Access to Innovation
by Simon Kent
April 2008
Ideally, pharmaceutical pricing provides an incentive for innovation and also makes quality medicines accessible to all. Achieving this delicate balance, however, is proving to be a difficult proposition.
Photography by Russell Kaye/Sandra-Lee Phipps/Stone/Getty Images
Since the U.K.’s Office of Fair Trading (OFT) delivered its report on the U.K.’s Pharmaceutical Price Regulation Scheme (PPRS) in February 2007, there has been a great deal of debate across industry, academia, government and interest groups regarding the best way to price pharmaceuticals.
Last renewed in January 2005, the existing PPRS addresses the cost of branded drugs to the National Health Service (NHS) and how the payment system operates through price cuts and profit caps. In general, PPRS agreements last five years, and they’re intended to give the industry predictability and stability in the market. So challenging the very grounds on which the PPRS operates—calling for the scheme to be redesigned to incorporate an appreciation of the value each drug brings—the OFT’s report has ignited a fierce debate on how to fairly price pharmaceuticals.
The U.K. Department of Health welcomed the OFT report and has now engaged in a renegotiation of the scheme well in advance of its usual expiry date. However, this consultation may not simply be about exchanging the old scheme for a new one. According to a January 7, 2008 article in the U.K.’s Financial Times, the government has taken this opportunity to push for a 10 percent cut in prescription drug prices—on top of the 7 percent cut agreed to in 2005—to meet its target of 3 percent savings on costs per year.
This government demand illustrates the diverse interests and pressures brought to bear on the pricing of pharmaceuticals. It is a political issue owing to cost to the taxpayer and the government’s obligation to look after the health of the nation. Within the NHS, there is a constant mantra of delivering more cost-effective practices and prescription prices since they are a clear identifiable cost. The latest call for better practice in this area has come from the U.K.’s Committee of Public Accounts (PAC) that, in a report published in January 2008, claimed the increased prescription of generic rather than branded drugs by general practitioners could save the NHS another £200 million pounds per year.
Naturally, the price of pharmaceuticals is also of concern to the industry. Too strict a limit on the returns from a new drug, the industry argues, will have a detrimental effect on research and innovation in the industry. Prior to taking a role in negotiating the new PPRS on behalf of the industry, Eddie Gray, general manager of GlaxoSmithKline U.K., explained to the Daily Telegraph in June 2007 the perils of a system that is based on a judgement of therapeutic effects and then selects the cheapest option: “It puts a block on innovation,” Gray said. “The trick is to get the right balance between how we get value for medicines today and yet make sure we are making enough of a return to innovate for tomorrow.”
What emerges from this discussion are two questions. First, is it actually possible to create a scheme that fairly prices pharmaceuticals according to the value they bring to patients—and indeed, the wider society? Second, presuming this is achievable, is such a scheme actually the best way to price medical interventions?
“There’s not a straightforward yes or no answer,” says Richard Ley, spokesperson for the Association of British Pharmaceutical Industry (ABPI). “We would argue you can’t reduce the issue to QALYs [Quality of Adjusted Life Years] alone,” Ley says. “If you get [people] out of hospital, reduce their dependence on carers or get them back to work so they’re contributing to society rather than receiving benefits, how do you measure that?”
Moreover, Ley raises the issue of personal benefits experienced by patients. For example, a drug that alters the pattern of administering from a daily injection to taking one single pill each week, but with no additional therapeutic benefit, clearly has a benefit to that person, but how should that be measured or reflected in the price?
The Value of Small Steps
Ley also notes that the development of an existing drug does not lend itself easily to a straightforward value-based pricing system: “A first-in-class drug makes one improvement, the next in class makes a smaller step forward and so on,” he says. “By the time you get to the sixth or seventh version you’ve come a long way from the first drug, but it’s impossible to jump straight there.” A purely value-based scheme would seem to have difficulty in rewarding such small steps forward, unless it also considers the wider history of the drug and what contribution it makes to the health of an individual overall.
Andrew Dillon, CEO of the National Institute for Health and Clinical Excellence (NICE) notes that the Institute’s evaluation methods do take such considerations into account in determining whether a pharmaceutical brings sufficient value to the NHS: “It may not be necessary in every case but, for example, if an agent is introduced to treat an end-stage condition and then licensed for first-line treatment, we will look at its first indications,” he says. “We then apply the same assessment to the subsequent license extensions.”
Although NICE itself has no influence over the price of a pharmaceutical, its methodology for determining the value of a treatment to the NHS appears comprehensive—even accounting for the value of the innovation made, thereby providing a consideration of the work and investment of the pharmaceutical company involved. “We have to listen to the different voices and opinions expressed on how to define value,” Dillon says. “It is difficult to get a shared interpretation of an element such as innovation, but if it were possible for the players involved to do that, it certainly would be beneficial.”
Although far from perfect, assessing the overall benefits and value of a new medical intervention has become more comprehensive and dependable. “The overall quality [of the economic evidence] has improved and as the application of economic criteria becomes more widespread, the sources of information on the cost-effectiveness of health care technologies will assume a greater level of importance,” says Gerry Crosbie, director of the U.K.-based Health Economic Evaluations Database (HEED), which collates and provides access to the findings of medical intervention research reports from all over the world. “There are now a lot of young people working in this area, and they are more inquisitive.”
As Crosbie notes, good practice in this area will have beneficial effects further down the line—good economic evaluation provides the correct information for decision makers both in pharmaceutical companies and within health care services, therefore ultimately delivering better pharmaceuticals and health care. “As the quality of the economic evidence continues to improve, it will help health care decision makers use this evidence, particularly as a criterion for the reimbursement of new pharmaceuticals and other medical interventions,” he says.
A Free Market?
Naturally, not everyone believes that the practice of assessing the worth of pharmaceuticals is beneficial to the industry. In November 2006, The Guardian reported that Alex Azar, U.S. Deputy Health Secretary, was lobbying U.K. ministers to end all price and rationing systems in favor of letting global drug companies fight for the market on price alone. “Attempts to use rationing mechanisms such as NICE to cut soaring drugs bills would stifle innovation,” he is quoted as saying. “In all of our [health] systems, it is so easy to make the decision to cut costs today by going after drug prices and to not focus on what will be the impact on long-term innovation.”
Azar’s approach that the NHS drug bill will naturally be driven down by open competition may have merit, but it fails to acknowledge that the pharmaceutical supply chain is not a perfect market where price is solely determined by demand. There are other aspects of the supply chain that should be considered in order to deliver good pharmaceuticals at an acceptable price, and there are already areas where the impartiality of this chain is being compromised.
In a more recent report from the OFT into the pharmaceutical market, it has been noted that pharmaceutical companies are deserting the traditional supply chain whereby they sell at a discount to wholesalers who then make further discounts to attract pharmacy customers. In its place a direct-to-pharmacy (DTP) model is emerging that enables the pharmaceutical company to determine price and leaves the wholesaler to compete for business on the basis of distribution service standards alone. The report notes that action may be necessary on this to ensure the trend does not compromise any agreement made under the PPRS. “If DTP schemes cannot be used to circumvent pricing arrangements agreed under the PPRS, we can be more confident that, when they are adopted, they will lead to efficiency gains,” the report states.
The National Pharmacy Association has already pointed out that the proliferation of DTP schemes will not only compromise the natural market forces that govern this area of the supply chain—through reduced competition between wholesalers and removing choice from pharmacies as to where they can buy certain drugs—but it also stands to remove the financial structure that helps fund the pharmaceuticals contractual framework. The implication stands that without some sort of intervention, the NHS would not receive full value for money when buying pharmaceuticals—a message that is all the more significant because it is supported by the OFT.
Decisions Already Made
Although some in the industry may be promoting the consideration of value for money in making health decisions, others believe such choices are already being made within health services—indeed, they are made everyday by those involved in selecting, giving and even receiving treatments.
“Ultimately there has to be a set of hard data concerning the value of the drug, but then there should also be an element of subjective assessment by whoever is making the decision,” says Klaus Hilleke, a senior partner with the life sciences division of Simon Kucher Consultants, in Bonn, Germany. “Whether it is [an organization] like NICE or a physician or the patients themselves, where the final decision to use the drug is also based on their willingness to pay for that treatment.
“I personally think the U.K. system, with all its drawbacks, is not the worst possible option,” Hilleke continues. “It provides guidance and insight into value but still allows a subjective analysis by the person who makes the decision.”
The idea that value decisions are already being made within the health service is supported by Simeon Thornton, who led the OFT’s original study into the PPRS. While acknowledging the debate around the use and definition of QALYs in determining the value of an intervention—and the threshold at which that value is considered cost effective—he says such decisions are already being made within the United Kingdom’s health service. “The rationing decisions that are made every day in the NHS entail implicit cost/QALY thresholds, whether they are made explicit or not,” he wrote in the October 16, 2007 issue of Health Economist. “Our argument is that only by focusing explicitly on cost effectiveness can we move toward making best use of available resources for patients.”
Whatever the outcome of the current round of PPRS negotiation, it will not be the end of the debate. The way in which medical interventions are assessed and priced will change over time alongside the treatments themselves. Not only that, but as society moves on, adapting to a government-mandated pricing structure presents new challenges for the pharmaceutical companies and new concepts of value. An aging population, a situation where previously terminal conditions are no longer such a threat, the expectations of the public served by health services and even the economic conditions in which the pharmaceutical companies operate (increased global competition for research and development activities, for example) will all have an influence on pharmaceutical pricing schemes—not just in the United Kingdom. Whatever the future holds, the process by which the value of a pharmaceutical is assessed and rewarded also must be allowed to evolve.
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