How the pharmaceutical industry misuses the concept of value to justify high medicine prices

Changing rationale  

In the past, the standard explanation given by pharmaceutical companies for high prices of medicines was that they were necessary to cover research and development costs and to compensate for the associated risks. 

However, as these arguments have become increasingly questioned, the industry is changing its rationale, arguing that R&D costs are actually irrelevant and that medicine prices should in fact correspond to their “value”.

Value-based pricing  

The idea of value-based pricing was initially developed by scholars and policymakers to challenge rising medicine prices and to allocate public health budgets more rationally.[1]

In response to significant increases in the costs of new medicines, various value-based pricing models have been developed to provide a standardized approach to prioritising “high-value” medicines. The implicit purpose of these models is to empower healthcare payers in pricing negotiations.

Most often, the value assessment of new medicine is composed of various factors.

It takes into account health benefit components such as medicine efficacy (often assessed through the added therapeutic benefit of the new medicine over existing therapeutic alternatives) and safety outcomes, as well as the improvement in patient quality of life.

The quality of evidence i.e., its sources or scenarios evaluated in clinical trials, is also often considered.

In addition, models using economic evaluation also look into cost-effectiveness[2], cost-utility[3] or cost-benefit analysis[4]. In several countries, a wider societal perspective[5] is also included in the evaluation process to assess the medicine’s costs and benefits.

Misusing the concept of value

Against this background, it can be observed that the pharmaceutical industry seems to place a disproportionate weight on economic aspects when determining the value – and consequently the price –  of new medicines.

Pharmaceutical companies argue that prices correspond to the “real value” of medicines, which equals the costs they save society (i.e., for example, costs associated with disease management and hospitalisation and long-term societal benefits e.g., patient’s productiveness contributing to the economy and the alleviation of the impact on caregivers).

From this perspective, the medicine price relates to the costs that the disease would cause to society if not treated, or if treated with the second-best therapy. Following this logic, such monetary calculation should indicate the final price.

Assessing medicine’s societal value

As noted, it is not uncommon to incorporate societal perspective for economic evaluation, and to consider all relevant costs and benefits related to disease management in medicine value assessments.

The wider social impact of a medicine is most often incorporated in estimates of costs per quality-adjusted life-years (QALY) or disability-adjusted life-years (DALYs) gained.[6]

QALYs capture both the gains from reduced morbidity (increased quality of life) and reduced mortality (quantity of life years added), taking into account, for example, gains in working days or in the productivity for the patient or his/her relatives resulting from reduced sick leaves.

However, the societal perspective may be difficult to apply in practice due to problems with accurately measuring and quantifying the value of non-market resources, such as  time for participants, patients and relatives, in monetary terms.[7]

Although healthcare payers may be willing to pay more for medicines that have greater value for the wider society and economy, establishing a clear link between a medicine and societal and economic savings it brings, and calculating them precisely, constitutes a great challenge (even more so for comparative assessments, given little consistency of evidence across products).

Indeed, there is little research on the monetary value of the societal and economic impact of new medicines.[8]

In addition, when assessing the value of a medicine to society, access considerations must also be taken into account, i.e., the impact of the medicine’s price on health budget (and thus the resources available to pay for treatments and therapies for other diseases) and out-of-pocket payments by patients.

Fair medicine pricing

Different value assessment frameworks can measure economic and societal impacts differently and assign them different weights in the process.

However, the logic that the price of a medicine should equal the costs it saves society should be strongly opposed.

In value-based pricing, social value is typically used to define the boundaries of a fair price (a cost-effectiveness threshold) rather than to set an exact price.[9]

While the idea to measure medicine’s value solely in economic terms can be justified from the market perspective, the actual threshold for defining value should include all relevant components.

Medicines should not be perceived as any other commodity. Therefore, the priorities required in pharmaceutical pricing must first concern patient’s rights, then be applied to solidarity in care determined by need, and finally concern cost efficiency.

Although the pharmaceutical industry argues that its pricing strategy will result in the public paying more for more valuable medicines, different studies show the current lack of a link between specialty medicine prices and the benefits they provide.

On the contrary, the industry’s conceptualisation of value appears to be yet another attempt to avoid the discussion on affordability and access to medicines, public contribution to pharmaceutical R&D and evidence that ever-high prices of new treatments are justified. 

Therefore, instead of following the industry’s logic, European doctors advocate a multidimensional approach to pharmaceutical pricing, based on health technology assessment, where various factors are taken into account from the added therapeutic benefits and the economic and social impacts to the ability to pay and access considerations.

[1]See: M. Mazzucato, “The Value of Everything: Making and Taking in the Global Economy”, Penguin Allen Lane, 2017, pp. 189-195.; OECD, “Value in Pharmaceutical Pricing”, 2013.

[2]Expressing outcomes in terms of health improvements (years or life gained for instance).

[3]Weighting health outcomes by their utility for patients.

[4]Expressing both costs and outcomes in monetary units.

[5]E.g., gains in worker productivity due to any reductions in sick leave, costs that are due to reduced working capacity or even all even all uses of time i.e., the utility of leisure, education or retirement. See: OECD, 2013, op. cit., p.34 and p.44.

[6]Cost-effectiveness is assessed by calculating how much per QALY a medicine costs.

[7]OECD, 2013, op. cit., p.34.

[8]A notable exception is hepatitis C.

[9]G. Persad, “Pricing Drugs Fairly”, 62 Wm. & Mary L. Rev. 929, 2021, p. 957 and OECD, 2013, op. cit., pp.45-46.