Indication-specific drug pricing: How and why to implement it?
Until ten years ago, if you developed wet age-related macular degeneration (AMD), there were not many doctors could do. Then somebody realized that this disease had something in common with cancers (the growth of new blood vessels, whether in the retina or tumor cells) and used a colon cancer drug that attacks these new blood vessels in tumors. It came out that this drug has the same effect on AMD and the vision of many patients significantly improved, a completely impossible result before this therapy. This is a quite spectacular example, given the distance between tumors and AMD, but many other drugs may be used in different indications (i.e. diseases).
Drugs approved for multiple indications already represent more than 50% of the major oncological drugs in 2014 and are estimated to become 75% by 2020. However, the same drug can have a very different efficacy in each of these diseases. An oncological drug can be excellent against melanoma, but just as effective as chemotherapy in lung cancer. In general, a different clinical efficacy could be observed depending on the indication and the patient subpopulation.
Pricing in muti-indication drugs
Therefore, how can we estimate the value of the drug and the price the laboratory is entitled to charge? The current pricing systems typically assign a unique price independently of the indication, therefore price and clinical value do not necessarily align.
The standard problem when a unique price is assigned to a drug with multiple indications is that the price will be typically based on the value of the first approved indication, while subsequent indications trigger price decreases depending on the size of the population covered –not on the value in each of the subsequent indications. This looks like the natural life cycle of a drug: the more I allow you to sell, the more I want a discount. The very familiar concept in business, but in the health sector, it has some drawbacks.
First, the price signaling (a higher price where there is a higher need for drugs and R&D) is distorted, as price level will depend on the first considered indication, not on the benefits the drug generates in each indication.
Second, the laboratory may find it unprofitable to ask for new indications, although the drug would be better than its current comparators in those, due to the discount that will be demanded all the treated population.
Indication-specific pricing, instead, aligns pricing and value and generates pricing flexibility across indications that reduce the laboratories’ concerns over a generalized discount. This means more choice for doctors and more possibilities of cure for the patients.
Drugs Pricing: The experience in other countries
Italy, Switzerland, the UK and Australia have recently used, at different degrees, indication-specific pricing. There are two main ways of reflecting indication-specific value in prices.
The first one consists of a blended price depending on the value and the number of patients in each indication. It is a simple weighted price, where the value in each indication is weighted by the expected population to treat in each indication, and it is the easiest approach, as it does not involve audit costs. This is the approach used in Australia. It has the benefits of indication-specific pricing, as it incentivizes laboratories to research for drugs in indications where they are needed the most and to ask for new indications where the drug generates a higher value without the fear of a generalized discount.
The second way consists of actually paying a price depending on the indication. This comes with an audit costs, in order to check that the hospital actually uses the drug for the indication it is claiming. This is the approach used in Switzerland and Italy. In Italy, the drug regulator (AIFA) has created national registries of oncological and hematological drugs with variables such as indication, patient characteristics, doses, duration, and clinical results. This allows encompassing payments that depend on the result in every single patient, further than reflecting indication-specific value in prices.
The implementation of indication-specific pricing is not necessarily at the national level, it can be done at the regional or hospital level. Regions have a main role in the Italian health sector, like in Spain, and more and more laboratories are starting to be interested in indication-specific pricing in Spain. Roche, for example, created a system to manage indication-specific pricing and gave it to Autonomous Communities. There is a rising interest towards indication-specific pricing, also on the public payers’ side, and the feeling is that this is just the beginning.
Post by Anton-Giulio Manganelli, Pricing professor at EADA Business School.