Value-based

pricing in
pharmaceuticals
Hype or hope?

Realizing value series

In the face of stagnant healthcare budgets, and ever-

growing demand for care, value-based pricing has real
potential to bring value to pharma companies, payers,
patients and providers in advanced health systems,
delivering ‘hope not hype’ to critical therapeutic areas like
oncology and cardiovascular. But to unlock value, healthcare
stakeholders must consider the following practical
implementation tips: defining and measuring outcomes
effectively, choosing appropriate patients, and managing
costs efficiently.

Roger van den Heuvel Peter Gilmore

KPMG in the US KPMG in the US

Global Strategy Group

Dr. Adrienne Rivlin Dr. David Ikkersheim MD MSc PhD
KPMG International KPMG in the UK KPMG in the Netherlands
Value-based pricing
in pharmaceuticals
Hype?

Value-based pricing (VBP) of pharma products has exciting potential to help

improve patient outcomes – at an affordable cost. The concept of VBP has been
around for some time, but healthcare stakeholders are still grappling with what
it means from a practical implementation perspective.

Or hope?

We believe that, by following these three key tips below, pharma companies
and payers can unlock the “value” component of VBP:

1. Keep it simple: VBP can be highly complex, so an emphasis on simplicity

should help all parties more accurately measure the effectiveness of
this approach.

2. Focus on appropriateness of care: Choose the right drugs for the right
patients at the right time, to give a better chance of positive outcomes.

3. Keep transaction costs at reasonable levels: Both pharma companies

and payers may have to invest significantly in VBP, so robust cost
management can help deliver an affordable cost of treatment.

In this paper, we look at the barriers to implementation and discuss

pragmatic ways to achieve successful and wide-spread adoption.

© 2019 KPMG International Cooperative (“KPMG International”). KPMG International provides no client ser-
vices and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All
rights reserved.

Value-based pricing in pharmaceuticals 3

Therapies need to
demonstrate greater value
Can VBP really meet its promise?

In the face of stagnant healthcare budgets, and ever- Within a VBP arrangement, risk is shared between pharma
growing demand for care, pharmaceutical companies are companies and payers, which means all parties should
under severe pressure to demonstrate the value of their focus on appropriateness of use and on outcomes.
products. Often it is no longer enough to show that drugs We believe that, with certain products, under certain
are efficacious; they now need to demonstrate improved conditions, VBP can add the value that healthcare systems
outcomes that justify the price versus established and patients are looking for.
therapies – preferably with real world evidence.
This paper – which also features a brief case study
With many Western economies still in recovery mode, based on Novartis’ experience to date with the heart
global pharmaceutical companies are under the public drug Entresto – is the first in a series of discussions on
and political microscope, with demands for an alternative VBP by KPMG professionals, and will be followed by a
to the traditional, sales-led approach to marketing. One global survey on the topic in 2017.
payment model receiving increasing attention is value-
based pricing (VBP).1 Can VBP really meet its promise? Or
is it just another complicated way of providing discounts?

What do we mean by value?

Value comes from achieving the highest possible health gains (outcomes) for patients, measured against the total
cost of care. The other key component of value is appropriateness, both of choice of product, and of care. Under-
or over-use of a treatment, or use in inappropriate conditions, can compromise the value.2
Defining value in healthcare

Outcomes
Added value
Appropriateness
for patients
Costs over the full cycle
of care

© 2019 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent mem-
ber firms of the KPMG network are affiliated. All rights reserved.

4 Value-based pricing in pharmaceuticals

Setting up for success: when
to apply value-based pricing
An unsuccessful VBP program fails all the stakeholders: the patient – who may
not have access to critical therapies; the pharmaceutical company – which fails to
generate sufficient revenue; and the payer – which has invested in the set-up.

Two deal-breaking pre-conditions for VBP ‘Nice to have’ conditions that could help VBP

Although the prospects for VBP are promising, it is not In addition to the two aforementioned critical
suitable for every type of treatment. Before deciding pre-conditions, drugs that satisfy some or all of the
whether to apply this payment method, there are two following criteria are also likely to be more promising
essential pre-conditions for therapy: candidates for VBP:

1. Measurable outcomes: value can only be calculated — When clinicians and/or payers have concerns
where there are measurable outcomes for the over the effectiveness and/or appropriate use of
population being treated. And these outcomes should the product: in such circumstances, VBP enables
have at least a significant correlation with the product pharmaceutical companies to show their commitment
use. by demonstrating their confidence in the drug’s
efficacy in a real world setting. This is also an excellent
2. No generic alternatives available: if there are
opportunity to gather clinical evidence and address
generic versions of the product already on the market
potential efficacy concerns.
– or soon to be available – the drug is competing
with other products on costs rather than outcomes, — When the market for the drug is highly competitive:
reducing the relevance of the concept of value. VBP gives pharmaceutical companies an opportunity
to differentiate their therapies and gain market share,
through preferred or exclusive status on the formulary.

— When actual or potential sales volumes are significant:

the substantial cost of administering VBP effectively
can only be justified where the product can generate a
high total sales revenue.

Additionally, given the importance of having reliable

outcomes data, a pilot (within a specific country or region)
can give a good indication of the feasibility of VBP for the
therapy in question.

© 2019 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent mem-
ber firms of the KPMG network are affiliated. All rights reserved.

Value-based pricing in pharmaceuticals 5

Key VBP implementation
challenges
Selecting a product and treatment area is arguably the easy part! Having decided to
proceed with VBP, there are three important barriers to overcome:

Defining outcomes useful resource for measuring or estimating outcomes like

mortality, re-admissions or re-operations.
The outcome set is the key component of the VBP
agreement. Outcomes can, of course, differ per diagnosis Speaking about his company’s efforts to set up VBP
but are often already available and described in (medical) for the heart drug Entresto, Novartis CEO Joe Jimenez
literature and/or quality indicator repositories (like the US’ commented:
National Quality Forum indicators, the UK’s NHS Outcome
Previously, the only thing that you had to
Framework, and the International Consortium for Health
do was prove that your drug was safe and
Outcomes Measurement (ICHOM)).
effective. Now, there is much more onus on
It is crucial to collaborate with hospitals, doctors and us to prove that the drug delivers more than
professional societies, to select outcomes and clearly that and has a positive patient outcome. So
define inclusion and exclusion criteria for patients, as one of the hardest things we had to do in the
well as gain support and buy-in. Longer-term outcome development of Entresto was to agree with
measures (like 5-year survival rates) are often less useful, the FDA on the endpoints of the trial. How are
due to the delay in these outcomes becoming measurable. we physically going to measure things like
reduced hospitalization? There was a lot of
Once outcomes are defined, the next hurdle is estimating
back and forth.3
causality between the product and outcome. This is
because outcomes in a real world setting often partly There may be a temptation to measure clinical outcomes
depend on various externalities (lifestyle, compliance, etc.), via clinical registries as well as functional status via
which may not be within the manufacturer’s control. There PROMs. We recommend a more efficient approach,
are no easy solutions here, as it is often impossible to fully sticking to one data source, with, preferably two or three
control these externalities. outcomes from the selected data source.

Measuring outcomes In the same VBP arrangement, which is discussed in

greater detail in the case study at the end of this paper,
An effective VBP scheme needs timely, accurate data to
a spokesperson for Cigna, one of the payers, noted that:
track the progress of therapies. Ideally, the infrastructure
to measure outcomes will already be largely in place; if Cigna will be tracking the outcomes based on
this has to be built however, it can push up costs. Clinical our own claims data of our customers.4
registries or patient reported outcomes (PROMs) are
As pharmaceutical companies search for ways around
already available in numerous therapeutic areas (e.g.
these hurdles, they may be able to learn from the recent
oncology) and geographies. When such facilities do not
VBP agreements in the US for a new class of cholesterol-
exist, the cost of establishing them should be factored
lowering drugs (PCSK9 inhibitors).
into the total cost of setting up VBP. Claims data (from
payers or pharmaceutical companies) can be a remarkably

© 2019 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent mem-
ber firms of the KPMG network are affiliated. All rights reserved.

6 Value-based pricing in pharmaceuticals

Regulatory and legal barriers

Many current healthcare payments systems are not compatible with VBP
requirements. The two main barriers to implementation are incompatible
pricing structures and restrictive legislation:

Existing pricing structure

To achieve greater buying power, many countries set drug prices centrally.
For example, in the UK the NHS caps spending growth on drugs via the
Pharmaceutical Price Regulation Scheme (PPRS). Without specific provisions
for VBP arrangements, there is no clear route for payers to negotiate separate
VBP schemes in such systems.

In the US, government pricing programs like Medicaid Best Price, Medicare
Part B and 340B did not foresee (and are not compatible with) the
requirements of VBP. Medicaid Best Price effectively creates a ‘floor’ price,
below which it is not possible to drop drug prices without incurring (additional)
rebate liability. Similarly in Medicare Part B Average Sales Price Pricing, VBP
agreements could drag down the average price of the product and reduce the
amount at which doctors are reimbursed.

Legal

It is often unclear how VBP arrangements fit within existing legislation.

Some health systems explicitly prohibit payments outside of legally
mandated reimbursement systems. Many countries already have some VBP
arrangements in place, which can at least provide guidance for meeting legal
requirements. According to Justin Senior, Deputy Secretary for Medicaid (US):
States have been trying strategies like value-based purchasing
to bring down their drug costs, but there are barriers to doing
so, such as ‘best price’ requirements. The requirement you’re
supposed to give [the Medicaid] program the ‘best price’
available – it becomes very difficult to calculate that when
you’re in a value-based purchasing arrangement. It’s used as
an excuse for getting out of those types of arrangements by
pharmaceutical companies.5

© 2019 KPMG International Cooperative (“KPMG International”). KPMG International provides no client ser-
vices and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All
rights reserved.

Value-based pricing in pharmaceuticals 7

Three tips for successful VBP
implementation
Our observations of VBP and our experience working with pharmaceutical companies
on this topic have highlighted three key ways to overcome the many barriers and
implement an effective arrangement:

Focus on appropriateness of care Keep it simple

1 The goal of any therapy is to achieve

good outcomes at an optimal cost. And
the best way to realize this ambition
is to provide the right drugs at the
right time to the right (sub)population. By understanding
2 Accept that confounding factors
can impact outcomes. It is difficult to
fully measure the impact of a product
on, for example, reducing hospital
admissions in patients, because causes of admissions
how their products best fit into care pathways, pharma are varied and complex. Ideally, a good control group
companies can recommend more precisely when (and can provide evidence of relative risk reduction, but this
when not) to prescribe the drugs, and increase the information is often not available. Those measuring the
chances of a good outcome. product’s effectiveness should be satisfied with a link
between usage and outcomes.
Targeting the appropriate patients also improves value
for payers, as they are not wasting money on prescribing Make full use of existing data infrastructure
drugs for patients unlikely to benefit. The overall success (e.g. existing clinical registries or claims data).
of a VBP arrangement is highly dependent on appropriate Data availability varies from country to country, making
patient selection. Off-label use typically leads to worse it difficult to implement equivalent pricing mechanisms
outcomes, pushing up costs for payers and reducing across several countries. Italy’s national health service,
payments to pharmaceutical companies. Sistema Sanitario Nazionale (SSN), has paid for data
collection, making VBP significantly more attractive and
increasing its deployment levels.

Keep the payment mechanism simple. Use a minimum

number of outcome measures (say two or three), even
when tempted to use multiple endpoints. For example,
there may be a temptation to measure clinical outcomes
via clinical registries as well as functional status via
PROMs. We recommend a more efficient approach,
sticking to one data source, with, preferably two or three
outcomes from the selected data source. ‘Perfect’ is often
the enemy of ‘good’ in these cases, especially in the
early phases.

© 2019 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent mem-
ber firms of the KPMG network are affiliated. All rights reserved.

8 Value-based pricing in pharmaceuticals

 Keep transaction costs at reasonable Regardless of who foots the bill, it is essential to drive

3
levels down transaction costs through smart measurement
processes. Be pragmatic when defining outcomes
Creating and maintaining an outcome
and factor in the possibility of externalities. And make
measurement infrastructure can be
use of existing data sources such as clinical registries,
so expensive that it undermines the
claims data (from payers or pharmaceutical companies)
cost-effectiveness of the entire VBP arrangement. Then
and/or patient reported outcomes. Also consider setting
there is the question of who pays for it? The insurer may
up online platforms for negotiation and contracting, to
often be responsible for tracking patients’ health, but
further drive down transaction costs.
few payers have the capabilities to do so. This shifts the
onus to pharma companies, who may bundle the cost of
measurement into a package that also includes the drugs.

How VBP can help to unlock value in healthcare?

Defining value in healthcare

2 Outcomes
Added value
for patients 1 Appropriateness

3 Costs over the full

cycle of care

© 2019 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent mem-
ber firms of the KPMG network are affiliated. All rights reserved.

Value-based pricing in pharmaceuticals 9

VBP can offer a win-win for all
stakeholders
VBP has real potential to bring value to pharmaceutical companies, payers, patients
and providers in advanced health systems, delivering ‘hope not hype’ to critical
therapeutic areas like oncology and cardiovascular.

But this can only happen when stakeholders define sharing data on treatment regimes. Spreading better
and measure outcomes effectively, choose appropriate practices in this way should yield better outcomes at
patients and manage costs efficiently. VBP can transform optimal cost, thus enhancing value for patients and the
the relationship between pharmaceutical companies and entire health system.
clinicians/hospitals.
The case study of Entresto, highlighted below, brings to
Instead of being just suppliers, drug companies can life the challenges and opportunities presented by VBP.
become a more integral part of care pathways, by
benchmarking outcomes for different providers and

Case study: Entresto

Entresto is an innovative drug for treating chronic heart failure. Manufacturer Novartis claims this is the first new
drug that can demonstrably lower mortality rates when compared to other treatments. A clinical trial showed a
21 percent reduction in heart failure hospitalizations – a clear improvement over existing treatments. Following
regulatory approval in both the EU and the US in 2015, Entresto was launched in US in the same year.

Entresto’s VBP arrangement6

In February 2016, Novartis signed VBP agreements with US based health insurers Cigna and Aetna. Cigna’s
payments to Novartis depend on a reduction in the proportion of customers admitted to hospital for heart failure.
Aetna’s payments are based on the drug replicating the results achieved in clinical trials, and on the rate of deaths
related to heart failure. To satisfy these targets, Novartis faced the following challenges:
Developing metrics to measure ‘reduced hospitalization’: This includes incorporating hospitalization
as an endpoint in clinical trials and getting US FDA (Food & Drugs Administration) approval.

Tracking and measuring outcomes: A lack of technology infrastructure for electronic medical records
was expected to hinder measurement. To overcome this, before the launch Novartis planned to bundle
Entresto with a remote monitoring device to help physicians trace early signs of deterioration, and also
reduce hospitalization. Unfortunately this technology is still in its infancy and was not ready at launch.
Cigna is currently tracking the outcomes using claims data of its customers.

Cardiologists’ reluctance to prescribe Entresto: Many cardiologists currently using effective generic
drugs cannot be persuaded to switch to Entresto, which is more expensive.

© 2019 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent mem-
ber firms of the KPMG network are affiliated. All rights reserved.

10 Value-based pricing in pharmaceuticals

 Case study: Entresto (cont.)

Reaching critical sales mass to get the most out of VBP

At US$21 million, 2015 sales were below the analysts’ forecast of US$80 million7 – although it is arguable that
without VBP the figures would have been even lower. J.P. Morgan analysts forecast sales of US$180 million in
2016, reaching US$2.4 billion in 2020, and a peak of US$5 billion (Novartis’ long-term target) from 2022 to 20258.
Getting VBP right is likely to be a crucial factor in the growth potential for this drug, which should ideally benefit all
stakeholders.

2015 2016 2020 2022-25

Forecast Actual Forecast Forecast Forecast
US$

5 bn

US$

US$
2.4 bn

US$
US$

80 20 m
180 m
m

© 2019 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent mem-
ber firms of the KPMG network are affiliated. All rights reserved.

Value-based pricing in pharmaceuticals 11

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12 Value-based pricing in pharmaceuticals

Sourcing
1. Other names for value-based pricing are: performance-based pricing,
managed entry agreements, risk sharing, outcome-based schemes, access
with evidence development, etc.

& notes 2. Adopted from What is Value in Health Care? Michael Porter, New England
Journal of Medicine, 23 December 2010. Appropriateness component
based on KPMG value-based pricing experience e.g. see Contracting value:
shifting paradigms, KPMG International, 2012.

3. Novartis CEO talks about drug costs, paying doctors and ‘doing the right
thing,’ Washington Post, 24 September 2015.

4. Cigna, Aetna enter outcome-based contract with Novartis for heart failure,
Business Insurance, 10 February 2016.

5. Value-Based pricing will help with high Rx cost, MEDPAGETODAY,

23 November 2015.

6. KPMG Research and Analysis, 2016.

7. Equity Research Report Novartis, Natixis, 1 February 2016.

8. Analyst Report Novartis, J.P. Morgan Cazenove Europe Equity Research, 25

April 2016. Courtesy JPMorgan Research, Copyright 2016.

© 2019 KPMG International Cooperative (“KPMG International”). KPMG International provides no client
services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
All rights reserved.

Value-based pricing in pharmaceuticals 13

Authors
Roger van den Heuvel Peter Gilmore About KPMG’s
Principal Principal Global Strategy
Global Strategy Group Global Strategy Group
Group
KPMG in the US KPMG in the US
KPMG’s Global Strategy
E: [email protected] E: [email protected]
Group works with private,
T: +1 212 997 0500 T: +1 703 343 2392 public and not-for-profit
organizations to develop and
Dr. Adrienne Rivlin Dr. David Ikkersheim MD MSc PhD implement strategy from
Partner Partner ‘Innovation to Results’ helping
Global Strategy Group Global Strategy Group clients achieve their goals
and objectives. KPMG Global
KPMG in the UK KPMG in the Netherlands
Strategy professionals develop
E: [email protected] E: [email protected] insights and ideas to address
T: +44 20 76941992 T: +31206 564354 organizational challenges such
as growth, operating strategy,
Anuj Kapadia Dr. Christoph A. Zinke cost, deals, digital strategy and
Director Partner transformation.
Global Strategy Group Global Strategy Group
KPMG in the US KPMG in China
E: [email protected] E: [email protected]
T: +1 212 872 3040 T: +85221402808

kpmg.com/strategy

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