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Delinking Prices: the future of Pharma and MedTech pricing?

Will R&D costs allocated to the device price bring down pharma and medical implant companies?

Will R&D costs allocated to the device price bring down pharma and medical implant companies?

There’s a core contradiction at the heart of most Pharma and MedTech companies: while their mission statements talk about “transforming lives” (Roche), “saving and sustaining lives” (Baxter), “making the world healthier” (Philips), and “contributing to human welfare” (Medtronic), often the very high prices for innovative drugs, devices and therapies limit the number of patients who can benefit. The justification for high prices is often the need to have sufficient funds for R&D. The tension this causes creates political pressures to change the rules for drug and medical device pricing.

What to do?

One idea that has some promise is “delinking” pricing for the R&D from the price of the physical product: payers would pay for the R&D separately from the consumed pill or device.

How would this work?

In the pure form, a manufacturer would agree with a health care payer (government, insurance company, etc.) to provide access to a drug, device or therapy for a potentially unlimited number of patients for a fixed number of years for a fixed amount. You might think of this as Netflix Pricing for Healthcare, or Deutsche Bahn ‘Bahncard 100’, giving unlimited travel on the Germany railway network for a year. For a hybrid version, a ‘per unit’ charge would also apply to cover the manufacturing cost of each unit (with a reasonable margin on top). An analog for this might be Car Sharing, with an annual subscription plus a per-mile fee, or ‘Bahncard 50’, giving 50% off German rail travel for a year.

Let’s try an example, with traditional, fixed payment and hybrid pricing approaches. 

  • In the traditional pricing approach, each pill has a price. In the US this can easily top $50,000 per month for novel cancer therapies, limiting the number of patients who can benefit without breaking the healthcare budget.

  • In pure ‘Netflix’ fixed pricing, the manufacturer might agree to a fixed payment (let’s stay $100 million) for 5 years of access to all the patients in the country that meet certain criteria. 

  • And for ‘car sharing’ hybrid pricing, perhaps the fixed price would be $50 million for 5 years, but with the price per month of treatment dropping to $5,000 to cover the cost of the pill manufacture (often gross margins for new products are very high). 

What are the advantages of Delinked prices?

Why would governments and other payers go for this? For the payer this gives them a much better handle on the costs, eliminating or reducing the risk of a successful product blowing their limited healthcare budget. Crucially it enables them to make the product available to a much larger number of patients. 

But what about the manufacturer? I’d argue this scheme would help them to get back ‘on-side’ with the public about the cost of healthcare (averting more brute-force price controls for example). They’d make strong profits from successful R&D efforts (and can still make great profits from successful blockbuster products), but those products would be much easier to distribute widely at low (or zero) incremental cost.  This delinking would also enable companies to focus on R&D: manufacturing of the actual products could in some cases be spun off to contract manufacturers (think Apple and Foxconn). The need for expensive marketing and sales efforts significantly diminishes. And finally, they would be much closer to living up to their mission statements!

Of course there are substantial barriers and risks: waste can be a problem if the consumable is free or very low price; therapies treating more than one disease will be a challenge (as they are today), and controls over distribution will be needed. And it will only work for products with high R&D costs and low consumable cost.

Delinking in action

The ‘Netflix’ approach is being used in Australia for Hepatitis C treatments from Gilead, AbbVie, Bristol Myers Squibb and Merck: in 2015 they signed a A$1B for a 5 year “all the medicine they can use” contract (Louisiana is negotiating a similar deal). Australia has been able to treat 7x the number of patients that would have otherwise been possible.

Conclusion

I believe this has huge promise for therapies that have high R&D and much lower manufacturing costs, which can benefit relatively large populations. And while there are clearly challenges, these appear much more tractable than those associated with risk-sharing schemes that have been trailed for several years but never seem to take-off. 

Finding a win-win for high pharma and MedTech prices is becoming urgent: delinked pricing seems to offer one attractive option that’s worth exploring.

 

What do you think? What are some of the other benefits and pitfalls? I’ll be reviewing this and all the other elements of great MedTech Pricing and Market Access Training in Frankfurt April 9-10 in the 2nd edition of the European Pricing Platform program. Join us!