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Maximize Value February 16, 2017

Striking a Balance Between Drug Costs and Best Care

Partner, Health & Life Sciences, Oliver Wyman
Senior Consultant, Oliver Wyman

In late-January, President Trump met with pharmaceutical industry leaders at the White House. The meeting demonstrated both that the administration hopes to cultivate a relationship with drug makers and that controlling drug prices is a priority for the president. 

Several drug makers, insurers, and pharmacy benefits managers have already started to promote value-based pricing as a price-control strategy. Now it seems provider organizations are moving in the same direction. The American Medical Association (AMA) adopted a policy calling for greater collaboration between drug companies and insurers and increased use of direct-purchase agreements. The AMA stated that such collaborations could result in drug companies lowering or stabilizing the cost of generics in exchange for guaranteed market share from Medicare/Medicaid. 

It remains to be seen, though, if such collaborations will lead to prices defining “best care” or whether such a strategy will improve the overall value of patient care. Here, we examine the potential impact and uncertainties of direct-purchase agreements. 

The market impact of direct-purchase agreements

Direct-purchase agreements with guaranteed-use provisions would secure markets for drug companies based on the drug price they offer. As a result, going forward we may see two dynamics shaping the market: Companies vying for market share via new innovation (secured by patents and other means), and those vying for market-share guarantees via purchase agreements. 

In this new value-based environment, governing organizations (government or industry associations) and commercial entities will need to align on:

  1. What encompasses “care”
  2. What constitutes a higher level of that care
  3. Associated success metrics   

One such success metric will likely be consumers’ ability to afford the care, but if participating organizations do not first establish a shared definition of value, the metric may produce only short-term, financial results. 

Questions for drug makers to consider in regards to direct purchasing

The questions drug makers should consider going forward include: 

Value definition:

  • Without an agreed-to form of value measurement, how can the financing of R&D, design of trials, measurement of results and the pricing and positioning of drugs be accomplished?
  • Will direct-purchase agreements drive good short-term decision making but poor long-term decision making, and will it truly maximize savings?
     

Implementation of purchase agreements:

  • How, and to what extent, might direct-purchase agreements be implemented?  And to what extent is the drive for value in healthcare dependent on price?
  • How might drug makers need to change their view of targets, trial design, and R&D investment, given a new incentive system that incorporates direct-purchase agreements?
  • Are other commercial organizations (rather than Medicare and Medicaid) likely to pursue similar agreements?
  • How would commercial insurers determine if a drug is truly cost efficient?  A reduction in cost of the drug is easy to identify, but it may be harder to quantify other criteria, such as the overall health benefits.

Going forward

Such agreements create a new issue for consideration in the healthcare 2.0 ecosystem.  Financing, research, development, and innovation will always be important in pharmaceuticals, but we’re now entering a stage in the industry’s development where cost cutting looks like the immediate priority. Direct-purchase agreements are a manifestation of how to achieve lower prices for consumers in a manner that is attractive to drug makers. 

Whether the “certainty” of price and market share will encourage certain forms of financing, such as royalties, remains to be seen. And it is not yet clear whether a move in this direction will impact patient-care decisions for the better or simply focus on low cost at the expense of a clear understanding of what creates value. 

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