Value-Based Pricing: Too High a Price for UK Pharma?

Discretion to set prices for new medicines free of government intervention is heading toward extinction in Europe, with the UK looking set to follow Germany in a race to an ill-defined destination it calls "value-based pricing." On target for phase-in at the end of 2013, the prospective new regime—dubbed by critics as a stealth system of payer-based value controls—will impact pricing beyond the UK, if only because most industrialized countries outside the US references UK prices in setting their own drug tariffs. Combined with controversial reforms to the National Health Service (NHS), an eroding base in clinical trials, and a politically charged debate on patent incentives linked to industrial policy (see sidebar), the price changes are likely to contribute to further erosion of the UK's reputation as a stable and predictable market for Big Pharma investors.

There is Value-in the Patent Box

The reform is much more than a simple endorsement of value-based pricing (VBP). What the government intends is to abandon one of the most venerable structures for P&R in Europe, the Pharmaceutical Price Regulation Scheme (PPRS), which was introduced more than a half century ago and, as negotiated at five-year intervals, stands as a symbol of close policy coordination between politicians, the health bureaucracy, and industry. In its place looks to be a far more hierarchical arrangement in which industry will basically function as price takers in a process administered exclusively through the Department of Health.

One reason why the changes have attracted less attention than they deserve is the larger debate over reform of the NHS, which is being reorganized under a bill now making its way through Parliament. Ironically, the NHS reforms promise more autonomy to local physicians in funding patient care and introduce more private sector competition in service delivery—just as the demise of the PPRS removes what is left of pricing freedom in medicines, in favor of outright controls. And although the NHS reform is expected to cut $8 billion in costs to the $160 billion system by 2015, none of the savings are pledged to improving access to medicines.

Speak softly, industry

In addition, industry itself is taking a low profile on the drug proposal, with the Association of the British Pharmaceutical Industry (ABPI) declaring basic support for VBP as a framework for evaluating a future pact with government. Rob Walton, an analyst for Wisper Public Affairs, noted in a recent blog that the industry position was "so uncontroversial" that the Department of Health was able to cite it in responding to critics of a PPRS overhaul during the first public consultation on its plans last year.

ABPI Director Stephen Whitehead's support for VBP—"it provides significant opportunity to both improve patient outcomes and stimulate the development of new and innovative medicines of the future"—did feature prominently in the government's press releases. But the language is highly nuanced and accompanied by a number of important caveats; like many other aspects of the debate on access and pricing in Europe, the way the industry speaks in public can be open to interpretation.

It is also true that there is little consensus on exactly what the government intends to do, and—more importantly—how and to what effect the new regime will be implemented. The discussion itself has been exhaustive to the point where all parties think they have heard back at least some of what they have said. VBP has been on the reform docket since 2007 and the Conservative coalition government formally presented it as a replacement to the PPRS in 2010.

DOH defines value

The fundamentals of the plan are relatively clear. The government intends to curtail the National Institute for Health and Clinical Excellence's (NICE) power to determine whether the NHS should adopt a drug for reimbursement or not, with formal recognition granted to the Department of Health (DOH) as the sole entity responsible for making pricing decisions on new products. NICE will retain responsibility for conducting initial cost-effectiveness appraisals on selected drugs and is given an expanded remit to set broad therapeutic guidances on how these medicines should be made available in the treatment of diseases. Pharma companies will decide on whether to offer products to the NHS at the prices the DOH government sets down, while physicians make a judgment on whether to prescribe them.

The nub of the matter is that these decisions will hinge on price thresholds geared to the maximum amount the government is prepared to pay, with higher thresholds in place for medicines tackling particularly severe diseases or diseases with unmet needs; those that can demonstrate "wider societal benefits"; and those that evidence "greater therapeutic innovation and improvements compared with other products."

Details, details

Despite Whitehead's broadly welcoming words, the government's narrow definition of innovation in the VBP proposals, in phrases such as "significant improvement relative to existing treatments," is a cause for ABPI concern. "Huge breakthroughs that transform treatment outcomes in a disease area don't happen very often in the normal course of science," Paul Catchpole, the ABPI's Director of value and access, told Pharm Exec. "You have to be able to reward the incremental steps in order to get onto the next step." He highlights that in areas such as colorectal cancer, recent important advances have only arrived through a series of increments. "The danger is if we don't reward those increments, if those treatments aren't used, then the UK will start to fall behind other countries that are making them available."

Can value be incremental?

Paul Healy, senior researcher for the UK think tank Stockholm Network, is similarly concerned that if innovation is understood only in a "binary sense," and follow-on medicines are viewed as duplicative and wasteful, it "could hinder the potential for the breakthrough innovations that very often are discovered on the back of these follow-ons." In addition, he says, patients could be deprived access to follow-ons, many of which are clinically superior to their first-in-class counterpart and can be a more effective means for treating patients. Half of all the drugs on the current World Health Organization (WHO) Essential Drug List, he reminds us, are follow-on compounds.

More bluntly, industry analyst Walton accuses the government of "forgetting how the model of pharmaceutical innovation works." True, he says, science occasionally provides a breakthrough of epic proportions, "but often this is more by luck than judgement."

The apparent favoring of the elusive breakthrough over steady incremental innovation is just one frustrating symptom of what some see as the VBP proposals' general vagueness. "The devil lies in the details," says Catchpole. "The problem is that so little detail has been elaborated so far." For ABPI, there needs to be a system where all the important aspects of innovation can be appropriately identified, valued, and rewarded. And innovation is dependent upon your position as a stakeholder, Catchpole adds.

The Stockholm Network's Healy agrees. He contends that if a VBP system fails to appreciate the true value of medicines by focusing only on factors that policymakers, rather than patients, perceive to be valuable, then industry innovation may only be directed toward those medicines. Patients may value treatments that offer, for example, greater dignity, convenience, and independence, but if such medicines are insufficiently rewarded in the pricing system, manufacturers may be duty-bound not to develop them in the long term.

Politicized medicine

This scenario, of course, runs counter to the government's pledge that VBP will boost patient access to new useful medicines. But, for Healy, VBP's retention of cost-effectiveness thresholds means that the concerns many patients have about being denied treatments are likely to continue anyway. "These thresholds can be a particularly useful tool for policymakers," he says, "but in truth they are a fairly clumsy one-size-fits-all method of assessing value." Their arbitrary nature, he argues, will continue to establish indelicate fine lines between patients being treated or not.

The current system, with NICE as the gatekeeper for determining routine NHS access to medicines "has some teeth in that there is a mandatory funding direction in place, which requires PCTs [primary care trusts] and local NHS organizations to make the medicine available," says Catchpole. But even with this system there is variation when it comes to consistency of uptake and access to medicines. "If it's a problem now it is certainly likely to continue to be one in any new system of value-based pricing," he adds.

As for the loss of NICE's role within the system, there is a fear that the government's proposed method of evaluation will be far more subjective than the one NICE currently uses, and one that is much more open to influence. For NHS blogger Nigel Edwards, this will put politicians back into the process, allowing for "horse trading" and less transparency.

Ed Schoonveld, Market Access & Pricing Practice leader at ZS Associates, told Pharm Exec that "the NHS seems to be looking for more flexibility to avoid negative reactions to NICE rulings, particularly in oncology and other therapy areas where there have been strong patient group and media reactions." But he admits that that flexibility "will in all likelihood also reduce transparency."

The new scheme will essentially move to a price-making approach. According to industry consultant Leela Barham, the price that the NHS is willing to pay will be clearer; companies can either accept that price, provide evidence to convince the NHS to pay more, or justify why they won't lower their price. But if VBP is intended to help combat the problem of NICE currently saying "no" to expensive drugs, Yorkshire Cancer Network's David Thomson adds that it will also no longer be able to say "yes." "There is nothing in the proposals which says that GP consortia have to pay for drugs priced at the VBP price," he adds.

But it is not lost on any observer that instead of putting NICE on the hot seat when it recommends denying access to a drug, the new regime will put the onus back on industry—patients will be knocking on company doors for that essential explanation of why a price doesn't measure up to bringing it to market.

The government is also neglecting the confidence factor in terms of what is lost by the disappearance of the PPRS. "PPRS was a voluntary, negotiated system agreed by joint consensus of the parties, largely in private. It looks like this element will be lost," says Schoonveld. "I don't see how global drug companies will be able to voluntarily accept the price-control nature of VBP." Healy reminds us, however, that the PPRS was "never an ideal arrangement," given that it involved behind-the-scenes negotiations between manufacturers and policymakers. "The problem," he says ironically, "is that it seems to work."

Over its 55 years, the PPRS, in the opinion of the industry and many other observers, was predictable as well as flexible. It regulated not product price but overall profit of the firm, so that companies could set their own prices as long as the return did not exceed an agreed company-wide ceiling. It allowed companies to know in advance what sort of returns they could expect from sales within the NHS and adjust these in response to a product's performance. Although price cuts did lately figure in to the PPRS, having been imposed as part of the last two PPRS negotiations, there was a basic assurance to industry that no further actions on price would be taken over the lifetime of the five-year pact. "This exempted the UK from the ad hoc, arbitrary price cuts or givebacks seen in other European countries," Healy said.

More missing links

For Catchpole, the loss of the PPRS presents a potentially twofold problem.Its current objectives are geared both to the promotion of a strong pharma industry and to governing the healthcare system. "It ensures value for money for the NHS and it permits fair and reasonable prices for medicines, so that industry is, at a minimum, able to cover its R&D costs," he says. But the stated objectives for VBP "don't make any reference to industry requirements with regard to fair and reasonable prices—only to the needs of the health service."

What's more, the government has said the VBP will only apply to new medicines launched after 2014. Says Catchpole: "There are only 20 to 30 medicines a year that will go through that process." But there are many thousands of existing medicines already on the market that will not be subject to VBP. "There has to be a system in place that will also cover those medicines." Significantly, the government plan is silent on that score, but wider "genericization" of the market is a possibility because the Department of Health has been pursuing that approach for the oldest drugs, for some time.

Reference price ripples

And finally, what are the consequences for UK pharma on the international stage? Might the introduction of VBP see the UK competitive position further eroded? Rob Walton, pulling few punches, believes so. "We should prepare for a period of significant retrenchment in the UK pharmaceutical base once the PPRS has gone," he writes. Tacitly, the ABPI agrees. "Historically, the UK is one of the first launch markets in the world for new medicines because it has rapid freedom of price setting at launch," says Catchpole.

And UK prices are used commonly as a benchmark in many other markets: Twenty-five percent of markets that have some kind of price referencing system reference the UK price in their own processes, and another 15 percent of countries indirectly reference UK prices. The UK's position as a commonly referenced market means that the reforms will "likely be met with manufacturers reconsidering how quickly they want to launch their products there," adds Healy.

If assessments were to accurately measure the value of medicines to society in the UK, this would not be too problematic, given that manufacturers would be delaying or not launching products that society values less. But, says Healy, "as VBP in the UK would not be considering all factors of value, patients may be forced to endure longer waits for some innovative medicines to be launched here." Similarly, Schoonveld warns that "companies will now have no choice but to deny access to new drugs where accepting a substantially lower price in the UK would impact business in the rest of Europe, Canada, and Japan." Thanks to the PPRS, the NHS already pays relatively low prices for medicines when compared with other developed countries. "If VBP assisted the NHS in extracting even further reductions," says Healy, "this could have a global effect on revenues and consequently on global investment in R&D."

Overall, most experts believe that reforms in a slow growth market such as the UK are unlikely to drive the global strategies of the Big Pharma players. But this does not mean that changes in the UK will not shape what other countries do to control price and access to medicines in the future. Schoonveld notes that while European countries have looked at the UK's cost-effectiveness-based system, most countries will probably not adopt the UK model as its approach is fundamentally different. "The messiness of the UK decision-making is hardly inspiring."

Nevertheless, the bottom line is that the UK denominator is trending down, not up—and Big Pharma will have one less country to cite in making the case that innovation must be rewarded.

Can we agree on definitions?

Stakeholders contacted by Pharm Exec also cautioned that the dire forecasts do not necessarily apply to the principle of value-based pricing. Reforms that establish a closer association between the price of a medicine and the value it presents to society are to be welcomed, and it may be that VBP will offer more latitude for incentivized pricing in outcomes-driven disease areas such as cancer, particularly where there are good diagnostic tools involved.

The fundamental problem for critics of the government's proposals is the confusion as to what "value" actually means. For Schoonveld, VBP, as the DOH is defining it, "does not mean anything." He contends the drug industry has always engaged in value-based pricing where it could—and when it was not restricted by government intervention. In reality, he says, the prospective UK system could be called "Value-Based Price Control."

it's a race—to the bottom

Arguments about definitions notwithstanding, what is indisputable is that the VBP (and other healthcare) proposals are being shaped by the pressures of an economic crisis. As such, changes aimed at establishing a more sustainable healthcare system could be outweighed by measures that are trying to plug holes in public finances. When the UK government's plans for VBP were first drawn up, Walton reminds us, the world was a different place.

The government's consultation document ended with the assertion that its preference would be "to achieve a negotiated agreement on value-based pricing," with the hope that these negotiations "might begin sometime in 2012." But a DH spokesperson threw no more light on this for Pharm Exec, and simply re-iterated that VBP was on course to take effect as originally set out in the proposals. That is just 18 months away, not long for lobbyists to secure the clarification of detail and definition that the industry is looking for. The industry strategy is to get tough behind the scenes, reminding politicians of the "hollowing out" investment consequences of taking the same path as Germany, where introduction of the AMNOG reform legislation (see Pharm Exec, November 2011) has resulted in the predicted lower price increases but at the expense of delays in the launch of medicines with EU approval. If this situation were mirrored in the UK, says ABPI's Paul Catchpole, "it would be a really bad outcome. Nobody benefits—not the patient, not the NHS, nor the industry."