Pharmaceutical Executive, April 2008
Pharmaceutical corporations are facing significant “pressure points” as blockbuster drug launches continue to slow and a number of major patents are due to expire over the next several years, increasingly driving restructuring and downsizing across the industry. Indeed, high prices on new and existing drugs have become a “double-edge sword” with pharma companies needing more money to fund R&D innovation and payers implementing formularies and other incentives to limit drug use and curtail costs in response.
To help pharma companies adapt to the growing demand for cost effectiveness, Thomas Nagle, a Monitor Group partner and specialist in strategic pricing, prescribes three value-based pricing models designed to boost the health of pharma industry while protecting the “well-being of the healthcare systems and the patients it serves.”
Performance-Based Pricing
Without positive proof that drugs’ promised benefits will be realized in practice, payers are reluctant to provide reimbursement, leading to a “tug-of-war between payers, who are unwilling to pay a premium for unproven value and pharma companies, which don’t want to get locked into a commodity price for a drug that may be worth much more.” Money-back guarantees and other performance-based pricing models should help pharma companies achieve higher prices and more volume, and ease payers’ coverage woes.
Capitation Pricing
Similar to the evolution of Internet service pricing models when AOL entered the market with monthly subscription rates for unlimited access, pharma companies could offer a per-member, per-month price rather than a price per unit of drug, eliminating the need to limit access to clinically preferred drugs” – an incentive equally strong for payers, patients and pharma companies.
Segmented Pricing
One of the biggest challenges facing pharmaceutical companies is “charging different amounts for essentially the same product when used across different applications and markets.” To overcome this, “companies must create ‘fences’ that hinder purchase for high-value-per-unit-applications from being met a price intended for lower-value applications. The most effective ‘fence’ – a different product for each application – is also the mostly costly, but it does work.