oncologists on the most cost-effective and clinically effective treatments. The resulting set of clinical pathways has two aims: reduce treatment variability and reduce the use of more costly drugs that produce less favorable results

Pharmaceutical benefit managers are using data from network retail phar-macies and mail-order pharmacies to analyze patient prescription filling and adherence to treatment programs. PBMs have contributed to the medical literature on outcomes, adherence, and value-related research, publishing 120 peer-reviewed articles since 2001.17

16 From courtship to marriage: Why health reform is driving physicians and hospitals closer together, PwC Health Research Institute, 2011.

17 HRI analysis of PubMed citations conducted in February 2012.

“ There may not be one right answer, but we can help patients pick the best choice for themselves.” Joe Selby, MD, PCORI Executive Director

13

Public: More investment made in comparative effectiveness research

CMS and other US government agen-cies are helping drive the migration from fee-for-service and unit-pricing reimbursement to new service-delivery and payment models that align to patient outcomes.

For example, in its bundling pilot, Medicare pays groups of doctors for the total cost of care instead of basing payments on individual services, drugs, or specialists. If the cost is below a previously agreed target price for a given condition, doctors can share in the savings. This can cut both ways for drug makers. Doctors who traditionally may have recommended surgery over drug therapy may recon-sider when their compensation hinges on overall savings. Doctors could also discard some drug options if they think they are too expensive.

Effectiveness studies of drugs and procedures have received scant funding or attention in the past, but that is changing in today’s economic environment. Programs are under way with increased funding for compara-tive effectiveness research (CER).18 Provisions of the Affordable Care Act funnel approximately $500 million per year from 2014 to 2019 to the newly established Patient-Centered

Outcomes Research Institution (PCORI). The group will use its funding to sponsor an array of CER, with a particular emphasis on patient input from study design all the way through implementation of findings.

“There may not be one right answer, but we can help patients pick the best choice for themselves,” says PCORI Executive Director Joe Selby, MD, a former director of research for Kaiser Permanente.

Supporters of PCORI believe patients will benefit from a research process in which drug makers, medical device companies, surgeons, and others in healthcare compete to prove their value. The industry trade group for research-based pharmaceutical and biotechnology companies, PhRMA, has raised concerns such as the lack of subject specificity in PCORI’s research agenda and whether it will focus on comparative product effectiveness rather than comparative systems of care delivery.19 PCORI responds that it wants to cast the widest possible net in evaluating research proposals rather than steer toward one partic-ular disease area.

Even with such an investment, the future of PCORI — and its poten-tial impact — remains uncertain. Legislative and legal challenges to the healthcare law pose one threat.

More broadly, public officials in the United States have historically resisted any actions that give the appearance of reducing consumer choice. Cost-effectiveness, which takes the clinical comparison one step further into the realm of value, is excluded from PCORI’s mandate. And PCORI’s guid-ance can’t be used to determine which treatments to cover in Medicare and Medicaid.

Nevertheless not all of the nation’s comparative effectiveness activity is contingent on health reform. The FDA, which sits on the largest stock-pile of clinical and comparative data, is funding a program for other researchers to use its data, called the Partnership in Applied Comparative Effectiveness Science. And private sector players are not waiting for the government results, as an increasing number of health plans and providers are incorporating the results of clin-ical comparative effectiveness studies into proprietary economic models.

18 The Institute of Medicine defines CER as the “generation and synthesis of evidence that compares the benefits and harms of alternative methods to prevent, diagnose, treat, and monitor a clinical condition or to improve the delivery of care.”

19 See “Re: Request for comment on draft National Priorities and Research Agenda,” PhRMA’s letter in response to request for comments by PCORI, March 15, 2011.



In the United Kingdom and Germany, government agen-cies assess value and reimbursement and ultimately influence the pricing of new drugs. Critics of these systems, such as Sir Andrew Witty, chief executive officer of GlaxoSmithKline, argue that such regulations slow innovation and access to life-saving drugs.

NICEA combination of rules and agencies in the United Kingdom assess the value of a medicine using pricing, cost effectiveness, and clinical effectiveness. For example, the price of a new drug is set by the manufac-turer, but it can adjust upward or downward based on any new uses or indications of the drug.20 The medicine is also evaluated by the National Institute for Health and Clinical Excellence (NICE). NICE publishes appraisals, evidence-based clinical guidelines, interventional proce-dures, and public health reports.

For existing indications, companies can request a one-time price increase up to 30% from the original list price. Additionally, there is no cap on a new price for new indi-cations. However, pricing for the original indication must remain the same as before.

While this “flexible pricing” model creates strategic options for pharmaceutical companies, the results have been mixed. As shown in Figure 5, the drugs that were subject to flexible pricing saw pricing decreases or marginal increases.

The value of the drug isn’t the only determinant of price, though. For example, a drug company’s total portfolio cannot exceed 21% return on capital or 6% return on sales, whichever is higher.21 In addition, the United Kingdom will roll out a new pricing scheme in 2014, based on a system of “value-based pricing.” HRI’s analysis of NICE assessment data shows that despite the imposition of clinical and cost-effectiveness thresholds, 14% of drugs or devices were categorized as “not recommended.”22 Rather than conduct its own trials, NICE reviews existing clinical trial data to develop clinical guidelines and ascertain cost effectiveness. Through the use of citizen councils, patients have a voice in the process.

QALYA key metric used by NICE is quality-adjusted life year (QALY), which measures the value of a year of life based on a person’s health. A year in perfect health equals 1.0 QALY and is discounted as a person becomes sick or develops a condition.

Playing NICE: UK and Germany regulatory approaches to valuing drugs

February2009

January2010

January2011

January2012

January2013

Source: UK Department of Health

-4.0%

-2.0%

0.10% 0.20% 0.20%

Figure 5: UK price adjustments on pharmaceuticals through 2013

20 As of February 2012, 167 pharmaceutical companies participate in the UK pharmaceutical price regulation scheme of 2009.

21 UK Office of Fair Trading, “The Pharmaceutical Price Regulation Scheme: An OFT Market Study,” February 2007.

22 NHS National Institute for Health and Clinical Excellence, www.nice.org.uk, Accessed April 5, 2012.


NICE uses a range between about $32,000 to $48,000 per QALY to determine whether a drug meets its clinical and cost-effectiveness threshold and is therefore accepted. For example, if a drug costs $50,000 per year and results in one QALY, NICE would not approve the drug. By comparing a new drug’s QALY with those of existing ones, an incremental cost-effectiveness ratio is determined.

However cost effectiveness is limited to health impact on the patient and savings to the National Health Service; it does not include indirect costs such as lost productivity of a patient or caregiver, or avoidance of hospitalizations and nursing homes.

Pharmaceutical companies have improved their evidence gathering to approach the optimal threshold with NICE. While pricing rates can change, pharmaceutical compa-nies believe that the first pricing opportunity represents the best chance to set profit-maximizing prices.

The United Kingdom has an outsized impact on global drug prices. Although it represents only 4% of global annual drug sales, its pricing system is referenced by 25% of the global market.23

GermanyMeanwhile, in 2011, Germany passed its own reimburse-ment modernization act. The law affects all new drugs with the exception of so-called orphan drugs or drugs with annual sales of less than about $66 million.

In the German system, a manufacturer picks its own launch price, which remains fixed for one year. After that, the price may change by an initial assessment (Figure 6) of the medicine’s clinical benefits. If the assessment determines no extra clinical benefit, payment will be set at the same level as the clinically equivalent medicines already on the market. All German health insurers pay the same price for the drug.

Unlike NICE, the German model does not use QALYs as a measure of cost effectiveness. Instead, it focuses on morbidity, mortality, and clinical effectiveness through head-to-head trials.

To date, six of the 12 drugs assessed were rated “low innovation” drugs and referred to reference pricing.

1. Major added benefit over comparator

2. Significant added benefit

3. Slight added benefit

4. Unquantifiable added benefit

5. No added benefit proven

6. Less than comparator

Highly innovative

Little to no innovation

Pharma can negotiate prices

Pharma takes reference pricing

Figure 6: Germany’s assessment of additional clinical benefit

23 UK Office of Fair Trading, “The Pharmaceutical Price Regulation Scheme: An OFT Market Study,” February 2007.


How imprisoned value is unleashed

What Munos, a 30-year veteran of the pharmaceutical industry, is referring to illustrates why purchasers such as health plans are becoming the new arbiters of value. Value typically was a function of skillful management of intellectual property, market timing and access, negotiating skill, and less consistently, addressing unmet patient needs.

Yet the very success of these manage-ment functions may be hindering deeper value. “Pharmaceutical companies used to do the least neces-sary to get to market. Now they have a burden of showing the best data to justify formulary placement and reimbursement,” says Greg Simon, an independent healthcare advisor who has worked in government and the drug industry.

There are no textbook methods for proving the real value of pharmaceuti-cals. Instead, we look at four examples of where real value is happening. All four approaches are concepts that may be familiar but are still at the early stages of a long journey to change our standards of care.

For instance, two competing drugs may have similar efficacy but significantly different adherence profiles, thus different outcomes for the patient. A drug that is paired with a diagnostic technology promises to take some cost

out of the system by avoiding unneces-sary, ineffective, or potentially harmful treatments. New reimbursement contracts can be based on meeting outcome targets rather than volume. Finally, patient-reported outcomes are now viewed as valuable evidence for approval and market access.

What does it mean to be “value based” in the pharmaceutical world? One increasingly common definition is

“ We’ve witnessed a disturbing trend where pharma has been producing marginal innovation, calling it the real thing, and charging as if it were.” Bernard Munos, chief apostle, InnoThink Center for Research in Biomedical Innovation

Figure 7: The health sectors must simultaneously address one another’s needs and align toward patient outcomes

to place patients and their desired outcomes at the center of the value universe (Figure 7). Pharmaceutical companies must align with the rest of the “four P’s” — providers, payers, and patients — in the effort to improve health outcomes, quality of life, and total cost of care. Total alignment is more likely when operating models meet the needs of each of these participants.

Needs:• Comparative evidence of clinical benefit• Reduce total cost of care• Focus on patient outcomes

Needs:• Treatment information• Minimal side effects• Evidence-based medicine• Reduce total cost of care

Patientoutcomes

Needs:• Better data sources• Early feedback from payers• Predictable formulary decision making

Needs:• Improved quality of life• Minimal side effects• Affordability• Symptom reduction• Disease cure

Source: PwC Health Research Institute

Patients

Providers

Pharma Insurers


Despite an increased burden of proof on today’s pharmaceutical companies to demonstrate real additional clinical benefit or cost savings, huge pressures still exist for companies to be first to market with new classes of therapies.

We discuss four areas where new thinking is invigorating the industry.

It takes two: Companion diagnostics freshen old drugs and embolden new ones.

Healthcare organizations are shifting from selling features to providing solutions. For pharma, this may mean more effort on teaming their drugs with diagnostics to ensure the drugs work on specific popula-tions.24 Research on genomics and cellular processes has yielded targets ranging from proteins to cell signal-ling molecules. The research also has increased the opportunities for new diagnostics to define populations for biologic drugs.

timing FDA approval such that both the diagnostic and the therapeutic are approved can be a daunting challenge, especially when two separate compa-nies are submitting applications.

Partnership trends (Figure 8) suggest pharmaceutical companies will inte-grate diagnostics with drugs to control more aspects of disease management, where the underlying condition has a specific target for the diagnostic product. Partnership makes sense — many drug companies do not have the necessary research and development capabilities to develop diagnostics.

The FDA is paying attention. It released draft guidelines and some-times gives priority review and accelerated approval status to drugs that are paired with companion diagnostics.25

The agency cited use of a newly approved drug for melanoma, Zelboraf, in combination with a genetic mutation test as resulting in increased median survival times among a larger percentage of patients.26 Notably, the trial data used a comparative “standard therapy” rather than a placebo. However,

Source: PwC analysis using data from Windhover, IVD Technology, and company press releases

30

2011

2010

2009

2008

2007

2006

2005

2004

25

19

7

14

6

6

12

Figure 8: Number of companion diagnostics partnerships with pharma, 2004-2011

24 For more on this, read: Christopher Wasden and Brian Williams, “Owning the Disease: A New Business Model for Medical Technology Companies,” In Vivo 29, no. 11 (December 2011). Can be accessed at http://www.pwc.com/us/en/health-industries/publications/owning-the-disease.jhtml.

25 Two recent examples are Xalkori (Pfizer) and Zelboraf (Genentech).

26 “FDA approves Zelboraf and companion diagnostic test for late-stage skin cancer: Second Melanoma drug approved this year that improves overall survival,” Food and Drug Administration, August 17, 2011. http://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/ucm268241.htm.


Additionally, companion diagnostics and the use of biomarkers present their own cost implications. Scientific understanding of biomarkers is the result of over forty years of intense research in the public and private sector. Protein biomarkers are also in an early developmental stage, and they present a significant research investment on top of pricey biologics.

Outcomes-dependent contracts are nascent but expected to grow.

“The days of selling drugs by volume are numbered,” says Andy Gaughan, director of payer and real world evidence informatics at AstraZeneca. “The industry will soon shift into a world in which outcomes-based contracting will be the standard reimbursement methodology.” This shift will elongate and deepen drug makers’ interaction with public and private payers, as well as patients.

Payers are blasé on current contracting and rebate models for pharmaceuticals, with only 4% very satisfied and 46% neither satisfied nor dissatisfied, according to the HRI survey.

In 2011, the FDA approved27 Pfizer’s Xalkori, a drug that treats non-small cell lung cancers in conjunction with a diagnostic test. The in vitro diag-nostic test, made by another company, identifies the small pool of patients with a gene abnormality who will respond well to the treatment. The drug was given accelerated approval and the test was approved at about the same time, maximizing the impact to patients and the cost effectiveness.

In announcing the decision, Alberto Gutierrez, director of the FDA’s Office of In Vitro Diagnostic Device Evaluation and Safety, noted that “this test is an example of the important role companion diagnostics play in deter-mining that the safest and most effec-tive treatments are promptly delivered to patients living with serious and life-threatening diseases.”

Payment issues remain thorny. Diagnostic companies argue that the value of a drug significantly increases when it is paired with a diagnostic, and they want a proportionally larger piece of reimbursement. But deter-mining the right percentages is as much art as science. Recent scientific discoveries suggest that cancer genetic markers can evolve based on stage of progression, making the challenge more difficult.

27 “FDA approves Xalkori with companion diagnostic for a type of late-stage lung cancer: Second targeted therapy approved with a test this year,” Food and Drug Administration, August 26, 2011. http://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/ucm269856.htm.


Even though contracting that depends on outcomes is embryonic, the premise will influence new thinking on contracting and reimbursement. Among insurers, 31% said they’ll support them in the next three years, while only 11% reported having them now.

Health insurers identified “increased negotiating complexity” and “lack of data infrastructure” as the top two barriers to implementing novel contracting practices with pharmaceu-tical companies (Figure 9). However, companies may be understandably hesitant to invest in data infrastruc-ture and methods for a one-time contract. These barriers are inter-twined but should dissipate as data convergence and exchange become more commonplace.

Outcomes-dependent contracts could take a few forms. In a more sophis-ticated scenario, a drug may elicit multiple levels of outcomes or clinical benefit for a patient subgroup — and payment may track these outcomes. Many opportunities exist to design contracts that are sensitive to varying outcomes for the patient.

Three examples:

• In 2009, Merck agreed to deeper discounts on two blood glucose drugs — Januvia and Janumet — if health insurer Cigna demonstrated its members had higher adherence rates and lower blood sugar levels. Cigna employs automated systems to monitor adherence based on refill patterns and communicates with

• EMD Serono and Prime Therapeutics, a PBM for Blue Cross/Blue Shield plans in 13 states, signed a more sophisticated contract for multiple sclerosis in 2012 that includes components of medication adherence, total cost of care, and comparative cost to competitor drugs.30

pharmacists and health advocates to reach out to patients. The agreement detailed sharing of claims data and diagnostic verification of diabetes patients regarding their medica-tion adherence. Early results from the partnership are encouraging. After one year, the two companies reported that blood glucose levels in patients taking the two drugs improved by more than 5% and adherence rates increased from 83% to 87%.28 Adherence rates of at least 80% are considered good.

• Cigna tied rebate payments for EMD Serono’s patient-administered injectable drug, Rebif, to the number of hospital visits as a result of relapses.29 Hospital stays for multiple sclerosis relapses average at least seven days at a typical cost of $10,000. Cigna, which has an integrated PBM, expects to report results in 2013.

Figure 9: Payers’ perceived barriers to novel contracting practices

Lack of data infrastructure

Increased negotiating complexity

New contracting lacks proven track record

Lack of internal alignment on metrics

Do not believe we need them to get best price


Major barrier Minor barrier Not a barrier Don’t know

43% 30% 5%

41%

32%

27%

24%

22%

38%

41% 27% 8%

40% 23% 10%

21% 9%

35% 13% 11%

28 Steve Davolt, “CIGNA-Merck Outcomes Contract Hailed as ‘First Step,’ but Some Want More Data,” Drug Benefit News 11, no. 24 (December 2010). http://aishealth.com/archive/ndbn121710-01.

29 Business Wire, “CIGNA and EMD Serono Team to Fight Multiple Sclerosis Under First Outcomes-Based Specialty Medication Contract,” Bloomberg, March 16, 2011.

30 Prime Therapeutics, “Prime Therapeutics announces CareCentered Contract with EMD Serono, Inc. for MS drug Rebif,” news release, March 7, 2012. www.primetherapeutics.com/pdf/RebifContractPressRelease.pdf.


As drug prices increase, the impetus for tying reimbursement to outcomes becomes more compelling (Figure 10). “Payers will demand more outcomes-based contracting proposals, particularly with biologics,” says one executive with contracting responsi-bilities at a managed care company, who asked that his name not be used. “Manufacturers have to justify a drug that costs $50,000 to $200,000 a year with a yearly 20% increase.”

Yet few companies have the neces-sary capabilities and infrastructure to measure and report outcomes at a population level. Hospitals and health plans, for instance, have legacy data platforms for different care settings or coverage groups and can’t easily integrate them. In the survey, 43%

of insurers indicated that a lack of infrastructure is a major barrier to the implementation of outcomes-depen-dent agreements.

Claims data are not always granular enough to gauge cause-and-effect. Electronic health records likewise lack the necessary details to judge the effects of certain medications. Valuable information is often stored in physicians’ notes but is lost in the EHR. Additionally while adoption of EHRs is growing, rates are not high enough to rely upon them solely.

US payers also point out that unlike European models, employees and their families may switch insurance carriers several times within their lifetimes, making it hard to track claims or prescription patterns over many years.

Trust is another major factor. When entering into an agreement that’s contingent on an exchange of outcomes data, each side may be sceptical of the other’s data quality and outcomes methodology. Even in today’s contracts between health plans and drug manu-facturers, resources are devoted to auditing market access data.

One final hurdle is concern that the proposed arrangement could put health plans or drug manufacturers in violation of laws or regulations such as the anti-kickback statute. For these arrangements to become more widely accepted, the health industry will need regulatory guidance that helps compa-nies operate with reduced fear of subsequent government investigation

Figure 10: Reasons why pharmaceutical companies enter into outcomes-dependent contracts

1. Improve formulary placement

2. Accelerate availability of new treatments for patients

3. Secure reimbursement when long-term benefits are less known

4. Gain faster access to the market

5. Upset a dominant standard of care with a new drug class


or backlash. One approach will be for pharmaceutical companies and payers to jointly approach regulators to obtain a “safe harbor” for collaborations and to set a framework that fosters innova-tion while managing risks.

Overseas, the British Pharmaceutical Industry Association has signalled approval of outcomes-based models by updating its code of practice, stipu-lating that full or partial refunds are acceptable if a drug does not deliver the intended outcome. But outcomes are multidimensional and come in shades of gray. How refund terms are established will be a critical precursor to a functioning payment model.

Data-sharing agreements are backfilling information gaps necessary to demonstrate and improve outcomes.

Data is the essential mechanism to make the leap from clinical efficacy to real-world effectiveness. From electronic medical records, claims data, electronic prescribing data, wireless and remote monitoring, and the FDA’s push for electronic submis-sions, data are coming in all shapes and sizes. And no one player holds all the keys. To get the complete picture, companies are forging partnerships to exchange and make sense of data. (See HRI’s 2012 report on clinical informatics titled Needles in a haystack.)


1. A spirit of mutual trust.

2. Clear, measurable criteria.

3. In partnerships with providers, employers and other data holders’ use of an independent third-party intermediary to process and interpret data.

4. A focused-patient population that has a limited set of co-morbidities or other characteristics that could confound outcomes.

5. Measurable, reasonable time frames, which will vary among conditions. For instance, a diabetes risk-sharing agreement would require daily or multiple-times-per-day measurements of blood glucose levels. But the outcomes measurement period may span one year.


Five components of successful outcomes-dependent contracts.

Pharma companies inked five data-sharing agreements in 2011-12 for two reasons: to gain access to real-world data and to get a closer view of payers’ mind-set. Put simply, “real-world data” is data not collected in traditional randomized clinical trials.

Drug makers are well aware that real-world data from claims may diverge from the results of carefully controlled clinical trials. Drug adherence is seldom an issue in randomized clinical trials because of carefully controlled study execution, but it becomes much more visible when examining prescription fill rates and emergency room visits.

Payer data, available to a handful of pharmaceutical companies, can be highly valuable for identifying unmet need early in the discovery pipeline. Andy Gaughan, of AstraZeneca, argues that “data are becoming a key R&D element as pharmaceutical companies seek to understand market demand.” If pharmaceutical compa-nies can start to understand specific population traits or prescription patterns through the use of claims and EHR data, they can better inform drug development.

Data partnerships are cutting across other sectors. AstraZeneca and Lilly established relationships with the Abu Dhabi health authority to share clinical data on cardiovascular disease and diabetes. AstraZeneca

also partnered with IMS (Europe) and HealthCore (United States), a subsid-iary of WellPoint, to study the two patient populations.

Consortiums are also being formed to craft industry standards, build plat-forms, and make sense of even larger amounts of data. One example is the HMO Research Network, comprising 19 hospitals and health plans, to conduct a variety of population health research, including pharmacoeconomic studies. In another example, Aetna, Humana, Kaiser Permanente, and UnitedHealthcare joined together to form the Health Care Cost Institute, to which they aggregate privacy-protected data on a regular basis. The institute, created as a nonprofit, will publish health cost and resource utilization research with the claims information.

PBMs are also partnering with other organizations to share data. CVS/Caremark has a 12- year partnership with Aetna to handle pharmaceuticals’ procurement and fulfillment. And major PBMs are conducting retrospec-tive and prospective longitudinal studies in patient adherence.

Although there are signs that data sharing is increasing, there’s still a long road ahead to capture and process the necessary information to build a robust understanding of population health. Claims data may provide insight into a patient’s treat-ments, but important information about a patient’s health is gathered aside from hospital settings (e.g. physician’s notes that aren’t captured in a claim). A patient’s nutrition,


exercise, and medication adherence habits comprise essential information that provides clues as to how effective treatments will be. Claims data does not adequately capture this informa-tion but is one important piece of the patient puzzle (Figure 11 below).

The pharmaceutical industry is well-positioned because of its detailed understanding of disease mechanisms to offer analyses and consultative services that help insurers build a more complete picture of how thera-pies affect patient health.

universally accepted standards for creating a consistent vocabulary and sharing data across the cloud.

Data partnerships can create critical feedback loops in everyday clinical interaction. According to one study, there is a 19% higher risk of nonad-herence if a physician fails to commu-nicate effectively with the patient regarding the importance of adhering to the drug, the correct dosage, and the timing of when to take it.32 Not only does adherence improve patient outcomes, but the cost implications are also enormous. As a result, tackling adherence issues is a clear necessity when aligned with patient outcomes.

“Pharma executives should help ensure that trusted, transparent, and real-time communications between physician and patient can happen. This communication could make all the difference in whether or not a therapy meets its full potential,” says Margaret Anderson, executive director of FasterCures, a medical research think tank.

Significant investments need to be made to standardize data across a variety of sources and transform it into actionable insights. Data aggre-gation is only a part of data sharing. Standardizing data is essential to transform it into a tool to gauge outcomes of different treatments. Additionally, issues around data integrity, reliability, and security are considerable but surmount-able. Sixty-three pharma and life science companies that are members of the Pistoia Alliance31, a private consortium, are working to develop

Figure 11: Current and future state of data convergence and analysis

Population Data Acquisition Data Consolidation Data Use

Prescription Data

Home Health

Social Media

MedicalDevices

Adherence

EHR

Nutrition

Health Behaviors

Wellness

Medical Claims

Multiple sources consolidated to reconstruct series of health-related events of the patient.

Data used to understand how different settings of care, treatments, and behaviors impact patient health outcomes.

Claims data captured primarily for billing purposes.

Data used primarily to measure direct costs and utilization.

None—all data iscaptured.

Uncaptured data can be used to better informanalysis of outcomesand proper treatment.

Lost Data


Current state captured and processed data

Future state captured and processed data

Cur

rent

sta

teFu

ture

sta

te

Current state

Future state

31 For more information on the Pistoia Alliance, visit http://www.pistoiaalliance.org/.

32 Kelly B. Haskard Zolnierek and M. Robin DiMatteo, “Physician Communication and Patient Adherence to Treatment: A Meta-analysis,” Medical Care 8, no. 47 (August 2009): 826-834.

23

Patient-reported outcomes are becoming a bigger part of demonstrating clinical benefit.

Patient-reported outcomes are often an afterthought in clinical trials. But recent studies indicate there is value to be captured by measuring a patient’s response to a treatment without outside interpretation. One 2010 study found that 12% of the interventional trials submitted by drug manufacturers and 15% of non-industry-sponsored proto-cols measured patient-reported outcomes.33 Pharmaceutical compa-nies use patient-reported outcomes to support a medical labelling claim with the FDA.

Incyte, a drug discovery and develop-ment company, used patient-reported outcomes in its trial design to gain FDA approval of ruxolitinib (Jakafi). Jakafi is a first-in-class drug for the rare bone marrow disorder myelofi-brosis. Phase III trials used a symptom assessment survey to measure treat-ment for the disease’s symptoms as a secondary trial endpoint, in addition to spleen size reduction.

Incyte developed an electronic symptom diary based on prior medical literature and FDA guidance. Patients recorded the information daily

Physicians look to oncology drugs to slow disease progression or improve survival benefit but are concerned about toxicity and severe side effects. In clinical trials, the drug did not slow the progression of myelofibrosis compared with controls, despite the drug’s symptom reduction benefits.34

Pharmaceutical companies that incor-porate patient-reported outcomes into standard clinical trial design will add cost and complexity to drug develop-ment. But the FDA’s release of industry guidance on the topic and subsequent approval of Jakafi are encouraging for companies that want to build a better reimbursement case by capturing the patient’s perspective.

and submitted it using hand-held computers, without the aid of clinical trials managers. At the completion of its trials, Incyte submitted symptoms improvement findings compared with both a placebo and alternate treatments. As a result, Incyte was approved to list the symptom relief on package inserts, a distinct advan-tage in the market. It has been more than 10 years since an oncology-class drug had been able to claim symptom improvement.

Some say that pharmaceutical compa-nies pursue these approvals to differ-entiate themselves in a saturated marketing environment. However, Jakafi has no approved competitors in its class. The case underscores how patient-reported outcomes signal an alternate value consideration.

“Demonstrating that patients feel better is a true clinical benefit, rather than a surrogate for anything else,” explains Rich Levy, MD, chief medical officer at Incyte. “In areas such as oncology, patient symptomatology may be an important drug design target.”

33 Lynda C. Doward, Ari Gnanasakthy, and Mary G. Baker, “Patient reported outcomes: looking beyond the label claim,” Health and Quality of Life Outcomes 8, no. 89 (August 2010).

34 Nuala Moran, 2012. “Incyte comes of age with JAK inhibitor approval.” Nature Biotechnology 30 (1) (January): 3-5.


What this means for your business

Pharmaceutical companies and payers need to speed their moves toward creating, and reliably demonstrating, better outcomes for patients.

25 What this means for your business

An explosion of data fuels expecta-tions of evidence for better outcomes, which will only escalate as health-care costs continue to rise. The key difference now is that the pressure is coming from nearly every stakeholder in the health sector and beyond.

Pharmaceutical and life sciences busi-nesses must recognize the challenge but also the opportunity of interacting with health insurers, providers, and patients as customers with unmet needs. These unmet needs for insurers surround clinical and economic comparative evidence quality and what steps they need to take to build trust and confidence among all stakeholders.

Fresh evidence is needed to secure limited formulary slots

Pharmaceutical companies are fighting for shrinking formulary real estate. Many formularies have generics in the first tier where possible and consider a limited set of branded drugs for second and tertiary place-ment. For 14% of prescription drug plans, costly biologics are now in a fourth tier and carry significantly higher co-pays or co-insurance, according to the Kaiser Family Foundation.35

Drug makers that have struggled with formulary acceptance or reimburse-ment levels may need to address the following challenges found in our survey:

Many health insurers are dissatisfied with the information provided by the pharmaceutical industry.

Just 5% of survey respondents were very confident — and 44% weren’t at all confident — in the economic evidence provided by pharma. Only 7% were very confident in the infor-mation to evaluate a drug’s compara-tive effectiveness. Not surprisingly, 52% were likely to utilize independent data to make formulary decisions. The largest proportion of respondents rated employers and patient or disease advocacy groups as “not influential.” (Figure 12)

35 The Kaiser Family Foundation and Health Research and Educational Trust, Employer Health Benefits Annual Survey, 2000-2011.


Many pharmaceutical companies already have the right resources, but need to make them customer facing and well-integrated into R&D and sales and marketing functions. These teams should be well-versed in under-standing the total picture of direct and indirect costs that a particular therapy can impact.

Some pharmaceutical companies conduct a mock “formulary evidence audit” before submitting to health plans. Consider that evidence presented will also be evaluated increasingly by large provider groups such as accountable care organiza-tions, not just commercial insurers.

For their part, commercial insurers have not always effectively used economic evidence in their formulary decision making.

Even when economic evidence is robust and available, not all health insurers are prepared to properly eval-uate the information. In other cases, discounts and other pricing incentives trump economic evidence.

“Some drugs reach tier two status not because it makes sense for formulary design, but because the negotiations were aggressive enough to warrant it,” says one managed care executive, who asked that his name not be used.

Payers’ lack of confidence may stem in part from poor experiences with evidence quality.

One study36 of 106 different US formu-lary submissions from pharmaceutical companies found just 43% performed any basic sensitivity analysis (e.g. varying the cost of the drug or time horizon) of their economic models. Some plans now have a subcommittee on their pharmacy and therapeutics committees to evaluate comparative cost evidence.

Figure 12: Sources of influence for formulary coverage and decision making

1%

1%

1%

3%

2%

2%

2%

5%

The availability of a generic alternative

Regulatory guidance

Physician opinion

PBMs

Employers

Hospitals

Patients/disease advocacy groups

A branded product

Secondary data sources


Very influential Somewhat influential Not influential Don’t know

66% 26%

32% 11%

7%

1%

11%34%

39%

45% 33%

51% 26%

32%50%

58% 26%

21%65%

31%

54%

53%

29%

21%

21%

17%

14%

9%

36 Colmenero et al., “Quality of Clinical and Economic Evidence,” 401-7.


Move from transaction to collaboration to build trust between payers and pharma

Companies should look inside their organizations to re-orient their definition of value.

Pharmaceuticals companies and insurers can improve their relation-ships by first answering whether they have a well-developed understanding of each other as a customer group, not just a transaction partner. Asked to think about the past 12 months, insurers surveyed by HRI character-ized the relationship with biopharma-ceutical firms three to one as being highly transactional versus highly collaborative.

Highly transactional relationships can be thought of as “discount only” and rebate driven where market share gain is incentivized through discounts and the interaction ends at the point of sale. Highly collaborative relation-ships may include customer analytics, partnering on drug labelling, earlier payer perspective on research pipeline decisions, data sharing and recog-nition of payer value drivers, and working together to address a provider or payer’s specific population profile.

Collaborative relationships are also important in the realm of data sharing. “Some pharmaceutical companies have not been able to take full advantage of data convergence

because they treat payers like any other vendor instead of true partners,” argues David W. Miller, senior vice president, global market access at BiogenIdec.

There are significant barriers to a collaborative relationship, including mutual trust issues.

Looking ahead, about one in four health plan executives said the rela-tionship was improving and nearly 60% thought it was neither improving nor deteriorating.

The act of exchanging and integrating data can help build trust. Right now, health insurers are more receptive to these partnerships with other health insurers. Thirty-two percent (32%) strongly agreed they would benefit from such partnerships, while 22% said they would benefit from a similar arrangement with pharmaceutical and life sciences companies.

If payers demonstrate good faith that they will use pharma-supplied data to inform formulary decision making and reimbursement, pharmaceutical companies may be encouraged to more closely follow evidence standards such as those outlined by the Academy of Managed Care Pharmacy. For their part, pharmaceutical companies that gain access to claims data will need to be transparent in their methods of utilizing the data and in how the data improves understanding of the disease or reduces development cost.


It is easy to understand why insurers and drug companies have a history of mutual mistrust. In the past, they have operated under diametrically-opposed value propositions. Many of their historical relationships were subject to intense scrutiny and publicity through high profile government investiga-tions and settlements. However, as the equation shifts, those few that are collaborating on things such as data sharing and outcomes-based payments are better positioned to capitalize on opportunities to maxi-mize patient outcomes.

As companies converge on the optimized patient outcome, the way forward may be similar regardless of whether you’re a payer, provider, or pharmaceutical company.

Practical steps may include the following:

• Sponsor research on cost and clinical effectiveness with external organizations.

• Agree to defined, measurable, and reportable metrics to ease the administrative burden of future clinical and economic evaluations.

• Share data repositories to help define treatment options that have the best real-world effectiveness and cost benefit.

• Create shared communication channels, including social media, to put educational material and new evidence into the hands of providers.

• Participate in disease manage-ment discussions occurring at the broader health system level.

Figure 13 shows seven touch points between patients and providers. Pharmaceutical and life sciences companies have the opportunity to engage with patients at these same touch points. Companies are at varying stages of development in their under-standing of the patient experience.

Figure 13: Opportunities for pharma to engage with patient-provider touch points

Prevention

Acute care

Care coordination

Patient engagement

Safety and overutilization

Chronic disease care

Palliative care

Patient


Patient-pharma touch point questions• Is the drug used in an acute, chronic, or specialty setting?• What clinical decisions lead to the use of the drug?• Are there productivity gains your drug contributes to?• Does your drug help minimize risk of readmission rates to a hospital?• Is the dosage regimen convenient to the targeted patient population? • Do you have the right educational materials for both healthcare providers and patients?


As the entire US health system under-goes significant change regardless of legislative or legal actions, a new definition of pharmaceutical value is emerging. Several forces are shaping it: the evolving evidence needs of purchasers such as commercial insurers and the government, funda-mental shifts in the delivery of care, rising patient engagement and regula-tory action.

Equally important, if not more so, are steps that pharmaceutical and life sciences companies are taking to create new value. Some are developing the next innovative drug indepen-dently — and quite effectively. Others are collaborating much more closely with payers and health systems. Together these efforts hold the promise of unleashing new value in the healthcare industry of the future.


About this research

Health Research Institute Kelly Barnes Partner Health Industries Leader [email protected] (214) 754 5172

David Chin, MD Principal (retired) [email protected] (617) 530 4381

Ceci Connolly Managing Director [email protected] (202) 312 7910

Sandy Lutz Managing Editor [email protected] (214) 754 5434

Benjamin Isgur Director [email protected] (214) 754 509

Serena Foong Senior Manager [email protected] (617) 530 6209

Christopher Khoury Senior Manager [email protected] (202) 312 7954

Joe Palo Partner (retired) [email protected]

Jack Rodgers Managing Director [email protected] (202) 414 1646

Ed Yu Principal [email protected] (415) 498 6408

The research for this report included 20 in-depth interviews with thought leaders and executives in hospitals, health plans, pharmaceutical/life science companies, patient groups, and industry organizations. HRI also commissioned a telephone survey in early 2012 of 100 insurance company managers, directors and executives.

Health Research InstitutePwC’s Health Research Institute provides new intelligence, perspectives, and analysis on trends affecting all health-related industries. The Health Research Institute helps executive decision makers navigate change through primary research and collaborative exchange. Our views are shaped by a network of professionals with executive and day-to-day experi-ence in the health industry. HRI research is independent and not sponsored by businesses, government or other institutions.

Sarah Haflett Manager, Health Information Technology Research [email protected] (267) 330 1654

Tiffany Bredeson Manager [email protected] (763) 218 5712

Shezaad Zainulbhai Research Analyst [email protected] (646) 471 0877

Advisory teamKarla Anderson Principal [email protected] (703) 674 6020

Peter Claude Partner [email protected] (415) 498 5024

Todd Evans Director [email protected] (312) 298 3368

Mackenzie Heal Manager [email protected] (860) 241 7151

31 Acknowledgements

Acknowledgements

Margaret Anderson Executive Director FasterCures/The Center for Accelerating Medical Solutions

Robert W. Dubois, MD, PhD Chief Science Officer National Pharmaceutical Council

Andy Gaughan Director, Payer and Real World Evidence Informatics AstraZeneca

Veronica Goff Vice President National Business Group on Health

James Heywood Co-Founder, Chairman PatientsLikeMe.com

Richard Levy, MD Chief Drug Development and Medical Officer Incyte Pharmaceuticals

David W. Miller, PhD Senior Vice President, Global Market Access BiogenIdec

Bernard Munos Chief Apostle InnoThink Center for Research in Biomedical Innovation

James D. Murray Vice President, Information Technology MinuteClinic, CVS/Caremark

Larry Posner General Partner Vedanta Capital

John Ross Former Chief Operating Officer SDI Health

Joe Selby, MD, MPH Executive Director Patient-Centered Outcomes Research Institute

Greg Simon Independent Advisor

Melissa Stevens Deputy Executive Director FasterCures/The Center for Accelerating Medical Solutions

Winston Wong, PharmD Associate Vice President, Pharmacy Management Carefirst BlueCross BlueShield

About PwCPwC US helps organizations and individuals create the value they’re looking for. We’re a member of the PwC network of firms, with 169,000 people in more than 158 countries. We’re committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com/us.

To have a deeper conversation about how this subject may affect your business, please contact:

Michael Swanick Partner, Global Pharmaceuticals & Life Sciences Tax Leader [email protected] (267) 330 6060

Douglas S. Strang US Pharmaceuticals & Life Sciences Advisory Services Co-Leader [email protected] (267) 330 3045

Peter Claude Partner [email protected] (415) 498 5024

Karla Anderson Principal [email protected] (703) 674 6020

© 2012 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure (http://www.pwc.com/structure) for further details.This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. AT-12-0239

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Unleashing value: The changing payment landscape for the US pharmaceutical industry

Health & Medicine

Transcript of Unleashing value: The changing payment landscape for the US pharmaceutical industry