Drug Pricing Models - Diaceutics

Drug Pricing Models

September 14th, 2015

Jeffrey Waldron

In the wake of numerous articles on the high cost of new drugs, several organizations have developed drug pricing models. With a number of these scorecards arriving at the same time to raise the profile of cost versus value, could they pose a major threat to pharma? Jeff Waldron, of Diaceutics’ PM Connective, examines three recent models and attempts to find out.

The drug pricing models published recently come from organizations that have their own entirely self-specific reasons for doing so, and transparency and accuracy are not the only key attributes—as with everything, “where you stand depends on where you sit!”

So, providers want to explain why they prescribe such expensive medications, hence the educational aspect of the Memorial Sloan Kettering model. Pharma companies, on the other hand, are loathe to discuss pricing due to the negative press they’ve been receiving.

Pharmacy Benefit Managers (PBMs), are caught in a classic ‘double edged sword’ situation. They want to control Rx costs for plan sponsors, but, at the same time, set drug sales revenue as a goal. Express Scripts, the largest US PBM, tell us they are deploying a unique pay-for-performance drug pricing model based on a combination of the Memorial Sloan Kettering and ICER models. This plan will price the same drug differently for different diseases and applications.

In the US, private payers have by far the largest market share of medical and pharmacy plan members and they protect their corporate pricing acidulously. Their pricing structures vary widely and are determined by clinical, business-related and geographical factors, as well as plan sponsor category and plan type. Prices fluctuate over time as well. The major government payer, CMS (Medicare and Medicaid) has somewhat more transparent pricing, but it also varies.

Thus, drug pricing models offer educational value, defence of high costs and, in some cases, specific comparative pricing to guide policy and buying decisions. How is a provider, payer or patient supposed to judge cost against value?

DrugAbacus from Memorial Sloan Kettering

This model helps us to ask what is the ‘right price’ for a new drug? It takes 54 new cancer drugs approved since 2001 and lets you compare the company’s price to one based on value – the ‘Abacus Price.’ How does DrugAbacus find the value of a drug? It doesn’t. You do. It stores everything about these drugs that might be relevant to their value (based on the data sent to the FDA to get the first approval). It uses the idea that a drug’s value can be broken up into its parts, leaving you to decide which parts should matter and with what weighting. The results are then compared to the drug’s actual price.

The DrugAbacus tool is quite informative as an educational model. It depicts the key attributes to be evaluated in determining a drug price. You can select a particular disease, and it shows quite handily all of the drugs used to treat that disease and their relative pricing. You can even alter the embedded variables used to calculate the drug price, such as dollars per life-year or cost of development. By way of example, Iressa (AZ) returns an actual price of $2,069 and a DrugAbacus price of $454. One major limitation of the model is that it only prices the drug at initial launch in 2014 adjusted US dollars. Nonetheless, the model is an interesting and useful tool for general understanding of the determinants of drug pricing.

Value Framework from the Institute of Clinical and Economic Review (ICER)

The Value Framework is intended to address ‘problems’ such as poor reliability and consistency of value determinations by payers, finding a transparent way to analyse and judge value and the tension between long- and short-term perspectives. Its goal is to find a common language and descriptive model of the components of value for all stakeholders. With a grant of $5.2m, ICER expects to provide benchmark prices for up to 20 drugs over two years, beginning with the new category of potent cholesterol-lowering drugs developed by Sanofi and Regeneron.

The framework considers the following aspects that lead to an assessment of care value:

  • Comparative Clinical Effectiveness: the comparative net health benefit and the level of certainty in the evidence on net health benefit. ICER uses its Evidence-Based Medicine (EBM) matrix to describe the judgement of the scientific staff.
  • Incremental Cost per Outcomes Achieved: the cost per aggregated health measure (QALY).
  • Other Benefits or Disadvantages: information about the intervention to caregivers, the delivery system or other patients not captured in the available ‘clinical’ evidence.
  • Contextual Considerations: can include ethical, legal or other issues (but not cost) that influence the relative priority of illnesses and interventions.
  • Potential Budget Impact: estimations of net changes in total health care payer costs over an initial two year timeframe and alternative measurements of the net budget impact of all known eligible patients switching to or beginning a new care option.
  • Provisional Health System Value: an early judgement based on the care value, potential budget impact and affordability of a new drug.
  • Managing Affordability: an action step, ideally supported by enhanced early dialogue among stakeholders to firstly determine the extent to which real-world constraints in uptake will limit the actual budget impact of the new service, and secondly to decide if this expected budget impact is manageable in the current health care landscape.

Overall, the ICER model is a rigorous, research-based analysis customized to the particular therapy and disease and the components are more academically derived than DrugAbacus. The ICER approach may not be as user-friendly, but that’s because it’s not a tool—it’s a scientific, quantified, organized and well thought out research methodology that is consistently applied.

The American Society of Cancer Oncology (ASCO) has recently released a Scorecard, or conceptual framework, for assessing the value of new cancer therapies based on treatment benefits, toxicities and costs. Developed by the ASCO Value in Cancer Care Task Force, the framework will ultimately serve as a user-friendly, standardized tool that physicians can use with their patients to discuss the relative value of new cancer therapies compared with established treatments. It is currently a discussion draft with ASCO inviting input on the proposed framework.

ASCO’s framework seems to add complexity beyond the ICER model. It uses many of the same considerations and variables, but it relies on extensive explanations and justification along with a visually complex structure.

My overall assessment of these models is that they are the first steps in the transition to a much more transparent health care system that allows all stakeholders to make effective decisions that yield improved health outcomes and better economic value. Advanced new personalized therapies, combined with state-of-the-art diagnostics, are poised to offer dramatic improvements in treating many major diseases, but the value tools are not in my view sufficiently explicit about the value of integrating one or more diagnostics alongside these therapies. Since the pricing of recent personalized medicine therapies (targeted by specific biomarkers) is triggering much of the development of these tools, it will be important that the diagnostic and therapy values are equally clear. In the long run, this will help both payer and pharma negotiate the right price for the right drug at the right time.

Further information


View all blogs

Webinars & Podcasts

August 20th, 2019
Podcast: How Diaceutics is repairing the diagnostic testing ecoystem for patients worldwide
Diaceutics CEO, Peter Keeling joins Pat Kenny on Newstalk FM to discuss how analyzing Big Data to implement better diagnostic testing can help patients access better treatment options for cancer and other life-threatening diseases.
July 5th, 2019
Liquid Biopsy in NSCLC
View all

Expert Insights

April 19th, 2018
The CMS National Coverage Decision on NGS
I. Introduction On March 16, 2018, the Centers for Medicare and Medicaid Services (CMS) finalized a National Coverage Determination (NCD) that cove...
January 19th, 2018
What does the EU IVD Regulation mean for companion diagnostics and LDTs?
Dave Smart, PhD, Director at Diaceutics, discusses the introduction of the EU IVD Regulation. While it is considered a necessary step, the Regulati...
View all expert insights

Competitive Benchmarking Reports

October 21st, 2019
Pharma Precision Medicine Readiness Report 2019
March 16th, 2018
PM Readiness Report 2018 Summary
View all reports

Case Studies

View all case studies


June 25th, 2019
FLT3 testing in relapsed Acute Myeloid Leukemia setting is becoming increasingly common, but laboratory turnaround times (TAT) may be a barrier to treatment with second generation FLT3 inhibitors
The treatment landscape in AML has developed at an astonishing pace in the last 3 years, with 5 therapies being approved by the FDA. FLT3 inhibitors gilteritinib (Gil) and quizartinib (Quiz) present an unprecedented opportunity for improved surviv...
May 23rd, 2019
Diaceutics reviews the ongoing debate on diagnostics reform legislation
Thought leaders at Diaceutics recently authored a peer-reviewed article that covers the ongoing national debate over diagnostics reform legislation in the United States. The article is now available online ahead of print in the Journal of Molecula...
View all publications