Pharma Pricing: Striking a Post-ACA Balance

Apr 14, 2015

David Ormesher makes sense of the new cost-containment model and value-for-money conundrums like those in the HCV space.

Even as evidence grows that we have begun to bend the US healthcare cost curve and reduce the inexorable rise in national healthcare expenses, there is a lot of talk about pricing, particularly pharmaceutical pricing. For pharmaceutical executives, engaging in this conversation is long overdue. Healthcare pricing poses a potential threat because people may get priced out of the market. And it’s not just drugs and medical devices, but pricing for medical procedures, physician visits, and hospitalization are also under scrutiny.

How the ACA affects costs

The goal of the Affordable Care Act (ACA) was to slow the rise in the overall cost of healthcare and expand health insurance coverage to more Americans. Constraints on costs are expected to come from three primary market forces. First, broadening insurance coverage enlarges the risk pool and gets healthcare services to uninsured people before their illness gets too serious (and expensive).

Secondly, by moving from a fee-for-services model to a pay-for-outcomes model, the financial incentives for healthcare providers shifts to quality and coordinated care to keep people healthy and out of the hospital. Finally, as consumers begin to bear more of the direct cost of insurance and out-of-pocket co-pays, there will be additional pressure on pricing.

In our free-market economic system, we’ve been reticent to tell private-sector producers of products or services what they can sell a product for, leaving it to customers and competition to rationalize pricing. The ACA largely left drug pricing to the market, assuming supply, demand, transparency and outcomes data would identify the right price ranges for most products.

Pay now or pay later

However, healthcare is a special case. Unlike most consumer products and services, healthcare is rarely a discretionary purchase. We either buy health services (e.g., physician office visit, lab test, drug therapy) today when we need it—when it is the most effective to treat or cure—or we, or society-at-large, will ultimately pay for it later when the situation is likely more acute and the cost of treatment is much higher. It makes sense that we do whatever we can to offset that higher risk tomorrow by providing access to health services today.

Offsetting future financial risk requires two inputs—universal access and measurable quality. We need to cover as many people as we can to insure that everyone has adequate access to healthcare products and services—but not just any products and services. Patients need access to quality care that results in positive outcomes.

A business model transformation

In this model, insurers provide the universal patient access and providers and pharmaceutical, diagnostic, and device companies deliver the quality outcomes. However, the financial lubrication in this complex workflow will require a new approach to balancing cash flow between healthcare entities. In fact, we are in the middle of a massive restructuring of risk, payments and health accountability.

With the introduction of universal insurance coverage and new incentives for cost containment and improved health outcomes, the ACA disrupted the long-standing business model that governed cash flow and profitability among the various healthcare entities.

The ACA has forced the national conversation to shift from one about pricing to one about value. When you really unpack the philosophy behind the ACA, it is a philosophy of value: We’re going to pay for outcomes, not just for procedures or services.

Is value-based pricing the answer?

Framed as value, the question then is about efficacy. Whether it’s a pharmaceutical therapy, hospital stay, or a medical procedure, did it fix the problem? Did we get the kinds of long-term, healthy outcomes we’re looking for? And if so, if we’re able to reduce hospitalization or arrest a chronic decline in health, then the result—the value of costs saved and future productivity secured—should be factored into the acceptability of the price of achieving this outcome.

But the question remains, is there a price point that is unacceptable, regardless of the long-term value?

Do cures deserve a premium price?

Gilead’s Sovaldi has become a lightning rod for this discussion. Sovaldi, which can cure hepatitis C virus (HCV) for 80% to 100% of patients who take it, carries a retail price of $84,000 for a 12-week regimen. Private payers, states insurers, and Medicare and Medicaid are up in arms at the cost. Hence, the moves by the major pharmacy benefit managers (PBMs) to cut exclusive deals with the makers of the new HCV drugs in exchange for discounts.

But on the other hand, Sovaldi is curing people, which very few drugs actually do. Compare the long-term cost of someone who has HCV, who will be on drugs and in and out of the hospital for the rest of his or her life, to a short-term spend of $84,000, and you’ll recognize that while there’s certainly short-term pain, there’s huge long-term value.

We either pay for it now or we pay for it later. It becomes a time-value of money question.

The time-value of money

Insurance companies were built on an actuarial model of paying for chronic illness over time. There hasn’t been a financial scenario that assumes there is a cure that will end treatment costs for a chronic illness, short of death. Insurers are accustomed to paying relatively smaller bills over long periods of time, not a large one-time payout.

However, if you step back from the intimidating numbers of three million HCV patients at a cost of $84,000 per patient and consider the literature that predicts treating the old way is on a path to rise from $30 billion a year to $85 billion a year over the next 20 years (complications, liver transplants costing more than $550,000 each), and that the number of new cases of HCV is falling (now only 20,000 new patients annually), not even taking into account the quality of life and productivity of those cured citizens, there is an actuarial risk/financial model that makes sense, even at a high short-term cost.

Total cost of ownership

As healthcare leaders, we need to reframe this argument in terms of total cost of ownership. There is a total cost of health in this country, and if by investing in innovative solutions today we can improve long-term cost and wellness tomorrow, then that is a move that makes sense.

The technology industry held a similar conversation 20 years ago when software and hardware manufacturers like Microsoft and IBM introduced the concept of total cost of ownership to chief information officers (CIOs). While the initial costs to outfit your entire company with IBM computers or a new Microsoft operating system might be high, if you looked at the total cost of ownership of that technology amortized over three to five years and analyzed the improved productivity and lower maintenance costs from the investment, it was actually quite affordable.

We need to look at healthcare in a similar fashion. We need to factor in the total cost of ownership—the total cost of the therapy and procedure and the total outcomes benefits—before we take severe measures like restricting access to certain types of care based on price or introducing price controls on pharmaceutical companies.

Amidst the feverish debate over pricing in healthcare, the industry needs to focus on the value that healthcare can provide to patients and let that calculation dictate relative costs. The value has to be measurable—pharmaceutical products will need to justify their price with outcomes data—but that’s part of the enlightened conversation that will lead to a more rationale social and economic contract between healthcare suppliers, providers, patients, and payers. 

David Ormesher is CEO of closerlook, inc. He can be reached at [email protected] or on Twitter at @ormshr.



Pharma Pricing: Striking a Post-ACA Balance

There are several assumptions within the article that are repeated often, but don't necessarily reflect reality.
1. Heathcare is a special case (in the free market economy). There is an ATTEMPT to make it a special case, but that doesn't make it so. Food is a special case, clothing is a special case. In a day to day effect, even transportation can be considered a special case that has an impact on the majority of people. Yet all of these thrive without major initiatives to make them universal, and are provided to those considered needy without negatively impacting their free market conditions.
2. Pay now or pay later. The current delivery of medical care is intended to address immediate or chronic medical conditions. That impacts the payment system being a NOW basis. That basis will not change, no mater how the payment system is defined. The actions required to reduce the demands on health care dollars (diet, exercise, habits) will primarily exist outside of the current healthcare infrastructure. Pursuance of that cultural shift will reduce total healthcare costs, and will result in free market movement towards infrastructures that improve the life in lifestyle. Universal access to this infrastructure will become the next "universal" discussion.
3. Universal access and measurable quality. No financial or bureaucratic system can ensure this. The BEST treatment centers for specific conditions (like cancers) will be limited. It will be impossible financially and resource wise to make the BEST available everywhere to everyone. A free market approach to specialize services will offer the best improvements in overall approaches and delivery of services. Sending the patients to these specialized centers will be more cost effective than trying to achieve this level of delivery everywhere.
4. Goals of ACA. The political goals of a federal program should not be confused with the practical goals. Spreading the costs against a larger pool works only if the added pool's contributions exceed their use of services. Like any pyramid scheme, eventually the base stops increasing and the promise of services for fees becomes imbalanced. Especially when the majority of payers (healthy young people) has limited use of the services. The politics that allow this can shift just as quickly to politics that don't allow it.
5. Fee for services vs pay for outcome. ANY action (public or private) that impacts where the available dollars flow will also include a shift in definition of outcome. Spending and systems will change to chase those dollars, where the improvement definition is based on political influence and measuring methods. Since the revenue impacts will be huge, the larger the entity the greater the impact on the definitions.

The history of private insurance provided by employers was a free market action that supported the hiring initiatives of companies. The continual growth during that phase kept prices sustainable, matching the infrequent and less expensive usage of an earlier time. As that growth rate slowed the usage rate increased (as the cost to use was minor). This condition resulted in price increases with limited action to control costs or usage. Businesses were suddenly open to discussion of government costs controls on health. The turn to government solutions only delays the inevitable.

Shifting costs to the individual does not change the price pressures, it changes the usage rates. This change in usage rates will result in a decrease of heath care expenditures. The rate of increased discretionary spending on health care matched the historic drop of other daily costs. The absorption of the maximum limit on this discretionary spending has been reached. Just as passenger trains were supplanted by cars and airplanes for transportation (and the government took over passenger trains); the current infrastructure for heath care will be replaced by new industries. People will still need doctors, hospitals, and drugs. How they need them will change. That will be the only universal fact.

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