Photographer: Andrey Rudakov/Bloomberg

Big Pharma’s Offer to Trump: Discounts When Drugs Don’t Work

  • Value-based pricing is ‘buzzword of the day:’ Allergan CEO
  • Drugmakers are seeking to defuse outcry over drug prices

President Donald Trump says drug prices are astronomical and something needs to be done. Pharmaceutical giants have an answer that doesn’t involve lowering list prices: refunding some of the money to insurers if a drug doesn’t work as expected.

The concept of pay-for-performance isn’t new in the industry. But the number of such agreements between drugmakers and insurers has grown in the past year as Big Pharma seeks to defuse criticism over the soaring prices of some brand drugs, which can cost $10,000 a month or more for cancer treatments.

“The new government in the U.S. with Trump talks about getting more value for less,” said Lars Fruergaard Jorgensen, chief executive officer of Novo Nordisk A/S, the world’s biggest maker of diabetes medicines. “Outcomes-based contracting could be one of the elements.”

The drug industry is seeking to dodge Trump’s most drastic threats to reduce costs, including forcing companies to bid for government business. In a sign of how central value-based programs have become in the pushback, the lobby group Pharmaceutical Research and Manufacturers of America plans to roll out the concept later this month to the media as part of proposals on addressing drug pricing concerns.

In recent weeks, executives have touted the idea during a big investor conference and on earnings calls, and brought it up unprompted in media interviews. The topic was also discussed when a group of top pharmaceutical CEOs met Trump at the White House last week.

“The buzzword of the day is value-based pricing paradigms,” Brent Saunders, CEO of Allergan Plc, said in a January interview.

For more on the outrage over high drug prices in the U.S., see this QuickTake.

While reimbursing part of the cost for a treatment that doesn’t perform well sounds like a sensible solution, the concept is hard to execute. In conditions like diabetes or high cholesterol, results can be tracked with simple numerical measures -- but it may be harder to pull off in areas like depression or cancer. There’s also little evidence that pay-for-performance will significantly lower drug prices overall. And one of the largest drug benefit managers in the country, Express Scripts Holding Co., has criticized outcomes-based plans.

Still, many insurance companies are intrigued. Cigna Corp., for instance, has entered into seven outcomes-based deals since 2009, including two last year for injectable cholesterol-lowering drugs.

Outcomes-Based Contract

Novo, based in Bagsvaerd, Denmark, recently signed its first contract for the diabetes drug Victoza as part of a pilot project with Humana Inc. At least five other companies have inked deals with various insurers in the past year, including Novartis, Merck & Co., Amgen Inc., Sanofi, and Eli Lilly & Co. Details on those agreements are proprietary, and remain scant.

Swiss giant Novartis, one of the biggest boosters of the concept, has deals in place to refund four insurers, including Cigna and Humana, if its Entresto drug doesn’t keep heart failure patients out the hospital. It is considering agreements for leukemia treatment Tasigna, which costs more than $12,000 a month, and multiple sclerosis drug Gilenya, which lists for about $6,700 monthly, according to data compiled by Bloomberg Intelligence.

While it’s “quite early” for the pricing approach, “there are more and more sophisticated payers both in the U.S. and Europe that are starting to put data in place,” CEO Joe Jimenez told reporters on Jan. 25.

“We’ve been able to get the best of both worlds,” said Chris Bradbury, senior vice president of integrated clinical and specialty drug solutions at Cigna. The insurer gets competitive guaranteed discounts on prescriptions, and “the manufacturer is aligned and accountable when something doesn’t work.” So far, all the drugs have performed up to expectations.

Additional Rebates

Drugmakers have defended their pricing system, saying it helps fund research and development of life-saving medicines. The value-based model offers a way to potentially lower health-care costs -- in the case of Novartis’s Entresto, cutting hospital expenses -- while maintaining the prices of drugs that work. Models are based on average population results, not individual patients.

In Lilly’s partnership with Harvard Pilgrim Health Care, the regional non-profit insurance provider gets additional rebates if fewer patients using Lilly’s diabetes treatment Trulicity drug meet blood sugar goals than expected.

This type of arrangement “can bend the cost curve but also reward the innovations that actually make the biggest difference,” Dave Ricks, CEO of Indianapolis-based Lilly, said during a January interview.

‘Really Complicated’

Digital data and medical records helped make pay-for-performance popular, yet tracking the results remains difficult with conditions that have subjective metrics, like those in the central nervous system.

“Everyone likes the idea of outcomes-based contracting, but the contracts themselves are really complicated,” said Mark Fendrick, director of the Center for Value-Based Insurance Design at the University of Michigan.

While outcomes-based pricing is useful for some drugs, the obstacles to apply the concept across the board “are nearly insurmountable,” said Peter Bach of Memorial Sloan Kettering Cancer Center. It could require calling patients in for additional tests they don’t need merely to determine reimbursement. And because almost all of the details are proprietary, it is hard to know whether the existing programs are actually saving money, he said.

“It would lower some drug prices, but the idea that this is a panacea is unfounded,” said Roger Longman, CEO of Real Endpoints, which analyzes drug reimbursements. “There is a significant amount of hype around these deals.”

Steve Miller, chief medical officer at Express Scripts, agrees. The drug benefit manager prefers simpler arrangements that refund money if a patient discontinues an expensive cancer or inflammation drug prematurely, rather than agreements that link discounts to hard-to-track results.

“Most of these get launched with great fanfare and most of them go away because administrative burden eats up all the savings,” Miller said in a December interview.

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