Moving toward a pay-for-value model of prescription drug pricing

October 10, 2017 by Neil Schoenherr, Washington University School of Medicine in St. Louis
Credit: Washington University School of Medicine in St. Louis

One of the health care issues about which seemingly all Americans agree: Prescription drug prices have skyrocketed. And they keep going higher. How do Americans get better value for their health care dollars?

One answer may be novel models that more closely link a drug's price to its value, rather than paying for volume. Drug manufacturers, however, argue that Medicaid's "best-price rule" inhibits their ability to enter into these new pricing arrangements.

Not so fast, says an expert on drug pricing and regulation at Washington University in St. Louis.

"The best-price rule is not as serious a problem as drug manufacturers might perceive it to be," said Rachel Sachs, associate professor of law and co-author of "Innovative Contracting for Pharmaceuticals and Medicaid's Best-Price Rule," recently published in the Journal of Health Politics, Policy and Law.

The best-price rule essentially states that Medicaid is entitled to the best price for any drug that's paid in the private market. If a drug company wants to give a big discount to a private insurer, Medicaid is entitled to that discount as well.

"The rule does not apply to a wide range of payers—drug manufacturers can enter into innovative contracting models with Medicare Part D or the U.S. Department of Veterans Affairs without running afoul of the rule," Sachs said. "It only applies when the discount it would trigger exceeds the statutorily required Medicaid discount, which is already quite large. And manufacturers can structure their contracts with payers ahead of time to minimize its impact."

The rule, argue Sachs and co-authors Nicholas Bagley of the University of Michigan and Darius N. Lakdawalla of the University of Southern California, should not be an obstacle to pricing innovation alternatives, including indication-based pricing, outcome-based pricing, drug licenses and drug mortgages. Where it is an obstacle, drug manufacturers can often restructure their contracts to avoid or mitigate the rule's impact.

"Pharmaceutical companies and insurers have expressed interest in a number of different innovative pricing models, chief among them outcome-based pricing and indication based pricing," Sachs said. "Many people find an intuitive appeal in the idea behind outcome-based pricing—if a drug doesn't work for a patient, why should they have to pay for it?"

Sachs said she is looking forward to more indication-based pricing deals, where manufacturers charge different prices for the same drug depending on the indication for which it is being prescribed.

"If the indication-based price is tied to how much value that provides for the particular indication, shifting to indication-based pricing systems could begin to move our payment system for drugs more in the direction of value, not volume," she said.

"The best-price rule is not as serious a problem as sometimes make it out to be," Sachs and her colleagues write in the paper. "But it is also not simply a convenient excuse for refusing to try something new. The law here is complex, and fostering the adoption of new will require close coordination among manufacturers, payers and regulators.

Explore further: Insider Q&A: A model for more rational drug prices

More information: Rachel Sachs et al. Innovative Contracting for Pharmaceuticals and Medicaid's Best-Price Rule, Journal of Health Politics, Policy and Law (2017). DOI: 10.1215/03616878-4249796

Related Stories

Insider Q&A: A model for more rational drug prices

July 4, 2016
Rising drug prices are creating anxiety for patients, politicians and physicians across the country, with little relief in sight.

When given the chance to pay less, patients choose cheaper prescription drugs

August 22, 2017
As prescription drug spending continues to rise in the United States, along with prices for new and well-established drugs, insurers, employers and patients are searching for ways to cut costs. A new study led by UC Berkeley ...

California to require advanced notice on drug cost spikes

October 9, 2017
Drug companies doing business in California will soon have to notify the public two months in advance of dramatic price spikes under legislation signed Monday by Gov. Jerry Brown.

Outcomes-based pricing suggested for new, costly drugs

December 14, 2016
(HealthDay)—Outcomes-based pricing for novel and expensive biopharmaceuticals is supported in an Ideas and Opinions piece published online Dec. 13 in the Annals of Internal Medicine.

Merck, Eli Lilly probed on drug pricing

November 6, 2015
The Justice Department is probing some drug pricing practices of pharmaceutical giants Merck and Eli Lilly, the companies disclosed Friday in securities filings.

Examining the rising costs of prescription drugs in the US, and possible alternatives

April 4, 2017
Prescription drugs are already unaffordable for many: The price tag last year in the United States was $425 billion, one out of every 10 health care dollars spent, and rising.

Recommended for you

US approves first generic competitor to Mylan's EpiPen

August 16, 2018
US regulators Thursday approved the first generic alternative for the EpiPen, a life-saving emergency allergy medicine, two years after soaring prices for the original version owned by Mylan stoked controversy.

Study: What patients really think about opioid vs non-opioid medications for chronic pain

August 14, 2018
Prescriptions of opioids for chronic pain has increased dramatically since the 1990s in spite of their known harms. Despite a shortage of scientific studies on the long-term effectiveness of opioids such as morphine, oxycodone ...

Doctors nudged by overdose letter prescribe fewer opioids

August 9, 2018
In a novel experiment, doctors got a letter from the medical examiner's office telling them of their patient's fatal overdose. The response: They started prescribing fewer opioids.

Benzodiazepine and related drug prescriptions have increased among young people in Sweden

August 7, 2018
The prevalence rate of prescriptions for benzodiazepines and benzodiazepine-related drugs (BZD)—medications used to treat anxiety, insomnia, epilepsy and other neuropsychiatric conditions—increased by 22% between 2006 ...

Unwise opioids for wisdom teeth: Study shows link to long-term use in teens and young adults

August 7, 2018
Getting wisdom teeth removed may be a rite of passage for many teens and young adults, but the opioid painkiller prescriptions that many of them receive could set them on a path to long-term opioid use, a new study finds.

Behavioral nudges lead to striking drop in prescriptions of potent antipsychotic

August 1, 2018
A study led by Columbia University's Mailman School of Public Health has found that letters targeting high prescribers of Seroquel (quetiapine), an antipsychotic with potentially harmful side effects in the elderly, significantly ...

0 comments

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.