Unleashing value: The changing payment landscape for the US pharmaceutical industry

Five major forces are dramatically altering the pharmaceutical industry’s revenue models and creating new notions of value. These forces are hastening the arrival of an outcomes-based world in which the value of a drug tracks more closely with its impact on patient health. Significant barriers remain, particularly between drug manufacturers and health insurers. This report explores possible paths for pharmaceutical companies to unlock value, improve clinical and economic evidence, and continue to build transparency with other health organizations.

Unleashing value: The changing payment landscape for the US pharmaceutical industry

Executive Summary

Companies in the pharmaceutical and life sciences sector face a fundamental challenge in the United States: demonstrating the fully realized value of their therapies in the face of intense competition from generics and rising total medical costs.

Branded pharmaceutical companies spend about $50 billion per year in drug development. And while the next-generation therapies are more targeted, they’re also more expensive. Health plans and providers, meanwhile, are becoming more sophisticated buyers and focusing on total cost of care, quality outcomes, and how drugs influence that.

Relationships among health insurers and pharmaceutical companies are as unsettled today as they’ve ever been. To determine insurers’ views on topics such as quality of evidence submissions, contracting strategies, and relationships with pharmaceutical companies, HRI conducted interviews and surveyed US health insurers and pharmaceutical benefits managers (PBMs). One theme that emerged from the research is a broad consensus that drug manufacturers and health plans need to accelerate efforts to deliver better outcomes for patients.

This report explores possible paths for pharmaceutical companies to unlock value, improve clinical and economic evidence, and build trust with other health organizations and pharmaceutical companies.

Among the findings:

  • Insurers are not confident in pharma formulary submissions. Just 5% of respondents in the HRI survey indicated they are very confident in the economic data provided by the drug industry when making coverage and formulary placement decisions. Only 7% are very confident in the information to evaluate a drug’s comparative effectiveness.
  • The availability of generics, physicians’ expert opinion, and regulatory guidance are the three most influential factors in formulary decisions by private insurers.
  • Among insurer respondents, 60% strongly agreed that pharma must demonstrate a significant clinical benefit compared to current branded and generic treatments to be considered for formulary placement. Forty-five percent (45%) agreed that a clear cost savings argument was necessary.
  • Novel payment and contracting models, such as those based on patient outcomes, are in nascent form but represent a way forward. Only 16% of health plans use this approach today, although 37% expect to support one or more alternative payment models in the next three years.
  • Lack of data infrastructure and concern about increased negotiating complexity are the top two barriers in implementing novel contracting strategies.

Explore five forces creating new notions of value

Click on each force to view a detailed pop-up chart

In this new environment, health plans and health systems may demand that a drug first demonstrate significantly more clinical benefit than existing treatment options, sometimes over a long period. Additionally, insurers and hospitals alike want to see how a drug reduces the total cost of care, reduces unnecessary or ineffective treatments, or improves quality of life. New ways to quantify these changes will impact how drugs are researched, marketed, manufactured, and priced.

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