Key Takeaways
- Pharmaceutical pricing should reflect patient outcomes, not just manufacturers’ profit targets.
- Outcome-based reimbursement links drug payments to treatment effectiveness.
- Transparent pricing requires clinical evidence and measurable patient benefits.
- Better pricing structures, segmentation and governance help protect margins when price increases are restricted.
Value-based pricing can help address affordability and access challenges in healthcare by linking medicine costs to patient outcomes. But can healthcare providers implement a value-based pharmaceutical pricing strategy? And how could this approach affect healthcare payers, pharmaceutical companies and patients?
How Can Value-Based Pharmaceutical Pricing Improve Healthcare Access?
Value-based pharmaceutical pricing can help reduce healthcare inequalities by linking medication prices to the actual benefits patients receive rather than allowing manufacturers to base prices primarily on profitability goals.
Healthcare providers, insurers and pharmaceutical companies can use this approach in several ways:
- Link prices to patient outcomes. Pharmaceutical companies must demonstrate that their medications improve patient health. Prices can then reflect the effectiveness of the treatment.
- Introduce outcome-based reimbursement. Medicaid programmes and other healthcare payers can explore outcome-based agreements in which reimbursement depends partly on how patients respond to a particular medication.
- Improve pricing transparency. Evaluating clinical evidence and actual patient outcomes provides a more objective basis for determining acceptable drug prices.
- Consider patient access. The value of a medication should also account for whether patients can access new treatments and whether the price is justified by the benefits they receive.
This approach can help healthcare payers manage the financial risks of treatments that fail to deliver expected outcomes while encouraging pharmaceutical companies to demonstrate the effectiveness of their medicines. However, implementation requires reliable clinical evidence, clear reimbursement agreements and cooperation between manufacturers, healthcare providers and payers.
Understanding why this approach is gaining attention requires looking at the existing problems with pharmaceutical pricing.
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Pharmaceutical pricing regulations vary significantly across markets. In the United States, manufacturers generally have greater discretion when setting initial drug prices, while countries such as Australia use government-led reimbursement and pricing arrangements. Despite these differences, patients in both regulated and less-regulated markets can face affordability barriers, particularly when treatment costs are high or reimbursement is limited. These conditions can also create challenges for smaller pharmaceutical companies competing with established manufacturers.
However, things will change if drugs are priced based on their value.
Value-based pricing can track improvements or declines in patients’ health after treatment. Reimbursement can then reflect whether the medication delivers the expected clinical outcomes. If implemented effectively, this approach could improve healthcare resource allocation and patient access. How can pricing experts make this happen?
In this article, we examine how the pharmaceutical and healthcare industries can move towards a value-based approach. First, we will examine the most recent policy changes affecting the largest healthcare assistance programmes. We will then explain what value-based pharmaceutical pricing should look like and how to implement it. We also discuss the advantages that value-based pricing can provide for patients and healthcare providers. Finally, we explore how pharmaceutical companies can protect profitability when regulatory restrictions limit their ability to increase prices.
At Taylor Wells, we argue that a value-based approach, in which medication prices reflect patient outcomes, can help alleviate healthcare inequalities. We believe that the purpose of healthcare assistance is to make effective treatments more accessible to those who need them most. By the end, you will learn how value can be maximised in healthcare services.
Table of contents:
I. The Benefits Of A Value-based Pharmaceutical Healthcare Pricing Strategy
II. Pharmaceutical Pricing Strategies When Governments Restrict Price Increases
See whether your pricing is under control
The Benefits Of A Value-based Pharmaceutical Healthcare Pricing Strategy
The pharmaceutical market is complex, making pricing a contentious issue. Cost-plus and competition-based methods are common, but they do not always deliver fair or profitable outcomes for manufacturers and patients. As a consequence, medication prices reflect what patients pay rather than the value they gain from treatment. This encourages companies to launch drugs at their own price or to negotiate high prices. It can also distort patients’ perceptions of new medicines.
Fortunately, insurance and healthcare assistance organisations subsidise pharmaceutical costs, reduce financial barriers to access, and increase medication use. Furthermore, they can now choose a value-based pricing and reimbursement approach that may be superior to other methods. This additional layer of intervention can address some inequalities in the healthcare system, although it cannot resolve them all.
Developments in Pharmaceutical Healthcare Pricing Strategies and Solutions
Value-based pharmaceutical pricing sounds promising. But why is the concept gaining in popularity in the first place? Let us examine how the concept gained the attention of pricing managers and their teams, using Medicare as an example.
Medicare is a federal health insurance programme primarily serving people aged 65 and older, as well as certain younger people with disabilities and individuals with end-stage renal disease. Medicaid is a joint federal and state programme that provides health coverage to eligible low-income individuals and families.
Medicare and Medicaid apply different coverage and reimbursement requirements to prescription drugs and innovative therapies.
Access to new medicines and gene therapies depends on several factors, including regulatory approval, clinical evidence, programme eligibility, coverage requirements and reimbursement arrangements. Even when a treatment demonstrates clinical benefits, affordability concerns and reimbursement restrictions can create barriers to patient access.
And yet change might be underway for the pharmaceutical healthcare sector.
The Centers for Medicare & Medicaid Services (CMS) introduced regulatory changes to support value-based purchasing arrangements for prescription drugs covered by Medicaid. Published on 31 December 2020, the final rule allowed pharmaceutical manufacturers to report multiple best prices for qualifying value-based purchasing arrangements under the Medicaid Drug Rebate Program. This flexibility enables participating state Medicaid programmes to negotiate reimbursement arrangements that account for patient outcomes. The multiple-best-price provision was initially scheduled to take effect on 1 January 2022 but was subsequently delayed until 1 July 2022.
Introduction to Value Culture 💡 Podcast Ep. 96!Why do we need to talk about the shift to value-based pricing in pharmaceutical healthcare?
Kymriah, a CAR-T cell therapy developed by Novartis, received FDA approval in August 2017 to treat certain patients with B-cell precursor acute lymphoblastic leukaemia. Novartis subsequently introduced a voluntary outcome-based contract with participating certified treatment centres. Under the agreement, Novartis would not charge the centres for the treatment if a patient failed to respond within one month of infusion. The arrangement covered patients with commercial insurance, Medicare, Medicaid and other government health plans.
Separately, CMS explored a demonstration proposal involving indication-based payment for CAR-T therapies in Medicare but did not proceed with the initiative in 2018. This was distinct from Novartis’s voluntary agreement with participating treatment centres and illustrates the regulatory and administrative challenges involved in implementing alternative reimbursement models.
These developments highlight growing interest in alternative reimbursement approaches across healthcare systems. Value-based pricing challenges traditional reimbursement models by linking payment to the clinical outcomes of treatment. Rather than assuming that every medication will deliver the expected benefits, healthcare payers can use agreed performance measures to assess treatment effectiveness. This approach could support greater accountability and transparency in healthcare spending.
What Does Transparent Value-Based Pharmaceutical Pricing Look Like?
A useful illustration of value-based pharmaceutical pricing is the assessment of a drug’s clinical effectiveness in relation to its cost. Independent health technology assessment (HTA) organisations evaluate clinical evidence and economic outcomes to determine whether a medicine offers sufficient value at its proposed price. These assessments can help healthcare payers make informed reimbursement decisions, negotiate sustainable pricing arrangements and allocate healthcare resources more effectively.
Cost-based pricing differs from outcome-based pharmaceutical pricing because it considers the costs of developing, manufacturing and delivering a medicine, whereas outcome-based reimbursement links payment to agreed measures of treatment effectiveness.
Instead of allowing pharmaceutical firms to charge whatever high price they believe will maximise profits, the value-based structure links the price to whether and to what extent the drug benefits patients compared with alternative medicines or treatments. Furthermore, patient access to new medicines is a deciding factor in a drug’s acceptable price.
In outcome-based pharmaceutical pricing, the treatment’s price is supposed to reflect the value it provides to patients. Value in this regard relates to: How are patients responding? Is the drug effective? How long has it been in the testing phase? How large is the sample? Is the sample representative, or have certain patients been excluded because their health conditions could skew the trial results?
Following this assessment, the relevant healthcare authority or payer may use the findings to inform pricing and reimbursement decisions. Depending on the country’s regulatory framework, a medicine may receive reimbursement approval, face restrictions on coverage or remain outside the public reimbursement system. These decisions are separate from regulatory approval to market the medicine.
Value in healthcare is complex. However, value-based pricing can help improve objectivity in clinical trials and support better healthcare decisions.
Value assessment guidelines are an important foundation for policymaking and can support more informed pricing decisions. However, certain prerequisites must be met before value-based pricing can be implemented in pharmaceutical healthcare. Pharmaceutical firms must justify their prices with credible, verifiable evidence.
Pharmaceutical companies may have considerable discretion when setting initial prices in some markets. However, pricing decisions can still be influenced by regulatory requirements, health technology assessments, reimbursement negotiations and payer restrictions. The requirements for clinical evidence and regulatory oversight remain contentious issues, delaying the wider adoption of value-based pricing in the pharmaceutical industry.
Under a value-based approach, pharmaceutical companies would need to support pricing and reimbursement proposals with credible evidence of clinical benefits. If a medicine fails to demonstrate sufficient effectiveness or value, healthcare payers may restrict reimbursement, negotiate a lower price or decline coverage. Separately, regulators can restrict or withdraw marketing authorisation when a medicine no longer meets the applicable safety or effectiveness requirements.
Similarly, if a drug demonstrably improved patient health, its price could increase. Price increases may also be restricted to a regulated price range and adjusted according to demand. Otherwise, price gouging situations are likely.
A value-based, outcome-based pricing strategy would therefore bring greater transparency and objectivity to an industry that still faces gaps in pricing regulation and evaluation.
What are the benefits of value-based pricing strategies in pharmaceutical healthcare?
Value-based pricing has the potential to benefit patients, healthcare payers and pharmaceutical manufacturers amid constrained healthcare budgets and rising demand for treatment. By linking reimbursement to agreed clinical outcomes, it can encourage more effective treatment decisions and improve the allocation of healthcare spending.
Drug manufacturers will not have the upper hand with value-based pricing because they will share the risks and benefits.
Just as patients pay for the possibility of getting better, pharmaceutical companies, including well-established manufacturers, will face greater incentives to develop effective medications. This is largely because profits are at stake and the opportunity costs of ineffective treatments are higher under value-based pricing systems. However, all parties in the model could benefit from value-based pricing: pharmaceutical companies could increase sales by maintaining effective, high-quality medicines, while patients would gain access to effective, potentially life-saving treatments at prices they can trust. Patients will benefit from more effective treatments and may be more willing to pay for drugs that actually work. Insurers can manage risk by objectively monitoring the profitability and effectiveness of alternative reimbursement models.
See how pricing breaks in practiceWhat Are the Implications of Value-Based Pricing Strategies for Medicare and Medicaid?
Value-based pricing is a significant departure from past and current pricing practices. This is because pharmaceutical companies can set prices with limited regulation, often based primarily on their profitability goals. Regulated and outcome-based pricing models are unfamiliar and may be difficult to implement.
Convincing Medicare and Medicaid to adopt value-based reimbursement arrangements can be challenging, despite growing interest among healthcare payers in alternative pricing models. However, it is unlikely that profitable pharmaceutical companies are lobbying for this type of price change.
Organisations in industries that are less familiar with value-based pricing, including healthcare financial assistance organisations, may benefit from establishing a pricing team.
A well-structured pricing team can help businesses identify margin improvement opportunities, strengthen price management processes and establish more effective pricing governance. Over time, these improvements can support stronger profitability and more sustainable commercial performance.
If properly implemented, value-based pricing could benefit Medicare and Medicaid in several ways. For example, they may be able to provide healthcare at a lower cost while ensuring that treatments remain cost-effective and deliver measurable outcomes.
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Conclusion
Value-based pharmaceutical pricing has the potential to improve patient experiences and treatment outcomes by linking reimbursement to the benefits medicines deliver. It also encourages healthcare payers and manufacturers to consider affordability, clinical effectiveness and patient access when making pricing decisions.
The use of value-based pharmaceutical pricing continues to evolve. Healthcare providers, pharmaceutical companies and policymakers are exploring different ways to connect treatment costs with clinical outcomes, affordability and patient access. There is still a long way to go before the industry widely accepts this approach. However, value-based pricing has the potential to address healthcare challenges in Australia and around the world.
Many new drugs, including gene therapies and other life-changing treatments, are in development for conditions previously thought to be incurable. Having a pricing model that is based on proven results is one way to ensure that sick people who truly need these drugs get them and continue to take them, but only if they are effective.
See whether your pricing is under control
Pharmaceutical Pricing Strategies When Governments Restrict Price Increases
When manufacturing and import costs rise, pharmaceutical companies operating in regulated markets may seek government approval for medicine price increases. These requests aim to help manufacturers recover higher operating costs, maintain production and protect the supply of essential medicines.
However, pharmaceutical manufacturers and governments can have conflicting pricing priorities. While companies seek to recover rising production and import costs, regulators must also protect patients from unaffordable medicine prices. When price adjustments are restricted or delayed, manufacturers face greater pressure to manage costs, protect margins and maintain reliable medicine supplies. What can executives and managers do in this situation?
Pakistan’s 2023 pharmaceutical pricing dispute illustrates the tension between rising production and import costs and the need to keep medicines affordable. In March, the government’s resistance to manufacturers’ requested price increases contributed to shortages of certain essential medicines. On 28 April 2023, the government approved medicine price increases of up to 20%, with essential medicines capped at 14%. The episode demonstrated the importance of balancing industry sustainability, medicine affordability and reliable supply.
At Taylor Wells, we believe that careful planning and consideration of available pricing and commercial options can help businesses survive and even thrive amid rising costs and restrictions on price increases. By the end, you will learn ways to lessen the negative effects of soaring costs by having a flexible pharmaceutical pricing strategy.
Managing Pharmaceutical Pricing Under Regulatory Restrictions
Pharmaceutical manufacturers face pressure from rising labour, raw material, manufacturing and distribution costs. They must manage these expenses while maintaining product quality and reliable supply. In regulated markets, companies may submit price adjustment proposals to government authorities to recover some of these additional costs.
However, governments have often rejected business proposals to increase the prices of goods and services. They do so to protect consumers and keep prices affordable. This is understandable, as governments have a responsibility to ensure that basic necessities remain affordable, supporting social stability and economic prosperity.
When manufacturers cannot recover rising costs through price adjustments, their profit margins may deteriorate. Prolonged financial pressure can limit investment in research and development, restrict operational capacity and threaten the continued supply of medicines. Companies therefore need alternative pricing and cost management strategies to maintain financial sustainability.
Pharmaceutical Pricing Strategies When Price Increases Are Restricted
Pakistan’s 2023 pharmaceutical pricing dispute illustrates the commercial challenges of operating under regulated pricing systems. Manufacturers and importers argued that rising production costs, inflation and currency depreciation made price adjustments necessary. However, policymakers also faced pressure to protect patients from higher medicine prices and maintain access to essential treatments. The dispute contributed to shortages of certain medicines before the government approved increases of up to 20% for general medicines and 14% for essential medicines in April 2023.
When governments reject, delay or limit requested price increases, pharmaceutical companies can explore alternative pricing and commercial strategies to protect margins while maintaining medicine availability. These include redesigning pricing structures, strengthening price governance, improving rebate management, optimising price points, applying strategic customer segmentation and reviewing commercial terms and agreements.
Some companies may also consider investing in new pricing systems that use automation, machine learning and artificial intelligence to improve efficiency. However, technology cannot fix weak pricing foundations. Businesses must first establish sound pricing structures, processes and governance before investing in more advanced systems. The priority is to remain flexible and proactive.
Implications of Flexible Pharmaceutical Pricing and Commercial Strategies
With careful planning, pharmaceutical companies can explore alternative pricing and commercial strategies to protect margins without damaging relationships with regulators, customers or other stakeholders. Investing in expensive pricing systems is not necessarily the answer. Businesses must first understand the underlying causes of their pricing problems.
Boost your company’s commercial capability.
Building commercial capability across the business strengthens internal pricing skills, improves decision-making and creates a more sustainable pricing system. These improvements can help businesses protect margins, retain profitable revenue and identify additional opportunities for growth.
See how pricing breaks in practiceTo strengthen pricing capability, businesses need effective tools, processes and governance. These help teams monitor key performance indicators, make informed decisions and align pricing strategies with commercial objectives.
Companies must also understand customer needs, preferences and budget constraints. Customer segmentation can help identify appropriate pricing options for different market segments while protecting profitability.
Finally, businesses should monitor competitor prices and industry trends. This information supports more informed decisions about price points, discounts and broader pricing strategies.
Build a High-Performance Pricing Team to Strengthen Your Pharmaceutical Pricing Strategy
With the right structure, skills and processes in place, a high-performance pricing team can begin identifying opportunities to improve margins and commercial performance. As pricing capabilities mature, businesses can address more complex opportunities, strengthen governance and capture value that might otherwise go unrealised.
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Bottom Line
Government regulations can limit pharmaceutical companies’ ability to increase prices. However, businesses can still protect profitability through stronger pricing structures, improved commercial governance, effective segmentation and better price management. By exploring alternative pricing strategies and strengthening internal capabilities, companies can manage rising costs, maintain competitiveness and support sustainable operations even when regulators restrict price increases.
For a comprehensive guide to integrating a high-performing pricing team into your company, download a complimentary whitepaper on How to Set Up and Integrate a Pricing Team.
Are you a business in need of help to align your pricing strategy, people and operations to deliver an immediate impact on profit?
If so, please call (+61) 2 9000 1115.
You can also email us at team@taylorwells.com.au if you have any further questions.
