A value-based or a fair price?

Is “value-based pricing” a fair pricing approach?

The quick answer is “mostly No!”

WHY?

Before we answer this, we need to define "fairness.” for whom??

• For the payer (the population)?
• Or for the manufacturer?

Now lets' look at both sides

• ?First, the concept of “value-based pricing” is focused only on the consumer (the public payer or the population) who will benefit from this “value”, so -by definition- the interests of the manufacturer are not considered in this approach.
• Second, this approach is not “fair” even for the payer/ population according to “Mike Paulden” the author of the paper “A Framework for the Fair Pricing of Medicines” which is the leading article in the January, 2024 issue of the PharmacoEconomics Journal.

In this article, I will try to shed some light on the main ideas discussed in his paper that tries to answer the following questions:

• What is a good price from the perspective of the consumer (payer or the population)?
• What is a good price from the perspective of the manufacturer?
• How can we agree on a price that is good enough for both sides (fair price)?

If this sounds interesting to you, I hope you enjoy this reading.

The Win-Win Situation and The “Total Welfare” In Economics?

The main idea in this framework is based on a fundamental concept in economics: the "total welfare" that should result from producing and purchasing any good.

?Total welfare is the total extra benefit or happiness enjoyed by producers and consumers who feel they got a good price for the product being exchanged

• ?For consumers, this additional benefit comes from paying less than they were willing to pay. This additional benefit for the consumer is referred to as the "Consumer Surplus".
• For producers, this additional benefit comes from receiving more than they were willing to accept. This additional benefit for the producer is referred to as the "Producer Surplus".

Let’ Talk a Bit About The Consumer.

We need to first agree that when we refer to the consumer, we mean the public payer, who is responsible for providing medicine to the entire population of a society. In other words, the consumer is?"the total population" or "the society".

For the consumer, the situation is quite simple. If you are familiar with the concept of a "cost-effectiveness threshold," you may be aware that there are two definitions?for the thresholds with?two approaches for estimating it. In this article we are mainly concerned with one of these definitions, that represents the opportunity cost.

?

In simple words, the threshold tells us, currently how much (on average) do we pay to gain one unit of health (one QALY)?

For example, if we pay $ 50,000 per one QALY, then it is irrational to purchase a drug the gives us a QALY with a cost of $100,000.

WHY?

Because if we did so it means for every new QALY we get by the new treatment we are losing 2 QALYs elsewhere in the health care system. Therefore, we are reducing the overall population health.

?From now on this cost-effectiveness threshold that is based on the health opportunity cost will be referred to as (K).

Based On This, What Can Be a Good Price For The Consumer?

As previously stated,?in economics, selling and purchasing goods should result in consumer and producer surplus. For the consumer, it represents the additional benefit of paying less than what they were willing to pay.

According to the definition of "k," the price of any drug should be less than "K" so that the health gain by?the new drug outweigh the health losses suffered by other patients in the healthcare system.

As a result, the overall population health is increasing, and we are achieving a positive "consumer surplus."

Note: in value-based pricing drugs are priced to “K” which means health gains equals health loss and the consumer surplus is ZERO. (Although this may change later after patent expiry).

What About The Producer?

When looking from the producer's perspective, one major difference is that the acceptable price is not linked to the price of a unit health (QALY), but rather to the price of the product.

The minimum acceptable price for producers should cover two costs:

• Manufacturing costs
• Research and development costs

Therefore, any price that exceeds these costs generates additional benefit or profit for the producer. In other words, will result in "producer surplus".

Using a Unified Unit for Both Parties

As previously stated, an acceptable price for the consumer is defined as the price per QALY, whereas for the producer it is the price per pack.

?To standardise price expression, we must first determine the price per QALY (ICER) that corresponds to the producer's minimum acceptable price per pack:

?The author called this value:

" The Reserve ICER"

Now, what do you think can be a good price for both the consumer and producer??

Exactly, it is the price below the threshold below (k) and above (The reserve ICER).

Why Isn't this applicable in practice?

?Though it appears simple to negotiate a fair price that benefits both parties. This is not really applicable because of three major challenges:

• Unlike (k), the reserve ICER is not known to both parties, but it is kept confidential by the pharmaceutical company.
• Different drugs may have different reserve ICERs based on their manufacturing and R&D costs.
• For some drugs, the threshold (k) may be very close to (or even equal to) the reserve ICER. This means there is no reasonable price that benefits both the consumer and the producer.

What Is?The Proposed Solution in Paulden’s Article?

The author proposed a common?price for all medications. In other words, all medications from all?manufacturers will have the same price per unit of health (per QALY).

This common price should of course be smaller than the cost-effectiveness threshold (K).

-For the consumer:

• Any drug priced below (K) will result in a total increase in population health, and thus result in "consumer surplus".

?-For the producer (manufacturer):

We will assume that the manufacturer has several products. These products should?match?one of three possible?scenarios:

• Products with reserve ICERs below the “common price”, these products will be priced above the minimum acceptable price resulting in extra benefit i.e. “producer surplus.”?
• Products with reserve ICERs almost the same as the “common price”, these products will be priced with their minimum acceptable price resulting in small or no “producer surplus” But at least won’t cause any loss.
• Products with reserve ICERs that exceed the “common price” will not be supplied. Because supplying them will result in a negative “producer surplus”.

?Overall, the supplied medications will result in both “consumer surplus” and “producer surplus”, and everyone should be satisfied .

At any ‘fair’ common price, there will generally be some medicines with low reserve ICERs for which the manufacturer receives substantial profits, and others with higher reserve ICERs for which most of the economic surplus for that medicine is allocated to patients.

The Author Also Addressed …

…. a number of other critical issues that were raised as potential topics for future research and discussion. These included (but were not limited to):

• The impact of lowering drug prices over the product's life cycle (after patent expiration and generics introduction).
• Differential benefits of a drug across indications and among patient subgroups.

An Excellent Framework, But..

Although the proposed framework makes a lot of sense, there are a few limitations that hinder its use in practice.

?Some of them are already addressed by the author in his paper (others are?personal comments). However, the author didn't suggest practical?solutions to the one mentioned in his paper.?

?These challenges include:

• Since the information regarding the manufacturing and R&D costs are assumed to be confidential for manufacturers. How can both parties agree upon a certain “common price”??
• Even if a specific common price was chosen, the manufacturer may claim that a specific medication has a reserve ICER that exceeds the common price and thus cannot be supplied. This claim may be false, and it could simply be used as a means of negotiation to raise the "common price".?
• This common price may indirectly encourage manufacturers to develop medications with low reserve ICERs (have lower R&D and manufacturing costs). This can discourage innovation in high-tech medications.?
• Not supplying a drug with a "reserve ICER" above the "common price" does not imply no loss for the manufacturer because R&D costs (a major source of costs) will be spent regardless of whether the drug is supplied.
• The framework does not consider patients with high?unmet need?who have no other treatment options. Not supplying a medicine for this patient category due to a high reserve ICER is not "fair" to them.

Conclusion

In my opinion, these ideas remain an excellent "theoretical" foundation for the topic of "fair pricing," but it?do not provide a feasible roadmap?for implementing "fair pricing" in the real world.

?References:

Paulden, M. A Framework for the Fair Pricing of Medicines. PharmacoEconomics 42, 145–164 (2024). https://doi.org/10.1007/s40273-023-01325-z

Disclaimers:

• ?All ideas in the article represent the author's opinion “Mike Paulden” and are not personal (except for the final comments on the framework).
• My article isn't a comprehensive summary of all ideas in the main paper but just a "highly simplified" introduction to the topic. Just in case Paulden’s paper piqued your interest but you're hesitant to read a 20-page paper filled with equations, graphs and technical terms.
• I tried to use a?plain and?non-technical language as possible, along with simple graphics; however, I advice anyone interested in the topic to read the original paper, which is actually?well-written, structured, and easy to comprehend.?