Drug Pricing Transparency and the Sticker Shock Crisis

The tension between payers and manufacturers over the price of innovative drugs has risen to a new level. Payers have taken an increasingly aggressive approach to communicating their frustration, while simultaneously challenging drug manufacturers to undercut their competitors’ price in exchange for preferred status. With spending on complex specialty drugs increasing nearly 27% in 20141 and new high-priced products continuing to enter the market, many with annual price tags in excess of $100,0002, the divide between payers and manufacturers continues to expand.

As the tension mounts, it raises the question as to whether providing greater transparency to how drug pricing is derived will yield alignment between payers and manufacturers.

Although transparency may contribute to a greater level of trust between payers and manufacturers, transparency alone will not address the underlying issues. Knowing what price to forecast for a new drug as part of a payer’s annual planning process may have some short-term benefit for payers, although the availability of the information from manufacturers has to be timed just right for payers to realize that benefit.

Addressing Value and Affordability

More significantly, providing visibility into the cost to discover, develop, manufacture and promote a drug does not address the fundamental question of the drug’s relative value and affordability—the root of the debate. Transparency is likely more appropriately positioned as a tool to communicate a level of commitment between payers and manufacturers toward gaining alignment and establishing a trust-based relationship than a solution to the drug pricing debate.

Over the past several years, the term “value” has been tagged to drug pricing as the game changer that will create alignment between payers and manufacturers. Despite this focus, drug manufacturers continue to be challenged to identify what actually resonates with payers as a true demonstration of value.

The irony is drug manufacturers do currently develop drug pricing from a value-based perspective. The vantage point of their value perspective however is not necessarily that of the payer. Building on a foundation of the drug’s effectiveness and clinical impact, manufacturers utilize the price of comparator products to form the foundation of the pricing equation.

Price, Market, and Payer Dynamics

In addition, manufacturers invest significantly in market research and analyses at the geographic level to price in the context of market and payer dynamics. Manufacturers’ couple these analyses with a perspective of their compound’s specific differentiators to arrive at a market price that they consider fair and defendable, leveraging the data used to develop the price equation.

And yet the debate over drug pricing continues to prevail. The significant emphasis on using the price of current products—which represent the standard of care within a disease category—as the pricing baseline has inherent flaws if the payer doesn’t view the existing price of the standard of care as being justified. This misalignment calls into question the foundation of the overall pricing approach.

At the heart of the debate is the unique customer model that surrounds how drugs are paid for in the U.S. market. The divide exists in part because the payer, who subsidizes the product and functions as an intermediary between the manufacturer and the end user—the patient—defines value differently from both the manufacturer and the patient. The manufacturer and the patient are focused on a specific drug. The payer’s vantage point is much broader and is focused on what a specific drug contributes toward total drug spend as well as how that drug spend changes from year to year.

A Contentious Future?

This is why affordability across the entire drug category weighs so heavily into the pricing discussion from a payer’s perspective. As payers look to the significant pipeline of innovative drugs and the relative drug spend for new products, the future is guaranteed to be contentious unless there is a change in direction.

The HCV price controversy that played out so widely in the popular press over the past year highlighted that there is more to the equation than value. Current HCV drug therapy cures the disease in less than six months at a price below the previous standard of care. At face value, this would appear to be the ultimate value proposition. It addresses what payers have been asking of manufacturers for years: Short-term tangible outcomes.

And yet despite this compelling value proposition, payers are not aligned with the manufacturers on either price or the relative value of HCV therapy. The high bar set by the HCV example is not likely to be duplicated by the majority of new drugs entering the market—that is, curing a disease with a short-term therapy.

The Challenge to Manufacturers

So the challenge for manufacturers in meeting the payers’ pricing needs will remain significant. The HCV experience has illustrated that the real concern is not just related to the value of the drug therapy but occurs more at the intersection of drug value and overall drug affordability. The affordability issue is also multi-dimensional since what is deemed affordable for a health plan as the primary subsidizer of drug therapies and what is affordable for the patient—based on their overall health condition—are two important and very distinct perspectives.

It is not within the individual drug manufacturer’s control or responsibility to focus on drug pricing beyond their specific product. Conversely, the payer cannot be in a situation in which they have to continually communicate to their customers that drug spending is increasing despite their drug management processes. As a result, the alignment gap between the two parties is wide.

Working Together with Payers

Both parties need to work to solve the drug pricing issue. Drug manufacturers can play an important role in helping to drive appropriate use both in terms of who gets the drug, and once a patient takes the drug, ensuring the patient receives the full benefit of the drug as measured by positive outcomes.

In turn, the payers can be better aligned with manufacturers in terms of developing efficient processes to facilitate appropriate use as opposed to establishing barriers to drug access.

The fundamental question: What will break the cycle and bring the manufacturers and payers together to provide patients’ innovative drug therapy that yields favorable outcomes?

There is a positive momentum relative to the drug pricing challenge. During the past year, a number of third-party, non-profit value assessment groups such as the Institute for Clinical and Economic Review, the National Comprehensive Cancer Network, and the American Society of Clinical Oncology have taken action to address the drug pricing value and affordability debate. These groups are developing formulas for drug prices based on clinical results, economic impact, comparative effectiveness, drug toxicity, and more. Although these are independent entities, a spirit of market collaboration is emerging.

As an example, The Institute for Clinical and Economic Review is a membership-based group currently with 10 payer organizations and 10 drug manufacturers as part of its membership. The participation of both payers and manufacturers is key to arriving at a balanced multi-dimensional view of fair drug pricing. Payers and manufacturers working together to determine what evidence fuels the value proposition—and agreeing on the approach to demonstrating value and affordability—will go a long way in establishing new relationships and gaining a better understanding of each other’s perspectives in order to address the pricing challenge.

New Models of Collaboration

The use of value assessment groups is a start toward closing the divide. However as witnessed outside the U.S., the presence of value assessment groups alone will not address the pricing debate in a sustainable manner. New models of collaboration between payers and manufacturers must emerge. There are good examples in the market of manufacturers who are taking a leadership role. Performance pricing has been in the works for several years. In the past it has always lost momentum as the payer and the manufacturer work out the details of operationalizing the contract.

Although it’s too early to determine the level of success, there are a few examples of innovative pricing approaches within the cardiovascular disease category that manufacturers have offered—in addition to traditional discounts and performance discounts tied to patient outcomes.3,4

Opportunity exists for manufacturers to think differently about pricing as they prepare to launch innovative drugs. Value assessments groups will clearly be in the mix, inserting a perspective on both price and value. The winners will be the manufacturers that build deeper, more collaborative relationships with both payers and the value assessment groups, establishing trust and forging a commitment to finding common ground toward a shared view of value and affordability.

A new model will allow manufacturers to create a level of differentiation with payers that can facilitate the growth of their product—and remove an otherwise increasing barrier to product adoption and access.


1. IMS Institute for Healthcare Informatics, “Medicines Use and Spending Shifts: A Review of the Use of Medicines in the U.S. in 2014,” 2015.

2. Evaluate Pharma. “Budget-Busters: The shift to high-priced innovator drugs in the USA,” September 2014.

3. Herman, Bob. “Harvard Pilgrim Cements Risk-based Contract for Pricey Cholesterol Drug Repatha.” Modern Healthcare. November 9, 2015. http://www.modernhealthcare.com/article/20151109/NEWS/151109899.

4. Reuters “Novartis Sets Heart-Drug Price with Two Insurers Based on Health Outcomes” February 9, 2016.

  • Karla Anderson

    Karla Anderson is Principal, U.S. Pharmaceuticals and Life Sciences at PwC. Karla is a Partner in PwC’s Advisory Pharmaceutical and Life Sciences Group within the Commercial Practice. She has over 30 years of experience in the healthcare industry. She has a clinical background and broad healthcare system knowledge.


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