Many companies have agreed to similar performance-based pricing agreements with the UK's National Health Service (NHS). In
2002, the three major suppliers of beta interferon drugs, Schering-Plough, Biogen Idec, and EMD Serono, created a "risk-sharing"
agreement with the NHS under which payment for the drugs is linked to the sustainability of the clinical benefit. If a drug's
effect on the patient condition diminishes over time, so does the cost of the drug. More recently, Janssen-Cilag tendered
a money-back guarantee to NICE for its cancer treatment Velcade. At first, NICE ruled the drug was not cost-effective. But
Janssen agreed to refund the cost of Velcade whenever a NHS patient fails to respond to it, and in so doing, convinced NICE
to reverse its coverage decision.
Money-back guarantees and other performance-based pricing models, when used proactively, should help pharma companies achieve
higher prices and more volume. As the Pfizer example and others show, it justifies a higher price per treatment and communicates
confidence in superior outcomes that the company may not yet have the hard data to claim outright. If the competitive alternative
works only half the time, a price twice as high for a drug is no more costly per successful treatment.
Performance-based pricing encourages use of the drug in populations for which it might not otherwise be cost justified. In
effect, a performance-based rebate enables the company to give a discount when payers allow the drug to be used in populations
with a high risk of failure, while still enabling the company to capture full value from populations where failures are less
likely. Most importantly, performance-based pricing can get a drug approved more quickly for reimbursement, resulting in higher
earning over the patent life.
Compuserve and Prodigy came to the market in the 1980s and made some headway by offering online data information services.
Users could access those services by paying by the minute or for each data download. But in the mid-1990s, AOL became the
market leader by offering a new model—monthly subscriptions for unlimited access. Even though AOL's revenue per minute was
less, its value per user, and the number of users, was greater, leading to an increase in overall revenue.
The pharmaceutical industry could use a similar model when negotiating with public or private payers. In particular, a pharma
company could offer a per-member per-month price for access rather than a price per unit of drug. In doing so, it could completely
reverse a payer's incentive to discourage use of its drug, without having to match the lowest prices in the category. In fact,
the more often doctors prescribed the capitated drug in preference to an alternative, the more a payer's total cost within
a therapeutic category would decline.
To illustrate the power of capitation, imagine that a leading-edge drug commands a 30 percent share within a plan despite
costing $5.00 per day. Two other drugs sell for $4.00 and $3.00 and have 15 percent share each. The largest share of the plan's
patients get less-efficacious generics that cost only $1.50 a day. The weighted average cost of treatment for this population
is $3.15 a day. For 12,000 patients per day under treatment, the plan's annual cost for all brands is around $13.8 million.
In this case, the leading-edge brand might offer the payer a capitation-pricing plan as low as $2.10 per diagnosed subscriber.
Certainly, this is much lower than the $5.00 it typically charges. But after negotiating access for these 12,000 patients,
the company would increase its revenue by 40 percent. Certainly, it costs more to manufacture and ship the increased number
of drugs. But even if the incremental cost of goods is 50 cents per daily dose, its annual profit contribution would increase
by more than $1 million.