The Overlooked Element of Value in Drug Pricing Strategy

March 2016

By David Friend, MD, MBA, The BDO Center for Healthcare Excellence & Innovation

The drug pricing media hype has opened a new window into the many factors behind current pricing strategy, including competition, the cost of research and development, and the bottom line. But one key factor has not received the attention it merits: value. As healthcare reimbursements trend toward value-based payments, value is one piece of the puzzle that could make or break drug companies and will surely alter the playing field for healthcare stakeholders – including providers.

How will drug pricing impact healthcare providers?

Hospitals are slowly but surely being asked to curate a cost-sensitive supply chain and function as a coordinator of suppliers. The recent move toward bundled payments (see article, “How Bundled Payments Will Redefine Value in Healthcare: A Primer for Investors”) tasks hospitals with bringing together providers and vendors to ensure the aggregate costs of all of the services required throughout an episode of care—the surgery, the physician, the drugs, the appliances and equipment, and the care outside of the hospital—remain within the bundle price.

Pharmaceuticals play a big part of this picture-—and their part will grow as highly drug-dependent oncology and cardiac bundles are developed. Pharmaceutical companies will need to identify their value proposition and price their products carefully according to value and outcomes to justify their place in the picture. Hospitals will have little reason to prescribe an expensive drug that doesn’t work as often or as well as a competitor drug, and they may think twice about an ineffective drug that seems inexpensive but results in a higher readmission rate.

How can a hospital assess a drug’s value?

Value is determined by a variety of stakeholders—consumers, institutions that manage and produce care, drug manufacturers, and investors. And their points of view are constantly evolving: There’s no scale that says what’s best or what’s value, which offers considerable opportunity for both drug developers and care providers to define and measure it.

One factor in determining a drug’s overall value – and one that has not yet been broadly factored into a drug’s price—is the “number needed to treat,” or the number of patients who must receive a drug before it’s deemed effective in a single patient. If the number needed to treat is 100, then one patient benefits from its use while 99 might receive and pay for treatment without the desired outcome—and they may suffer side effects. The potential risk of non-treatment may in some cases justify a high number to treat, but such factors have not been factored into a drug’s price until now, when they are getting new attention with the rise of pay-for-performance.

To extend the concept further, hospitals should look at outcomes and how well a drug prevents the need for future care, not only in the short term, but over a lifetime. Take the recent discussion around hepatitis medications: While one drug is very expensive—up to $100,000—it is also considered a cure for a disease that could otherwise require millions of dollars in medical care over the course of the patient’s lifetime. One could argue that the net present value for that investment is very significant. That’s one component of value.

Of course, there’s also the factor of convenience, just as we see in consumer products. If a patient uses the least expensive drug but must take it five times a day, that drug may not be very appealing to the healthcare provider that must administer it. A somewhat more expensive drug that is administered once a day may ultimately have more value for the patient or the hospital. The tradeoffs depend on the hospital bringing the supply chain together and what it considers valuable. The largest providers, for example, may find that it’s too expensive to deal with readmissions or litigation and unhappy patients—which means that even if the second-best drug is offered at a steep discount, that still may not be good enough to avoid being excluded.

How can a hospital look back to determine whether value was achieved?

A drug’s value is difficult to forecast. To get a clear depiction of value, hospitals can look backward at readmission rates to assess how often a drug failed and whether it cost the provider more money to continue to treat the patient.

It’s also important for hospitals to compare the claims about a drug’s performance with the outcomes to verify that the predicted outcomes did in fact happen, especially as payment becomes explicitly linked to the clinical reported outcome. The need will increase for someone in organizations to verify that the clinical data is true and being accurately measured, and that the connections between drug, outcome and cost are being made.

Over the next 10 years, we believe that somewhere in the neighborhood of $10 trillion of value is going to be
created in healthcare, and about $4 trillion is going to be destroyed. The pricing and reimbursement landscape is front and center in this changing landscape, so it’s incumbent upon providers, suppliers and anyone with a financial interest in healthcare to understand these changes in order to adapt.

Dr. David Friend, MD, MBA, is a Managing Director and Chief Transformation Executive for The BDO Center for Healthcare Excellence & Innovation. He can be reached at

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