Economics of Innovative Payment Models Compared with Single Pricing of Pharmaceuticals

Cole, A., Towse, A., Lorgelly, P., and Sullivan, R.

Research Paper
July 2018

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The current system of a single price per medicine means that, for multi-indication medicines, the relationship between price and “value” can vary substantially.  In this OHE Research paper, we consider: What are the economic implications of an alternative to single-price payments for pharmaceuticals? In particular, what are the implications for: payer budgets, patient access, and the incentives for innovation?
Varying prices with the use of a drug offers the opportunity to better align payment with value, but the impact on patients, payers, and incentives for innovation are not clear cut. Two key papers offer competing perspectives. Bach (2014) described the potential for IBP to increase transparency and illustrated how IBP could lead to lower prices for lower value indications, while Chandra and Garthwaite (2017) argued that IBP would lead to higher prices overall. The key differences arose from assumptions as to where (single) prices are currently set, and the extent to which IBP could expand patient access by allowing further indications to be developed.
In the short term theory suggests that indication-based pricing can improve overall welfare if it means greater patient access, but payers may face higher expenditure. However, the potential longer-term (dynamic) effects of IBP are sometimes neglected: optimising incentives for R&D means indications that can provide cost-effective treatment are likely to be developed, and there is the potential for increased price competition at the indication-level, which could lead to lower prices, so delivering better value to the health system.
In order to explore the potential impact of competition, we identify two classes of cancer therapy: tyrosine-kinase inhibitors (TKIs) and PD-1/PD-L1 inhibitors and show how competing products and competing indications have developed over time. In the case of the PD-1/PD-L1 inhibitors additional indications are currently in development with more competing therapies expected to enter the market for several further cancer types. We illustrate how competition by indication in the PD-1/PD-L1 space could, in theory, reduce prices below the value-based price.