Can Value-based Pricing Strategy End Pharmaceutical Healthcare Inequalities? 🏥
It seems that value-based pricing can never run out of upsides as various analysts claim that it can also solve the long-standing inequalities in healthcare systems and improve patient outcomes. Is it possible for healthcare providers to implement a value-based pharmaceutical pricing strategy? If so, how will it affect the medical assistance industry?
The problem is though, majority of pharmaceutical drug prices are unregulated. Usually, manufacturers set prices that are profitable for them. Patients who want to improve their health are left to pay the fee for the chance of improving their health. This is unfair to brands that are not yet well-known, forcing them to price lower than the giants to attract buyers.
However, things will change if drugs are priced based on their value.
Value-based pricing would track the decline or improvement in the health of patients taking the medication. The price adjustment will follow. If executed properly, value-based pricing may be the best mechanism for improving healthcare. How can pricing experts make this happen?
In this series of articles, we will look at how the pharmaceutical and healthcare industries can transition to a value-based culture. First, we’ll go over the most recent policy changes affecting the largest healthcare assistance programmes. Then we explain what value-based pharmaceutical pricing should look like and how to put it in place. We also discuss the advantages that value-based pricing can provide for patients and healthcare providers. Finally, we advise pharmaceutical companies on how to remain profitable when the government prohibits them to increase their prices.
At Taylor Wells, we argue that a value-based approach wherein medication prices are based on 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 the most. By the end, you will learn how value can be maximised in healthcare services.
Table of contents:
The Benefits Of A Value-based Pharmaceutical Healthcare Pricing Strategy
Because of the complexities of the pharmaceutical market, pharmaceutical pricing has always been a contentious issue. Pharmaceutical pricing methods such as cost-plus and competition-based pricing are common but not necessarily the best methods of delivering fair or profitable prices in the pharmaceutical industry. As a consequence, medication prices refer only to what patients pay, not to the value they gain from the treatment. This encourages companies to launch drugs at their own price or to negotiate high prices. It also skews patients’ perspectives of new medicines.
Fortunately, insurance and healthcare assistance organisations subsidise pharmaceutical costs, reduce financial barriers to access, and increase medication use. What’s more, they can now choose a value-based pricing and reimbursement approach that may be superior to other methods. This intermediary / additional layer of intervention addresses some of the inequalities of a broken healthcare system but not all (as we find out later in this article).
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 look at how the idea came to the attention of pricing managers and their teams using the example of Medicare.
Medicare has a medical insurance programme for people over the age of 65, as well as younger disabled people and dialysis patients, and Medicaid, a financial support programme for low-income patients’ healthcare fees.
Medicare and Medicaid both provide limited coverage. That is, assistance is only available for drugs with sufficient clinical trial data for evaluation.
There’s a lot on the line here. As the development of more medicines and life-saving gene therapies continues, the risk that these treatments will never reach those in need arises. This is because Medicaid, Medicare, and other government programmes do not cover costs when manufacturers fail to provide adequate clinical data.
And yet change might be underway for the pharmaceutical healthcare sector.
Recently, the Centers for Medicare and Medicaid Services (CMS) lifted a policy that limited Medicare and Medicaid to setting only one price per drug. This, in turn, enables organisations to establish a price range. Now, they can enter into value-based purchasing agreements for medications, where compensation is linked to outcomes.
Why do we need to talk about the shift to value-based pricing in pharmaceutical healthcare?
Kymriah, a CAR-T therapy for acute lymphoblastic leukaemia, was approved by the FDA in 2017. There was also an announcement of an outcome-based contract with Medicare and Medicaid, under which those organisations would only pay for Kymriah if patients responded to it after a month.
Without revealing why Medicare and Medicaid backed out of the deal. This was a setback for patients who could have been helped.
Nonetheless, we believe that recent policy developments will prompt Medicaid and Medicare to look at alternative reimbursement approaches. The importance of value-based pricing is that it challenges traditional models that charge patients for drugs that might not be effective and instead posits that patients will pay only for medications that work. That is a great goal to strive for and ensure a much more transparent healthcare system.
What does transparent value-based pricing look like in pharmaceutical healthcare?
A good example of a value-based approach that Medicare and Medicaid can use is outcome-based pricing. For example, ICER conducted a preliminary analysis of Aduhelm based on clinical trial data. Adulhem is a medication for patients with Alzheimer’s disease. ICER defined a cost-effective price benchmark range for the drug but its decision was not based on practical evidence beyond clinical trials, as any true value-based pricing contract should be.
The cost-based model differs from outcome-based pharmaceutical pricing and reimbursement models because the latter focuses on the value of the actual healthcare outcome rather than the cost to perform treatments or manufacturing medications.
Instead of allowing pharmaceutical firms to charge whatever high price they believe will maximise profits, the value-based structure binds the price to whether and to what extent the drug benefits patients more than other alternative medicines or treatments, for instance. 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 its patients. Value in this regard relates to: How are the patients responding? Is the drug effective or ineffective? How long has the drug been in the testing phase? How big is the sample size? Is the sample size a cross sample or have patients been deselected because their health would skew the results of the drug trial?
Following consideration of these factors, a regulating committee recommends a price. On the occasion that the pharmaceutical company does not agree, the drug is either not approved or approved with market limitations. If they do agree, what happens?
Value in healthcare is complex. However, value-based pricing has the ability to unlock value to drive objectivity in clinical trials and better healthcare options.
For instance, value evaluation guidelines are now the important foundation for policymaking, assisting in the development of more intelligent pricing. Saying this, however, there are some prerequisites before value-based pricing in pharmaceutical healthcare can happen. Namely, pharmaceutical firms will have to justify their pricing and back it up with real, proven evidence.
Currently, drug companies do not need to prove evidence for their pricing. They can set their own prices. The idea of evidence and regulation is a point of contention delaying the full application and use of value-based pricing in the pharmaceutical industry.
If healthcare providers did use value-based pricing, the pricing process would be very different: Drug companies would have to justify all price increases based on proven, observable, and actual patient health improvements. For example, even if the production costs are high, if the drug is ineffective, the price will be reduced or the drug will no longer be allowed on the market.
Similarly, if a drug effectively improved patient health, its price would rise. Price increases may also be restricted to a specific and regulated price bandwidth and demand level. Otherwise, price gouging situations are likely.
A value-based and outcome-based pricing strategy therefore would provide much more transparency and objectivity to pricing in an industry largely removed from regulation and evaluation.
What are the benefits of value-based pricing strategies in pharmaceutical healthcare?
Value-based pricing has real potential to provide value to patients, insurers, and drug manufacturers amid stagnant healthcare budgets and rising demand for care. It will simplify the healthcare process by reinforcing appropriate care and lowering transaction costs.
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 to get better, even those already well-known pharmaceutical companies will also be more obligated to develop effective medications as they are now incentivised to do so. Largely, this is because profits are at stake and opportunity costs are higher with value based pricing systems. Saying this, however, all parties in the model could benefit from value-based pricing: Pharmaceutical companies could benefit from increased sales by maintaining high-quality drugs and patients would get life-saving treatments that work at a price they can trust. Patients will benefit from more effective treatments and have a greater propensity to pay for drug that actually work. Insurers can manage risk by objectively monitoring the profitability and effectiveness of alternative reinbursement models.
What are the implications of value-based pricing strategies to Medicare and Medicaid?
Value-based pricing is a significant departure from past and current pricing practices. This is because pharmaceutical companies can set their prices mainly unregulated, primarily based on their profitability goals. Regulated and outcome-based pricing is unfamiliar and may be uncomfortable to initiate.
Convincing Medicare and Medicaid to buy into a game-changing value-based pricing medical model will be challenging. Yes, there are more agencies keen to pursue new value-based agreements. However, it is unlikely that profitable pharmaceutical companies are lobbying for this type of price change.
Industries that are not yet very familiar with the use of value-based pricing like these healthcare financial assistance organisations may benefit from having a pricing team. Our findings show that with the right set-up and pricing team in place, incremental earnings gains can begin to occur in less than 12 weeks.
After 6 months, the team can capture at least 1.0-2.25% more margin using better price management processes. After 9-12 months, businesses often generate between 3-7% additional margin each year as they identify more complex and previously unrealised opportunities, efficiencies, and risks.
If properly implemented, value-based pricing will benefit Medicare and Medicaid in a variety of ways. For example, they will be able to provide health care at a lower cost. While also ensuring the cost-effectiveness and outcomes of treatments.
The medical healthcare pricing model has the opportunity to transform with customers and improve lives. Value based pricing in healthcare puts the spotlight back on the patient. It posits that every patient requires a balance between prices and the value provided.
The proposition and implementation of value based pricing is still in its infancy. Pricing experts continue to test, learn and apply new learnings. There’s a long way to go before industry acceptance. But many can see that value-based pricing has the potential to solve healthcare issues. Not only in Australia but around the world.
Many new drugs are under production – including gene therapies and other life-changing treatments – 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.
Pharmaceutical Pricing Strategy When The Government Prohibits Price Increases
As the costs of manufacturing and importing pharmaceutical products rise, many large companies are passing price increase proposals to the government. This pharmaceutical pricing increase strategy serves as a lifeline for many businesses, providing them with a means of offsetting rising costs and continuing their operations.
The problem is though, businesses often have opposing viewpoints compared to governments regarding pricing, which can lead to disagreements. Despite constant requests, many large corporations are prohibited by regulatory bodies and officials from raising their prices. This places a significant burden on businesses that are not very flexible and adaptive in terms of profit and revenue generation. What can executives and managers do in this situation?
In this article, we are going to discuss a case study on a pricing dispute between the Pakistani government and the country’s pharmaceutical industry. We explore the difficulties faced by pharmaceutical manufacturers and importers as costs rise and the government forbids them from raising prices. We argue that the pharmaceutical industry, along with other sectors, can still navigate rising costs and remain profitable even if they are not permitted to increase prices.
At Taylor Wells, we believe that careful planning and thoughtful consideration of all available pricing and commercial options will allow businesses to survive and even thrive amid rising costs and the absence of price increases. By the end, you will learn ways to lessen the negative effects of soaring costs by having a flexible pharmaceutical pricing strategy.
Pharmaceutical Industry Pricing Strategy During Regulatory Price Increase Prohibition
Pharmaceutical businesses today are facing mounting pressure due to rising costs. From labour and materials to overhead expenses, businesses must find ways to keep their costs in check while maintaining the highest quality of service possible. Several companies are passing price increase proposals to governments, which can then be used to help cushion the impact of any financial headwinds.
However, there have been numerous instances when the government rejects proposals from businesses to increase the prices of goods and services. They do this believing that it will protect the interests of consumers and ensure that prices remain affordable for all. This is understandable as it is the government’s duty to provide an environment where basic necessities are available at reasonable costs, so as to maintain social stability and economic prosperity.
The bad news is that without an increase in price to cover these extra costs, businesses are threatened by the probability of a decrease in their profit margins which can eventually lead to losses. When managers can’t find ways to adjust their pharmaceutical pricing strategy, it could result in layoffs. Additionally, without the ability to raise prices, businesses may be unable to invest in research and development or pursue other opportunities that could serve as a source of growth. This sometimes results in bankruptcy and business closure.
Discussion On Pharmaceutical Industry Strategies When Price Increase Is Not Allowed
A pricing conflict between the pharmaceutical industry and Pakistan’s Ministry of Health has recently made headlines. Because of the dispute, essential medicines are in short supply, pushing patients to rely on smuggled and possibly counterfeit drugs at significant expense. What is the appropriate pharmaceutical pricing strategy when this happens?
According to medicine manufacturers and importers, an inflationary price adjustment of 38% is a must because pharmaceutical companies are on the brink of financial ruin due to soaring cost inflation and massive local currency devaluation in recent years. They also assert that if governments do not comply with the manufacturers’ demands, pharmaceutical companies will be forced to cease operations.
The government disagrees with this, believing that while profits are down, the industry is still in good enough shape to function. Likewise, a national group of health professionals is also opposed to raising prices. Instead of raising prices, they proposed that the government and the pharmaceutical industry share the burden of inflation and currency depreciation.
When the government rejects a demand for a price increase, like in this case study in Pakistan, businesses can look into other pharmaceutical pricing strategies to maximize margins. Things like: building strategic price structure, improving internal price governance, tighter control of rebates, strategic price optimisation, strategic / nested segmentation, and updating commercial terms and customer agreements to name but a few alternatives.
We also see some companies looking to invest in a new price system. Using digital solutions such as automation, machine learning, and artificial intelligence to run more efficiently and cost-effectively. But this is not necessarily the best way to go if the foundations (how you price & why you price like that) are unsound. Ultimately, then, it is important to remain flexible and proactive.
Implications Of Flexible Pharmaceutical Pricing And Marketing Strategies
With careful planning and thoughtful consideration of all available pharmaceutical pricing strategy and commercial options, businesses can manage their financial situation and maximise margins without disrupting governments, or customers or experiencing revenue or volume loss. The truth is that often buying fancy systems is not the answer to your pricing problems.
Boost your company’s commercial capability.
Our findings show that when a business builds and embeds commercial capability across the business; bolstering its internal pricing skills and capabilities to build a sustainable pricing system, it can generate at least 3-10% additional margin each year while protecting hard-earned revenue and volume. This is at least a 30-60% profit improvement straight to the bottom line.
To boost pricing capability, businesses must have effective tools and processes in place. These will not only help them to track key performance indicators and make better decisions but also ensure that their pricing strategy is in line with their overall objectives.
An important part of this process is to develop an accurate understanding of customer needs, preferences and budget constraints. This will enable businesses to identify the most suitable pricing options for their products and services. Additionally, customer segmentation can help devise pricing strategies for different target markets and customers.
Businesses also need to remain up-to-date with market conditions by tracking competitor prices and analysing industry trends. This information can help inform decisions around setting price points and discounts, as well as the overall pricing strategy.
Build a high-performance pricing team to oversee your pharmaceutical pricing strategy development.
Our findings show that with the right set-up and pricing team in place, incremental earnings gains can begin to occur in less than 12 weeks. After 6 months, the team can capture at least 1.0-3.25% more margin using better price management processes. After 9-12 months, businesses often generate between 7-11% additional margin each year as they identify more complex and previously unrealised opportunities, efficiencies, and risks.
Oftentimes, governmental and regulatory entities prohibit particular levels of price increases. The good news is that it is possible to weather the current business and economic crisis without raising prices. Businesses should always strive to be flexible and open-minded in their pharmaceutical pricing strategy. By exploring alternative pricing options, companies can increase their potential customer base and expand their sales opportunities. This will help them survive rising costs and continue operations when the government does not allow price increases.
For a comprehensive view on integrating a high-performing pricing team in your company,
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 email@example.com if you have any further questions.
Make your pricing world-class!
- marketing strategy (15)
- Organisational Design (13)
- Podcast (114)
- Pricing Capability (60)
- Pricing Career Advice (10)
- Pricing Recruitment (15)
- Pricing Strategy (184)
- Pricing Team Skills (10)
- Pricing Teams & Culture (15)
- Pricing Transformation (18)
- Revenue Model (8)
- Sales Effectiveness (15)
- Talent Management (5)
- Technical Pricing Skills (28)