Kelly: The United States features a “free pricing” system. Cost-effectiveness analysis is effectively prohibited for major federal payers and evaluators under the Affordable Care Act. What role does economic evaluation play in the pricing and reimbursement of medicines in the United States?
Key Terms
First, it's important to set the stage a bit with some background and clarification of terms, because “economic evaluation” is relatively broad and can include an array of different analysis types, all of which would serve a different purpose in terms of the role they could play in the pricing and reimbursement arena. If we consider a textbook definition of economic evaluation, it would primarily encompass cost-effectiveness analysis (CEA) and its close relative cost-utility analysis (CUA), as well as cost-benefit analysis (CBA). The two former analyses are focused on a “value for money” argument in which the incremental cost of a new intervention compared to an alternative is considered relative to the incremental clinical benefits achieved (expressed in clinical units or another metric such as quality-adjusted life-years). On the other hand, cost-benefit analysis monetizes those same outcomes and compares those costs to those of the intervention used to achieve those outcomes such that there is either a net gain or net loss. While CBA sounds attractive, there are technical and ethical considerations that render its use in the healthcare field (and pricing and reimbursement specifically) practically non-existent. And while CEA/CUA are integral components of the evaluation and pricing and reimbursement process in numerous countries outside the US, its usefulness in the US is much less clear. Yet, it's still often hotly debated. I don't think that cost-effectiveness analysis should be completely neglected though so I will weave in a few thoughts related to that during our interview.
In addition to these standard types of economic evaluation, there are a variety of other economic studies and tools that can be brought to bear by manufacturers and payers when it comes to considering pricing and reimbursement. For instance, budget impact analysis, burden or cost of illness studies, or even more straightforward financial analysis like profit and loss calculations; there really can be a rationale for all of these types of economic analyses , but which play a key role and which may be indispensable will depend on a variety of factors.
The Payer Audience
In addition to the methodology terms, it's important to consider the audience. In other words, who are the potential consumers of these economic evaluations or analyses? Certainly, some of the entities that first come to mind would be large health insurance companies like United Healthcare and Anthem, especially when you consider that the top five largest insurers in the US cover nearly half of the population. But there are hundreds of health insurance companies in the US, not to mention large public payers like Medicare and Medicaid, all of whom need to evaluate and understand the financial impact of new health interventions and technologies, many of which are innovative yet costly. Payers also need to consider to what degree they might implement utilization management modalities or other administrative hurdles. Of course, the level of sophistication when it comes to this type of assessment may vary dramatically. At one end of that spectrum, and probably the most common, would be just a simple evaluation of the product’s list price and negotiated rebates relative to competitors in the marketplace. In terms of economic analyses, that would be one of the most minimal efforts in the pricing and reimbursement area. At the other end of the spectrum might be value-based contracting approaches in which incentives between payers and manufacturers are more aligned, risk is shared between the two entities, and costs and patient outcomes are more closely linked. The latter sounds attractive, but practically speaking, while appealing, these are difficult agreements to structure.
Budget Impact Analysis Plays an Important Role In the US Healthcare Setting
Having clarified some of the terms and audience considerations, when it comes to economic evaluation and pricing and reimbursement, how do I counsel my clients and what are important use cases to consider?
First, manufacturers need to be able to understand and communicate the potential budget impact of their new product to a payer. Clearly, payers are making similar calculations, perhaps using different approaches or different forecasts, and likely more simplistic methods, all of which may tend to disadvantage a new technology. So, it's incumbent upon manufacturers to have conducted their own budget impact analyses. This type of economic study may be more compelling and important for a product in a new class of therapies, or with some anticipated superiority in efficacy or safety that would lead a manufacturer to price that product at a premium rather than, for example, a product that's a late entrant into a saturated market where pricing at parity with competitors is a more likely scenario.
A drawback that some clients express is that budget impact analysis does not always robustly quantify comparative clinical outcomes and the associated resource use and possible cost offsets or savings that can go along with that. In addition, budget impact analysis isn't intended to capture important patient-reported outcomes like quality of life. Therefore, benefits in those domains aren't an element of a budget impact analysis but would be a component of an economic evaluation such as a cost-effectiveness analysis. This expands upon an earlier comment in which a budget impact narrative may not always be particularly favorable because it can't comprehensively capture all the potential benefits associated with a new product.
In this situation, I encourage clients to at least explore the feasibility of economic evaluation (specifically, cost-effectiveness/utility analysis) as an additional means of providing a more comprehensive value story that focuses on a broader range of costs and outcomes than a budget impact analysis. As mentioned, the degree to which that cost-effectiveness analysis will gain traction with payers really might be limited, especially for example, for a payer like Medicare, although that could eventually change in the years ahead. For my clients playing the long game or with a global reach, development of a US-based cost-effectiveness analysis can provide some efficiencies for their global affiliates and partners in countries where cost-effectiveness analysis will be mandated. This could streamline the process of modification for an Australian perspective or a UK perspective or similar jurisdictions. So, despite its prohibition with some US audiences in terms of pricing and reimbursement, frequently it can be worthwhile to consider a cost-effectiveness analysis anyway.
“So, budget impact analysis can play a key role in pricing and reimbursement, and in selected cases, I think a cost-effectiveness analysis is still important. Other economic studies, such as burden or cost of illness analyses, are something else that clients in some circumstances also need to consider. ”
For very well-known diseases that are extensively studied, a burden or cost of illness study can probably be readily found in the academic published literature. Those certainly may need to be updated to reflect more current management practices and costs, but as we've seen in the marketplace, manufacturers are increasingly turning their attention to the treatment of rare diseases or very specific patient subgroups, and there may be little or no published contemporary evidence documenting medical resource use and costs to manage those rare diseases or subgroups or describing the patient experience or the burden that a patient might face. Again, in select cases, that type of economic analysis can be helpful for better framing the value story and possibly informing pricing decisions by manufacturers or reimbursement by payers.
Other Key Audiences – Hospitals and Physician Office Settings
Thus far we’ve taken a somewhat narrow view of pricing and reimbursement as seen through the lens of traditional insurers. I think there are other stakeholders that we ought to acknowledge and consider.
The first example would be financial decision-makers for products that may not be separately reimbursed, such as a hospital purchaser. They constantly need to make technology purchases that have financial implications. And many manufacturers in the life science sector sell into that type of market dynamic and need to consider those stakeholders as well. Developing economic analyses that consider those unique circumstances and product pricing considerations can be helpful in product adoption decisions.
A second example would be the physician practice setting and decisions related to adopting a particular technology in their office or ambulatory surgery center. There again, they have financial considerations that do not fit into the traditional manufacturer/payer discussion. Sometimes developing economic tools with those stakeholders in mind is something that some manufacturers need to consider. For that audience then, what types of economic analyses might be germane?
Economic evaluation (cost-effectiveness/utility/benefit analysis) is not necessarily a tool that would particularly resonate in those situations with those audiences. Other financial analyses, however, like profit and loss modeling, can be informative for both pricing and purchasing decisions from a hospital or office setting perspective.
I can describe a real-world example that might be illustrative: this analysis was for a surgical device product and it was unclear how payers might reimburse for its use, in which settings, and how much they might reimburse, if any. For this client I developed an economic analysis, evaluating the trade-offs to both parties (payer and purchaser), of different pricing and reimbursement policies. This economic study was helpful for this manufacturer in that it helped to demonstrate situations and policies in which sub-optimal reimbursement in a physician office setting (where this device could conceivably be used) could drive those procedures to be conducted in settings of care that would ultimately be more costly to payers. By not reimbursing sufficiently in the physician office setting, ultimately payers were doing themselves a financial disservice because patients were going to then be treated in a hospital outpatient department, which would be more costly to the payer. So I think these are some examples where economic analyses can be particularly helpful for pricing and reimbursement decisions outside of the typical manufacturer-payer relationship.
Summary
To summarize: for pricing, reimbursement and, in some cases purchasing and adoption decisions, budget impact analysis is certainly an important consideration for most new products, but especially so for those priced at a premium to existing alternatives. Furthermore, it may be useful for any new product in a crowded marketplace that may undercut the price of existing technologies in that space, although that's relatively rare in today's environment. Communication of these budget impact results is routine and expected these days, usually as part of product dossiers. Increasingly, although still relatively infrequent, peer-review publication of budget impact analysis is being considered by my clients. So budget impact, I would say, is a key type of economic study while cost-effectiveness or cost-utility analysis certainly can be an important supplement, despite not gaining as much traction with payers. I think it can be useful in certain circumstances, but certainly less than budget impact in the current US healthcare setting.
That calculus may differ for global manufacturers; it behooves them to at least consider cost-effectiveness analysis, especially if partners in other countries will benefit by having that research conducted. Finally, other types of economic studies (for example, cost of illness or burden of illness) can play a role, in specific niche settings, on a case by case basis.
About Steve Duff
I have spent nearly 25 years providing health economic and reimbursement consulting services to pharmaceutical, biotechnology, medical device, and diagnostic companies. I provide to my clients a unique combination of health economics expertise with clinical knowledge and product development experience gained through various positions in the consulting and pharmaceutical industries.
Prior to founding my own consulting practice, I spent eight years as a principal consultant with Covance Health Economics and Outcomes Services where I focused on medical technology assessment, economic modeling, and development of dossiers, manuscripts, and strategic plans. My clients ranged from small start-ups to Fortune 500 companies with technologies in various stages of development and commercialization.
In addition to my consulting experience, I also have held various positions in pharmaceutical research and clinical development. I spent seven years in research and development at Kendall McGaw and Allergan, primarily in the field of pharmacokinetics.
Over the course of my 25-year career providing health economics consulting services, I have been privileged to assist hundreds of clients achieve their market access and commercialization goals. Examples of these accomplishments include:
Conceptualization and programming of sales and pricing models for dozens of pharmaceutical, device, and diagnostic products to inform successful market adoption strategies;
Development and publication of the first cost-utility analysis of robotic surgery and six comparator treatments of prostate cancer informed by an extensive literature review and synthesis;
Supporting a cutting-edge ophthalmology product for over a decade with budget impact and cost-effectiveness models, dossiers, publications, and literature reviews across five approved indications; and
Development of several economic models used to support successful listing recommendations by Australia’s Pharmaceutical Benefits Advisory Committee (PBAC).
I have a Bachelor’s Degree in Biology from the University of California, San Diego and a Master’s Degree in Health Policy and Management from the Harvard University School of Public Health.