For millennia, people have looked at the heavens and tried to make sense of what they saw. Several moments in this history shine brightly:
- On philosophical grounds, Aristotle embraced a flawed geocentric view where the moon, sun, and the five other then-known planets revolved around the earth.
- Aristarchus saw things differently and correctly hypothesized a heliocentric model that described the earth and other planets revolving around the sun. But Aristarchus lacked a telescope and failed to collect convincing evidence. So, while he saw the light, we remained in the dark.
- Ptolemy, likely using fabricated data, developed elaborate mathematical models to support a geocentric system. This was a great example of fitting data to a model, versus fitting a model to the data. Because it aligned with Christian theology, Ptolemy’s flawed model remained entrenched for more than 1,000 years.
- Copernicus gravitated toward a heliocentric model. But due to unresolved problems and, likely, because the model conflicted with Christian theology, his iconoclastic work remained unpublished until the year he died. Copernicus’s work amassed some support but failed to eclipse Ptolemy’s geocentric model.
- Leveraging his telescopic observations, Galileo promoted a heliocentric model. Though he was charged with heresy the year after his iconoclastic work was published, scientists now had convincing evidence to make sense of what they saw.
The prevailing view among patient advocates is that payers’ price negotiations and restrictions help payers and hurt patients. This view typically overlooks whether the negotiated price or restriction is aligned with a product’s value. This overly simplistic access-centric model suggests that what’s good for manufacturers is good for patients, and what’s good for payers is bad for patients — the latter being a zero-sum game. In contrast, an iconoclastic value-centric view sees negotiated prices and access aligned with a product’s clinical and/or economic value as being good for patients and payers and, yes, even some manufacturers.
Price negotiations
The prevailing access-centric view is that price negotiations have a negative impact on innovation. Here, “innovation” is defined loosely as new products and new indications — unfortunately, without any distinction between high-value and low-value drugs and indications. The argument posits that price negotiations reduce drug prices, which decreases manufacturers’ revenue, which reduces manufacturers’ investments in R&D, which slows innovation. The evidence supporting this logic is weak, and the evidence that price negotiations negatively impact the development of high-value drugs and indications is nonexistent.
Access-centric alarmists look at Medicare price negotiation under the Inflation Reduction Act and think the sky is falling. They gravitate toward PhRMA-sponsored modeling that assigns all new products and indications equal value, and thus fails to explain how price negotiations will have different impacts for high- and low-value drugs on revenue and R&D. Importantly, this line or reasoning ignores how the size of negotiated discounts will likely be adjusted based on products’ real or perceived value. And this modeling overlooks how manufacturer revenue is also impacted by payers’ market-access decisions (e.g., restrictions, tier placement), and how these decisions reflect a product’s clinical and/or economic value. Further, this view disregards the fact that manufacturers do not have to innovate to be successful. “Evergreening” tactics such as “pay-for-delay” agreements can be a substitute for innovation. Manufacturers and payers interact in a complex system with feedback loops, not in vacuums.
As seen through a value-centric lens, price negotiations help to ensure that drugs are priced appropriately relative to their value while allowing for potential savings through competitive market forces. In economic terms, a value-based price represents the point at which the consumer surplus is zero — where the consumer is indifferent to buying the product or keeping their money. This price should be an upper limit, not a fixed point. Payers should try to keep prices at or below this level, and it is fair to pay less if the manufacturer agrees. Competition plays a crucial role, potentially driving prices below this threshold and allowing payers and consumers to retain the surplus. Thus, price negotiations can benefit payers and consumers and foster a more efficient market.
A value-centric model predicts that price negotiations will incentivize manufacturers to make larger investments in high-value drugs and indications and smaller investments in low-value drugs and indications, and larger investments in clinical trials and health economics and outcomes research when evidence is more likely to demonstrate greater value. Consumers and payers are willing to pay more for high-value products and less for low-value products. This fuels innovation; truly innovative products and indications will likely come to market, whereas some new products and indications not addressing an unmet need may not. That’s good for both payers and consumers, and likely good for manufacturers of truly innovative, high-value products.
Restrictions
The access-centric view sees all restrictions (step therapy, prior authorizations, exclusions) in a negative light. This view focuses on the potential downsides: delays, denials, innovation disincentives. The upsides are never perceived to be in scope.
In contrast, the value-centric view sees a positive tradeoff: limiting access to some care makes room to pay for other innovative and expensive care. This view is iconoclastic for most patient advocates, but not for those who understand the reality of budget constraints. Without utilization management (UM), health care cost inflation, largely driven by innovation, would spiral out of control — the spend and trend would not be sustainable. UM makes budgetary space for cutting-edge therapies that would otherwise have been unaffordable. That’s good for consumers, payers, and manufacturers of innovative products.
This value-centric view sees restrictions (step therapy, prior authorization, exclusions) based on the clinical and/or economic value of products as innovation incentives. Restrictions incentivize manufacturers to bring new high-value products to market, expand indications to increase the value of products already on the market, and promote the development of evidence demonstrating superior value or greater value for specific patient populations. Restrictions do not stifle innovation; on the contrary, they help to fuel innovation and evidence generation. And that’s good for consumers.
The threat of restrictions can motivate manufacturers to enter the market with more competitive pricing and avoid or lessen the need for price negotiation. This threat can also increase the rebates and discounts manufacturers offer and can also slow price increases. Tempering prices is good for payers and can be good for consumers, too. Members who face a coinsurance based on the list price would benefit directly, especially when the products are costly.
As the world turns
The gravitational pull toward value is undeniable. Manufacturers know or should know that pricing needs to be aligned with value, and that restrictions should be, and typically are, aligned with value. Manufacturers should not be surprised by price negotiations or restrictions — they are both predictable and aligned with payers’ perceptions of value.
Importantly, the value-centric model is not anti-pharma. It simply rewards higher-value products over lower-value products. Nor is the value-centric model new. While most patient advocates currently throw shade on price negotiations and restrictions, the value-centric model is the guiding star for payers, the Academy of Managed Care Pharmacy and the Institute for Clinical and Economic Review.
The value-centric view is that price negotiations and restrictions are not all bad; only those not aligned with value are bad. Payers surely benefit from price negotiations and restrictions aligned with value. Just because the value-centric model can be viewed as being aligned with the interests of payers does not make it wrong. Patient advocates should be able to hold two truths at the same time.
For now, most patient advocates see patient and manufacturer interests with respect to price negotiations and restrictions as being aligned. If pressed to develop a model, perhaps they would see patients as the center of our vast, complex health care system with manufacturers locked in orbit around patients. With time and stronger evidence, patient advocates will hopefully see the benefits of a value-centric model that embraces price negotiations and restrictions aligned with value to foster a more competitive, efficient, and innovative market. Until a revolutionary shift in perspective occurs, for patient advocates, this view will remain iconoclastic.
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