Defining a Medicines’ Value versus its Price

When it comes to determining value, the U.S. health care system faces unique challenges. Without a better approach, the twin goals of continued innovation and broad-based drug affordability will be difficult, if not impossible, to maintain.

Value assessment models are quickly becoming the approach du jour to overcome these challenges. However, value assessment models suffer from several flaws, but perhaps most importantly, as applied, these models assume that there is one number that accurately portrays the value of a medicine to all patients.

Such an assumption rarely holds in practice. Take a product as simple as a cup of joe.

There is not just one price for coffee. It could cost $1.50 at a convenience store, but three times as much at a premium coffeehouse. For some people, the value created by a premium coffee is worth the price and there is definitely a buoyant market for premium coffee as we have seen by the growing number of new shops. For others, the price at a convenience store better reflects how much they value the product, and there is a market for less expensive coffee too. Ultimately, coffee’s value is reflected in the array of prices and attributes that millions of coffee lovers choose between every day.

Now imagine trying to determine the value of a cup of coffee if after ordering it took up to $2.9 billion and 10 to 15 years to produce your first cup. And, what if it was unknown whether after 15 years the brew would be successful or simply a cup of brown sludge. Given this time and uncertainty, the value of actually receiving a cup of coffee would be even greater, and the price of coffee much higher. While unrealistic with respect to coffee, these are fundamental considerations for determining the value of new medicines. From a value perspective, these are the “supply-side” considerations.

The “demand-side”, or patient considerations, are equally important. Fundamental to the considerations for patients are the medicines’ efficacy, safety, side effects, cost, and convenience.

Ineffective U.S. supply chains and payment models hamper the balancing act between manufacturers and patients, making it very difficult for a medicine’s value to be accurately determined.

Value assessment models are an attempt to circumvent the problems created by these obstacles and determine a drug’s value by decree. The leading proponent of value assessment models in the U.S. is the Institute for Clinical and Economic Review (ICER), a private non-profit organization.

Unfortunately, ICER’s methodology reflects the flawed belief that a centralized organization can determine the value of medicines for tens of millions of individual patients. Without fundamental reforms, ICER’s approach will ultimately threaten patients access to innovative, life-saving medicines.

There are several problems with ICER’s approach. ICER analyses are based on a “population perspective”, which is designed to support “population-level decisions”. This means the evidence on value are based on broad averages that, by definition, will be inapplicable to large numbers of individual patients whose particular circumstances vary (perhaps substantially) from these population averages. More fundamentally, the value of any medicine cannot be determined without accounting for the needs of individual patients that ICER’s population perspective is incapable of incorporating.

Worsening this problem, while ICER’s reports discuss qualitative benefits from medicines (such as reduced pain or less absenteeism from work or school), the analyses do not incorporate these considerations into their quantitative calculations. These quantitative calculations are the oft-cited conclusions used to justify whether a medicine’s price reflects its value. Since ICER calculations don’t include the qualitative considerations that are essential in determining a medicine’s value to patients, the assessments underestimate the value of medicines by definition.

The value assessment methodology fails to account for key supply-side considerations as well. ICER’s value assessment framework fails to account for the full risk-adjusted cost of capital that is required to develop a new medicine, which must include the costs of failure. Nor are the implications of personalized medicines and orphan drugs that treat rare diseases fully considered. These medicines can provide higher value to individual patients but will, by definition, be applicable to a small number of patients.

Several groups are attempting to address these methodological flaws with value assessment models. For instance, the Patient-Driven Values in Healthcare Evaluation (PAVE) at the University of Maryland and the Center for the Evaluation of Value and Risk in Health (CEVR) at Tufts Medical Center are both attempting to incorporate qualitative metrics directly into the value assessment models. The Innovation and Value Initiative (IVI) is taking these considerations a step further by attempting to create an interactive model whose goal is to create an interactive “learning system”.

IVI’s learning system is particularly promising given the flaws that are currently obstructing the value discovery process. A flexible interactive system that empowers multiple perspectives (e.g. patients, providers, payers, and manufacturers) and can account for both individual and qualitative considerations can be a valuable tool that addresses some of the flaws inherent in the value assessment frameworks.

Ultimately, the value of a medicine can only be discovered through an interactive process that connects the costs facing innovative manufacturers with the benefits provided to patients. Policy reforms that remove these obstacles are, consequently, necessary.

Since the necessary policy reforms are unlikely to be implemented anytime soon, it is imperative to correct the most egregious flaws that plague value assessment models. Without such fixes, value assessment models threaten to become a fancy means for imposing uneconomical price controls on medicines and jeopardize future innovation and cures for patients.

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Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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