When I went to the store this summer to buy a television for my dorm room, I entered a contract of sorts with the seller. Panasonic told me the size of the television, the quality, the price, the electrical consumption and all sorts of other relevant details to my purchasing decision. In return, I paid them what I felt was a fair price for the value it would add to my life. All this, of course, with the understanding that if it didn’t work as advertised, I could take it back and get a refund.
Now, this model doesn’t totally translate to prescription drugs for a number of reasons. Most obviously, you can’t return a drug that doesn’t work once you’ve taken it.
So what’s the connection to drugs? Medication efficacy generally falls along a bell curve. Imagine a Drug X, approved this summer for heart failure. In a clinical trial, Drug X reduced the risk of cardiovascular death or heart failure hospitalization by 20 percent and improved overall survival by 16 percent compared to its competitor. However, you could imagine that those numbers result from a distribution of patients; most people probably derived the middle range of benefits along the distribution curve, but there may have been some people who experienced even greater increases in quality of life, and others who had negative reactions and died from the drug.
Should someone who dies immediately after taking Drug X pay the same amount per treatment as someone who derives immense benefits? (Well, should that patient’s insurance company pay the same price?) In other words, given that you can’t return a drug, is there a way to price drugs such that the price reflects the value to the patient?
That seems to make sense. Just as I wouldn’t want to pay an arm and a leg for a great television that turned out to be only mediocre, I (as an insurer) wouldn’t want to pay a lot of money for a drug that didn’t help my policyholder very much.
Alright, let’s move away from the abstract.
Drug X is actually called Entresto, and is Novartis’ new blockbuster heart failure drug. Early this summer Novartis announced a pretty revolutionary pricing model for Entresto. In short, they will sell the drug at a reduced price to payers at the beginning and then share in the downstream savings if the drug turns out to be as effective as the clinical trial indicated. That is, if the drug does in fact reduce death and hospitalization in the long run—both very expensive medical events—insurers will give Novartis some of the money they would otherwise have spent on the patient.
This seems to make pretty good sense. If the drug works great, Novartis gets reimbursed at a higher rate than if it provides little benefit.
Entresto isn’t the first drug to come to market with this pricing model. For example, Novartis has used this strategy before for its Multiple Sclerosis drug Gilenya, and other companies have also adopted pay-for-performance models to some extent. Nonetheless, it is far from common.
There are a couple main reasons for drug companies to price their drugs this way. First, there are a number of older, less expensive (albeit less effective) heart failure drugs on the market. Novartis needs some incentive for payers to cover their new, significantly more expensive drug instead of just sticking with the status quo. Second, there has been significant uproar over the last few years about the skyrocketing costs of prescription drugs. (See: Gilead’s Solvaldi, Hillary Clinton’s recent proposal, etc.) This pricing model, with its upfront discounts, will help to quell public relations issues.
Circling back to our original contract idea, there are definitely still two unresolvable differences between returning a television and this drug-pricing model. First, there is no way to return the drug once it’s administered. That will never be the same. Even if the drug is ineffective, Novartis won’t have to refund all the money. Second, the discounts and future upcharges are not directly imposed on the patient; insurers — public and private — will work with the company to negotiate initial rates and potential for shared savings.
Even though this model doesn’t correlate perfectly to the way we purchase normal consumer goods, it certainly begins to approximate a more familiar purchasing relationship. “When you buy other goods that don't work you either take them back or get your money back. Our industry is a bit unique because historically if the drug doesn't work it still gets paid for. I think that model will have to shift,” said David Epstein, Division Head at Novartis.
Healthcare’s payment landscape is in flux, and the shift towards paying for value is underway. Prescription drugs are an important part of that movement, and going forward, I expect to see many more high-cost drugs coming to market with value-based reimbursement models.
In a culture where we expect to get what we pay for, it just makes sense.
Max Stayman is a Trinity senior. His column usually runs on alternate Fridays.
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