The presentation summarises an OHE report, exploring the economic implications of permitting multiple prices where a medicine’s value differs by indication. It considers the impact on payer budgets, patient access, incentives for innovation, and the role of competition. Author(s) and affiliation(s): Amanda Cole, OHE. Adrian Towse, OHE. Paula Lorgelly, OHE. Richard Sullivan, King's College London. Event: Webinar presented to IQVIA based on our OHE Research Paper Location: n/a Date: 12/09/2018

1. The Economics of Innovative Payment
Models Compared with Single Pricing
of Pharmaceuticals
Is there a better way to pay for cancer drugs?
Amanda Cole, Adrian Towse, Paula Lorgelly and
Richard Sullivan
Webinar for IQVIA, September 2018
We would like to acknowledge funding from IQVIA

2. What are the economic implications of an
alternative model?
• Research question: What are the economic implications
of an alternative to the single-price model of payments for
pharmaceuticals in oncology?
Please cite as:
Cole, A., Towse, A., Lorgelly, P. and Sullivan, R. (2018). Economics of Innovative Payment Models
Compared with Single Pricing of Pharmaceuticals. OHE Research Paper 18/04, London: Office of
Health Economics. Available at: https://www.ohe.org/publications/economics-innovative-payment-
models-comparedsingle-pricing-pharmaceuticals#overlay-context=publications
• In particular what are the
implications for:
• payer budgets?
• patient access?
• incentives for innovation?

3. Agenda
1. Introduction
i. Alternatives to a single price
ii. Price discrimination and IBP
iii. Assumptions
2. Short-term (“static”) effects of IBP
i. What does the literature say?
ii. Deconstructing the arguments:
alternative scenarios for the impact of IBP
iii. Critique of the literature
3. Longer-term (“dynamic”) effects of IBP
emerging over time
i. The potential impact of competition
ii. Example: PD-1/L1 inhibitors
4. Can innovative payment models work?
i. Practical challenges
ii. Different country contexts
5. Conclusion
Agenda

4. Agenda and five key take-aways
1. Introduction
i. Alternatives to a single price
ii. Price discrimination and IBP
iii. Assumptions
2. Short-term (“static”) effects of IBP
i. What does the literature say?
ii. Deconstructing the arguments:
alternative scenarios for the impact of IBP
iii. Critique of the literature
3. Longer-term (“dynamic”) effects of IBP
emerging over time
i. The potential impact of competition
ii. Example: PD-1/L1 inhibitors
4. Can innovative payment models work?
i. Practical challenges
ii. Different country contexts
5. Conclusion
Single price for a single drug creates a disconnect
between price and value. Innovative pricing models
– such as IBP – could address this disconnect.
Where IBP expands access, social welfare
is increased, but expenditure may rise.
Previous critiques of IBP have their
limitations, and crucially omit the
potential longer-term dynamic
impact of IBP.
There are practical challenges, but
these are surmountable.
The overlooked benefit of IBP is long run impact of
incentivising R&D (leading to new treatment
options for patients) and increasing price
competition, thereby delivering better value.
Agenda

5. Single price for a single drug disconnects
price and value
• It is generally accepted that the price of a medicine
should be linked to its value
• Oncology drugs are increasingly found to be of value in
multiple contexts, e.g.
• In different cancers
• Different stages of disease
• Different time points in a treatment regimen
• In combination with other therapies
• A single price (i.e. one, uniform price) for a single drug
means that relationships between price and value may
vary a lot by context
1. Introduction

6. Different models are emerging to address
this challenge
…all are designed to better match payments with value.
• We use the term indication-based pricing (IBP) to refer to
the concept of having different prices when a drug is
used in different contexts
Indication-based
pricing (IBP)
Value-based
pricing
Outcome-based
reimbursement
1. Introduction

7. Economic principles: price discrimination
• Charging different prices for the same product
• Third degree price discrimination: dividing the market
into segments, and charging different prices to those
different segments
• Involves segmenting the market based on willingness and/or
ability to pay
• Prices higher/lower depending on price sensitivity (“price
elasticity of demand”)
• Examples:
– Trains: peak vs. off-peak
– Cinema tickets: Adult, Student, Senior
• Total social welfare1 increases if and only if total
consumption increases
• There is a transfer of “surplus” from consumer to producer
1. Introduction
1 Economic (social) welfare is the total benefit available to society from an economic
transaction or situation (sum of producer and consumer surplus)

8. Price discrimination in the context of
pharmaceuticals
• Decisions are mediated by a third party payer (e.g.
NHS England)
• The direction of price change ( or ) and surplus
transfer between payer and producer depends on
where “single” price is set
• Price discrimination via IBP could expand patient
access1 if it allows additional indications to be
reimbursed
• If patient access expands, then welfare is improved
• We consider a whole market analysis, where there are
several competing products
1. Introduction
1 New subgroup of patients receiving treatment with a better safety/efficacy profile than
before.

9. Price discrimination in the context of
pharmaceuticals
We assume that…
• …Consumer’s demand curve is replaced by a third
party payer’s willingness to pay (WTP) schedule. This
can be inferred from an implicit or explicit “threshold”1
• The greater the incremental health gain, the greater the
payer’s willingness to pay (WTP)
• …If an intervention is “cost-effective” (falls under the
relevant threshold) then it represents good value for
payers and a worthwhile investment
• …There is a direct relationship between price and
investment in R&D by manufacturers
1. Introduction
1 Describes the WTP for a unit of health benefit. The threshold should be based on the
opportunity cost of spend at the margin.

10. Short-term “static” effects of IBP
By which we mean…
• The impact of IBP is considered in terms of what
indications are targeted (or not) now
• Does not consider longer-term (“dynamic”) impact on
incentives for R&D, and the role of competition
• Most of the literature arguing for/against IBP illustrates
only the static impact of IBP.
2. Short-term (“static”) effects of IBP

11. What are the arguments for and against:
single price model vs IBP
Bach (2014)
IBP would increase transparency and lead to
rational prices for drugs, potentially lowering
prices for lower value indications
Chandra & Garthwaite (2017)
IBP would lead to higher prices for patients who
benefit the most, higher utilisation for patients
who benefit the least, higher overall spending
and higher manufacturer profits
Bach, P. B., 2014. Indication-specific pricing for cancer drugs.
JAMA, 312 (16), 1629-1630.
Chandra, A. & Garthwaite, C., 2017. The economics of indication-
based drug pricing. New England Journal of Medicine, 377 (2),
103-106.
Maybe
Absolutely
Not necessarily (more
on this later)
2. Short-term (“static”) effects of IBP
The crucial difference is the starting point: how is the single price set?

12. Survival
gain
(years)
Typical
treatment
duration
(months)
Total
typical
treatment
cost ($)
Current
monthly
price ($)
Indicator of
current
value: Cost
per life year
gained
(approx.)#
Monthly
price based
on
Indication
with most
value
Monthly
price based
on
Indication
with least
value
Monthly
price based
on value of
$150,000
per life
year
gained
First line – low
value
indication
(LOW VALUE)
(i) first-line
treatment
recurrent/
metastatic
HNSCC
0.23 4.16 $42,875 $10,319 $190,556 $471 $10,319 $8,123
Locally
advanced –
high value
indication
(HIGH VALUE)
(ii) locally
advanced
HNSCC
1.64 1.39 $14,292 $10,319 $8,706 $10,319 $226,075 $177,798
HNSCC: Squamous cell carcinoma of the head and neck
Uniform
price
High/low value
at uniform price
Bach
(2014)
Chandra &
Garthwaite
(2017)
“Value-
based”
prices
What could IBP look like?
The starting point matters: the example of
cetuximab
2. Short-term (“static”) effects of IBP
Price goes
down for
low-value
indication
Price goes
up for
high-value
indication

13. Deconstructing the arguments
• Imagine you have a drug with three indications
• It works best in one indication (‘high value’: HV), OK in
another (‘medium value’: MV), and has smaller (but still
positive) benefits in the final indication (‘low value’: LV).
• Under uniform/single pricing you can pick one of 3 prices,
which correspond to the value in the high-, medium- and
low-value indications
• Each price captures different segments of the market
• IBP permits you to have three different prices for the HV,
MV and LV indications
2. Short-term (“static”) effects of IBP

14. Value($)
PU
NU
LV
MV
HV
Value($)
Number of patients
PM
NIBP
LV
MV
HV
PL
PH
Uniform pricing scenario:
N: Number of patients (Nu under uniform pricing, NIBP under IBP)
P: Price (PU under uniform pricing scenarios, PH [high value] PM
[medium value] PL [low value] under IBP)
Value: HV- High value; MV: Medium value; LV: Low value
Consumer (payer) surplus
Producer surplus
↑ Prices, ↑ Spend,
Access unchanged,
Transfer of surplus
to producers,
Welfare unchanged
The varying impacts of moving to IBP
IBP scenario (static)
2. Short-term (“static”) effects of IBP
• Price corresponds with LV indication
• All patients have access
• Significant consumer surplus for
use in MV and HV indications

15. Value($)
PU
NU
LV
MV
HV
No access
Value($)
Number of patients
PM
NIBP
LV
MV
HV
PL
PH
Uniform pricing scenarios:
N: Number of patients (Nu under uniform pricing, NIBP under IBP)
P: Price (PU under uniform pricing scenarios, PH [high value] PM
[medium value] PL [low value] under IBP)
Value: HV- High value; MV: Medium value; LV: Low value
Consumer (payer) surplus
Producer surplus
No patient access
↑/↓ Prices, ↑ Spend,
↑ Patient access,
Transfer of /extra
surplus to producers,
↑ Welfare
The varying impacts of moving to IBP
IBP scenario (static)
2. Short-term (“static”) effects of IBP
• Price corresponds with MV indication
• Patients in LV indications are denied access
• Consumer surplus for HV indications

16. Value($)
PU
NU
LV
MV
HV
No access
No access
Value($)
Number of patients
PM
NIBP
LV
MV
HV
PL
PH
Uniform pricing scenarios:
N: Number of patients (Nu under uniform pricing, NIBP under IBP)
P: Price (PU under uniform pricing scenarios, PH [high value] PM
[medium value] PL [low value] under IBP)
Value: HV- High value; MV: Medium value; LV: Low value
Producer surplus
No patient access
↓ Prices, ↑ Spend,
↑ Patient access,
Extra surplus to
producers,
↑ Welfare
The varying impacts of moving to IBP
IBP scenario (static)
2. Short-term (“static”) effects of IBP
• Price corresponds with HV indication
• Patients in MV and LV indications are
denied access
• No consumer surplus

17. Value($)
PU
NU
LV
MV
HV
Value($)
PU
NU
LV
MV
HV
No access
Value($)
PU
NU
LV
MV
HV
No access
No access
Value($)
Number of patients
PM
NIBP
LV
MV
HV
PL
PH
Uniform pricing scenarios: IBP scenario (static)
N: Number of patients (Nu under uniform pricing, NIBP under IBP)
P: Price (PU under uniform pricing scenarios, PH [high value] PM
[medium value] PL [low value] under IBP)
Value: HV- High value; MV: Medium value; LV: Low value
Consumer (payer) surplus
Producer surplus
No patient access
↑/↓ Prices, ↑ Spend,
↑ Patient access,
Transfer of /extra
surplus to producers,
↑ Welfare
[If (as assumed by Bach) MV and LV
indications are reimbursed at HV price, then
↓ Spend and patient access unchanged]
OVERALL …
↑ Spend
↑ Patient access
↑ Welfare (but
transfer to
producers)
The varying impacts of moving to IBP

18. Existing literature fails to take into account three
critical factors
1. Level of uniform price assumed
• Is it credible to assume profit-maximising uniform price
would be equivalent to lowest value indication?
• More likely profit-maximising uniform price corresponds with
higher value indications, with manufacturers choosing to
forgo lower value indications altogether to protect profits
• Where IBP expands access, social welfare is increased
2. The presence of an HTA system to guarantee value
• If differentiated prices under IBP are set using an acceptable
cost-effectiveness threshold, then the spend is a worthwhile
and cost-effective way to generate health gains for patients.
3. The dynamic context…
• Impact on incentives for R&D and role of competition
2. Short-term (“static”) effects of IBP

19. Longer-term (“dynamic”) effects of IBP
3. Longer-term (“dynamic”) effects of IBP
By which we mean…
• Consideration of the impact of IBP on incentives for R&D
and market entry

20. Dynamic context has an impact on R&D
and on pricing
• IBP could optimise R&D incentives:
• Allowing companies to target further indications – by
permitting entry into new indication markets without
compromising presence in existing indication markets
• In turn, this will likely drive competition at the indication-
level
• Manufacturers are not price-setting monopolists. There
can be competing entry during patent-life
• Value-based indication prices (based on setting price at
the maximum WTP) should therefore be seen as price
‘ceilings’; competition can drive prices down below these
levels.
3. Longer-term (“dynamic”) effects of IBP

21. Value($)
Number of patients
PM
NIBP
LV
MV
HV
PL
PH
IBP scenario (static)
N: Number of patients (Nu under uniform pricing, NIBP under IBP)
P: Price (PU under uniform pricing scenarios, PH [high value] PM
[medium value] PL [low value] under IBP)
Value: HV- High value; MV: Medium value; LV: Low value
Consumer (payer) surplus
Producer surplus
Value($)
Number of patients
PMd
NIBP
LV
MV
HV
PLd
PH
PM
PL
IBP scenario (dynamic)
Dynamic price for
the medium / low
value indications
(PMd/PLd)
Value (PM/PL in
static scenario)<
This leads to transfer of surplus
from producer to consumer (payer)
The potential impact of competition
3. Longer-term (“dynamic”) effects of IBP

22. An illustrative example: competition and PD-1/L1
inhibitors
• Rapid momentum for clinical development in immuno-
oncology, e.g. PD-1 and PD-L1 inhibitors
• 160 agents in clinical/pre-clinical studies, with 50 in the
clinical phase; more than 1,500 clinical trials underway
and over 1,000 combination studies in the pipeline1.
Vastly simplified version of the T cell interaction with cancer from www.SmartPatients.com.
3. Longer-term (“dynamic”) effects of IBP
1 Alsaab, H. O., Sau, S., Alzhrani, R., Tatiparti, K., Bhise, K., Kashaw, S. K. & Iyer, A. K., 2017. PD-1 and PD-L1
checkpoint signaling inhibition for cancer immunotherapy: mechanism, combinations, and clinical outcome.
Frontiers in pharmacology, 8 561.

23. Timelines for PD-1 and PD-L1 inhibitors
Source: EMA authorisation documentation
*Note that Avelumab is an orphan medicinal product granted conditional approval by the EMA
Abbreviations: Non-Small Cell Lung Cancer (NSCLC); Renal Cell Carcinoma (RCC); Squamous Cell Cancer of the Head
and Neck (SCCHN); Urothelial Carcinoma (UC); Merkel Cell Carcinoma (MCC).
Indication timeline for EMA-approved PD-1 and
PD-L1 inhibitors
3. Longer-term (“dynamic”) effects of IBP

24. Using indication information from the previous slide together
with evidence from HTA value assessments* we illustrate the
potential for competition using the IBP PD-1/L1 inhibitors in
three indications.
Potential impact of competition with IBP
PD-1/L1 inhibitors
*Indicative data on gain in quality-adjusted life years (QALYs) and patient numbers obtained from
documentation from NICE and the Institute for Clinical and Economic Review.
Consumer (payer) surplus
Producer surplus
3. Longer-term (“dynamic”) effects of IBP
• Competition at the
indication-level can drive
down prices below value-
based ‘ceilings’
• Transfer of surplus from
producer to consumer
(payer), thus limiting the
impact of IBP on payer
budgets.

25. Can innovative payment models really work?
Practical challenges
• Legal and regulatory hurdles
• e.g. Medicaid’s best price rule
• Contractual or financial flow issues
• Payer who agrees the price with the manufacturer may be
reimbursing the provider who in turn pays the wholesaler
who pays the manufacturer …
• Data collection that tracks uses and outcomes by
indication
• Proxies or surrogate measures: e.g. treatment duration?
• Arbitrage (re-selling) must be impossible
• How to attribute value between drugs for combination
therapies?
4. Can innovative payment models work?

26. Can innovative payment models really work?
Implications for different country contexts
• There may be differences between tax-based health
systems and social insurance based systems
• Tax-based systems can focus on expenditure control at
the expense of health gain, hindering the use of IBP to
improve overall health system value
• Social insurance based systems may find it easier to have
rebates made directly to the payer, which facilitates
implementation of IBP
• Social insurance systems require data collection to meet
patient claims. This can provide a starting point for
supporting IBP.
4. Can innovative payment models work?

27. Conclusion
• In the short term, IBP can improve overall welfare if
patient access increases, but expenditure may rise
• Existing research has neglected longer term impact:
optimised incentives for R&D can lead to new treatments
options for patients
• Increased price competition at the indication-level drives
down prices and delivers better value to the health
system
5. Conclusion
IBP could lead to short term rewards of greater
patient access, and long term gains of incentivising
R&D and competition

28. To enquire about additional information and analyses, please contact
Amanda Cole (acole@ohe.org) or Adrian Towse (atowse@ohe.org)
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