Today, prices driving prescription drug spending are largely rooted in a long history of pricing by dosing unit. In most cases, the pricing of a given prescription drug or biologic does not vary by clinical indication it is being used for, whether the use is on-label or off-label, or the product’s relative effectiveness for one indication versus another. Indication-specific pricing (ISP) represents a possible way to modernize and better rationalize drug pricing.
ISP is the focus of an interesting Institute for Clinical and Economic Review (ICER) report, entitled Indication-Specific Pricing of Pharmaceuticals in the United States Health Care System.1 The 42-page report describes indication-specific pricing of drugs, potential benefits for the U.S. market, and considerations for stakeholders.
Background to Development of Indication-Specific Pricing
The Institute for Clinical and Economic Review held a policy summit in 2015 that included representatives from a total of 22 health insurers (“payers”) and life sciences organizations and resulted in this white paper. The report’s overall aim is to “analyze the barriers and potential solutions for efforts to implement ISP initiatives in the US.” Furthermore, its basic perspective is that “innovations to create and test value-based reimbursement models for drugs appear to be lagging behind efforts in other parts of the [health care] system.
Definition and Characteristics of Indication-Specific Pricing (ISP)
The model of indication-specific pricing (ISP) is described by Pearson et al—the report’s authors—as “setting different prices for different indications or for distinct patient subpopulations eligible for treatment with a medication.”
The following three different ISP models are described:
- Distinct product differentiation: authorized and marketed under different brand names with different prices.
- No brand differentiation: distinct, separate discounts are applied for each indication.
- No brand differentiation, but a single “weighted-average” price developed using estimates of indication drug use across the U.S. population, with possible retrospective reconciliation through rebates based on actual utilization.
Catalysts to Interest in ISP – Providers, Patients, and Payers
Projected to increase to 75 percent by 2020, 50 percent of oncology drugs marketed in 2014 in the U.S. were already multi-use agents, according to a Harvard Business Review article as cited in this report.2 Yet, a single price is typically established for that drug, regardless of the targeted condition for which a physician prescribes it to a patient. For example, a brand-name diabetes medication is also currently prescribed for obesity, and a brand-name erectile dysfunction drug is also prescribed for pulmonary arterial hypertension.
In addition, the clinical value of a multi-use medication for each specific disorder can differ tremendously. Numerous cancer drugs are of greater or lesser clinical value for treating a particular cancer, based on certain factors (e.g., genetic subtype, disease severity, and risk level for metastasis). Whether recognized as a high-value or low-value treatment, the cost of that cancer drug is not different based on its expected effectiveness for that patient.
One particular catalyst to increased payer interest described in this report—in determining the feasibility of a private insurer shift to ISP—was Express Scripts’ ISP launch for cancer drugs in 2016.
How is an ISP Weighted-Average Price Determined?
The report describes the following process as that by which a given weighted-average price is generally derived: “Most applications of indication-specific pricing use ex-ante estimates of population use to establish a single weighted-average price, and then use some mechanism to review retrospectively the use of a drug across all its indications and apply a rebate as needed based on actual use.”
A significant obstacle toward efficient determination of a weighted-average price is that the electronic capacity does not yet exist to link patient data that is not protected by HIPAA with all indications for use of the specified drug across the U.S. population. The report also presents a related problem: “Clinicians are not always required to provide the indication when prescribing a drug, and therefore standard pharmacy claims data for indication-specific pricing are not useful.”
Potential Benefit to Payers of ISP for Multi-Indications Drugs
A few of the described potential benefits to health insurers if an ISP model becomes the norm across the U.S. healthcare system are:
- ISP offers a new mechanism to facilitate patient access to medications within a model that seeks to balance payer needs for affordability and manufacturer needs for sustainability: General recognition exists among payers that any cost-control approach needs to balance the needs of payers, manufacturers, and providers.
- ISP offers the potential to save money: Under the current model, payers often feel compelled to take steps to limit use of high-priced drugs in broad populations, whereas a tiered drug-price linked to clinical value may alleviate this pressure.
- ISP offers the potential to demonstrate a commitment to innovative payment models (e.g., value-based payment models).
Potential Benefit to Drug Manufacturers
The following are some of the potential benefits of ISP for pharmaceutical and biotechnology companies:
- Provides incentives to develop high-value, secondary drug-use indications.
- Protects existing price in high-value indications.
- May assist in justifying targeted price increases.
- May assist in aligning—independent of biopharma company competitors—an individual drug’s access, value, and price.
Risks to Health Insurers and Wholesale Pharmacies
Potential risks of embracing an indication-specific pricing model for health care payers and wholesale pharmacies are as follows:
- Could have minimal impact on affordability or even increase costs.
- May raise concern among purchasers and patients: will require extensive communication to address probable confusion as to a specific drug’s cost.
- Administrative burdens may prove greater than anticipated (i.e., necessary data systems may be difficult and costly for payers to develop).
Primary Challenges to ISP Implementation in the U.S.
Five of the primary challenges to U.S. implementation of ISP described in the report are:
- The complexity of drug purchasing and delivery systems: multiple pathways and intermediaries involved in drug purchasing and delivery.
- Insufficient data collection, information technology, and analytic capabilities.
- Limitations of drug formulary tier structure and difficulty linking indication-specific pricing to differential patient cost-sharing.
- Potential misalignment with Medicare provider reimbursement for office-administered drugs: Medicare reimbursement rate for physician-administered drugs (now based on a method using average sales price [ASP]) could be lowered to the point where physicians might feel their cost of acquiring a given drug would not be mitigated by the limited reimbursement available from Medicare.
- Unintended pricing effects related to Medicaid best price provisions: If a rebate linked to one health condition generated a resulting drug price lower than the federally mandated minimum Medicaid rebate, it could trigger a new (lowered) price that could become a benchmark across Medicaid drug benefits in all states.
There are also multiple administrative, legal, and regulatory challenges that currently darken the prospects for ISP (Indication-Specific Pricing) in the US.
Federal Anti-Kickback Law and FDA Restrictions on Marketing
“The Anti-Kickback Statute (AKS) prohibits offering or receiving remuneration (broadly defined) to induce or reward referrals for items or services paid by federal healthcare programs,” explains the report. Absent a legislative fix by Congress, the authors believe this could preclude Medicare and Medicaid’s ability to embrace ISP as a model. (However, formulary-based benefit designs and cost-sharing structures in Medicare Part D and private drug coverage and preferred drug lists and state-negotiated supplemental rebates in Medicaid are not seen as kick-backs or inducement.)
Likewise, Food and Drug Administration (FDA) restrictions on pharma industry marketing related to off-label indications may present an indirect obstacle. However, this perceived FDA obstacle may be surmountable through the following:
- Selection of drugs for ISP that have minimal off-label use.
- Application of price adjustments only to labeled indications for drug prescribing.
- Using a weighted-average approach to implementing ISP.
Possible Solutions to ISP Challenges
Recommended in this report is a pilot program—initially on a small scale—of the ISP model, in tandem with a focus on orally ingested drugs. Pearson et al favor a weighted-average approach as the best choice for the pilot test, due to the greater simplicity in applying this approach to drug pricing. Additionally, they believe:
- “Payers could identify drug indications using medical and pharmacy claims data as well as existing drug management capabilities, including prior authorization and specialty pharmacies.”
- “Manufacturers with a global presence and experience executing indication-specific pricing agreements in countries that support such models can use that expertise to inform and guide implementation in the US health care system.”
- “Payers and manufacturers should favor contracts involving oral drugs for which formulary tier placement can be consistent across indications when ISP is implemented.” (This proposed solution is based on the assumption that entanglement with Medicare ASP pricing can be avoided through a focus on oral drugs in pill form.)
International ISP Utilization
The healthcare system administration by a sole government-sponsored entity has simplified ISP implementation in countries utilizing such as system. In other words, the regulatory bodies of these nations negotiate pricing and reimbursement agreements with the pharmaceutical manufacturers. For example—in the United Kingdom—flexible-pricing was introduced as an option in the 2009 Pharmaceutical Price Regulation Scheme (PPRS).
The four objectives of this PPRS scheme are described in the UK Department of Health Pricing and Supply’s published manual3 as:
- Deliver value for money
- Encourage innovation
- Promote access and uptake for new medicines
- Promote stability, sustainability, and predictability
Meanwhile, in Italy, the report states that “some products are subject to indication-specific registries that are owned and maintained by the Italian Medicines Agency (AIFA).”
Medication Distribution Channels in the U.S.
Prescription medications are currently distributed in the U.S. through an array of different channels, including:
- Drug wholesalers
- Pharmacies (retail and specialty)
- Hospitals and outpatient clinics
- Providers (i.e., through drug samples provided by drug companies)
The complexity of drug delivery and distribution in the U.S. adds to the challenges in implementing ISP models. Although recommending a U.S. healthcare system shift to an ISP model, the report’s authors realize that “indication-specific pricing is but one of many possible policy tools available to payers and manufacturers.” Their concluding recommendation is that an ISP model at least be attempted, with the impact on drug prices subsequently assessed.
The white paper can be downloaded in its entirety from the ICER website here (PDF).
- Institute for Clinical and Economic Review (ICER). Indication-Specific Pricing of Pharmaceuticals in the United States Health Care System. March, 2016.
- Bach PB. “A new way to define value in drug pricing.” Harvard Business Review. October, 2015.
- United Kingdom Department of Health Pricing and Supply. The Pharmaceutical Price Regulation Scheme 2009. December 2008.