Value-Based Pricing of New Technologies

What is value-based pricing?

Value-based pricing aims to reward pharmaceutical companies and medical device companies for investments in new healthcare technologies that result in sustained improvements in patient quality of life. We also expect such technologies to deliver measurable net economic benefits for society.

In economic theory, value-based pricing is when a buyer’s willingness to pay for a product (or service) matches what the buyer pays. For example, a buyer that is willing to purchase a mug of coffee for $3.50 purchases it for $3.50. It means the price of the mug of coffee matches the buyer’s valuation of the mug of coffee.

A buyer’s willingness to pay depends on income levels (affordability) but it also depends on the perceived value of the product (service) and whether the buyer can estimate its value. In this article, we’re interested in the latter – better approaches to estimate the value of new healthcare technologies.

We have more data generated through scientific methods in healthcare markets to facilitate a value-based pricing approach than, for instance, the dominance of perceived value in mobile phone markets. Value-based pricing works if it adheres to rigorous standards and is independent of institutional conflict of interest.

Figure 1: Value-Based Pricing of New Technologies

Why is value-based pricing important?

Health insurance companies and governments use financial and administrative barriers to manage the use of new technologies. Cost-sharing (coinsurance or copayments), prior authorization, clinical panel reviews, therapeutic reference pricing, and new technology appraisals manage the incremental uptake of new technologies.

New healthcare technologies are funded through employer and employee premium contributions or financed through government tenders or national health insurance systems. Patients can sometimes access new technologies when all other treatment options have proven unsuccessful. This depends on the strength of the health financing system and the price of the new healthcare technology.

High prices incentivize the research and development of new healthcare technologies. However, the list prices of some new technologies are unaffordable for health financing systems undergoing rapid change.

For example, the Department of Health in Abu Dhabi introduced a reference reimbursement pricing system and mandated the dispensing of generic medicines for patients with health insurance. In South Africa, the National Department of Health plans introducing a national health insurance system that will remodel the health financing system.

A value-based pricing approach determines the value status of a new healthcare technology. If the current list price is an overvaluation of the new healthcare technology then the price should decrease, or if undervalued then the price should increase. Value-based pricing is a critical price-finding mechanism in healthcare markets.

Understanding value-based pricing and the WHO’s “serious reservations”

The first World Health Organization Fair Pricing Forum met to discuss improvements to medicine pricing practices. They established the Forum to:

  • facilitate the exchange of insights on fairer medicine pricing systems,
  • identification of research gaps to support improvements, and
  • explore the intended and unintended results of the current pricing system.

Press coverage on the first Forum included remarks by World Health Organization assistant director-general, explored further below. They were: “So-called value-based pricing has become a mantra for much of the industry, but Kieny said she had “serious reservations” about a system that essentially puts a value on a life and then allows a drug to be priced up to that level.”

However, the assistant DG’s comments appear to conflict with recommendations made by the same organisation. The World Health Organization project on Choosing Interventions that are Cost-Effective (WHO-CHOICE)  recommends that willingness to pay thresholds be based on national income per person (Gross Domestic Product per Capita). That is, it links the willingness to pay for a healthcare technology to the average economic productivity of a person in a country.

For example, the average annual GDP per person in Kenya is USD 1,710.50 (2018), meaning each person contributes this amount in economic value to the economy. It includes children, the poor and the most productive in the “per capita” calculation. Under health technology assessment guidelines, for equity purposes, all people in a country are treated fairly and impartially.

The WHO-CHOICE project recommends that a technology is cost-effective if the cost per DALY avoided is less than three times the annual GDP per capita. World Health Organization Member States (those in low and middle-income countries) use the WHO-CHOICE recommendation to guide pharmaceutical policies on new healthcare technologies.

Figure 2: Value-Based Pricing of New Technologies

Returning to the Kenya example above, the World Health Organization recommended willingness to pay threshold in Kenya would be USD 5131.50. They consider a new medicine at a cost per DALY less than this threshold as cost-effective. The World Health Organization approach puts a value on a life. It recommends that a medicine is good value for money when the cost per DALY avoided is lower than three times the average annual income level of a person in a country.

A medicine priced to capture the full productivity of a person leaves no surplus income for the economy. For example, a medicine priced at USD 1,710.50 per annum in Kenya is equal to a person’s GDP. This leaves no surplus income for other economic activities, e.g.: infrastructure investments, education subsidies, etc. Many pharmaceutical markets (and national economies) are unlikely to sustain “full pricing” of new health technologies if they extract the entire economic productivity of a person.

Although standard economic theory links value-based pricing to the willingness to pay of a buyer, evidence to inform such pricing strategies are often challenging to generate. Differences in disease areas, market structure, and national income levels would make a single, globally applicable value-based price approach indefensible. Such differences may lead to differential pricing strategies responsive to varying GDP per capita levels, an approach already pursued by some global pharmaceutical companies.

A better approach to make valued-based pricing work

Our work in this area links value-based pricing to the cost-effectiveness ratio. It also addresses the limitations of the WHO-CHOICE approach of thresholds based on GDP per capita, and medicine pricing mechanisms based solely on willingness to pay. The aim is to strengthen pharmaceutical markets by delivering value for money in new healthcare technologies and rewarding market participants.

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