Link to report: Principled Drug Pricing

MTS Health Partners, L.P. is publishing its first “Strategic Analytics” report “Principled Drug Pricing Centered on Innovation and Choice: Part 1”. The US drug pricing debate is one of the most important contemporary societal issues. However, this debate has been severely handicapped not only by its extreme complexity and concomitant lack of understanding of the totality of the drug pricing ecosystem, but also by the dearth and non-transparency of the key facts. Within our report we have utilized a data-driven approach (much of it proprietary), combined with in-depth analysis of global drug pricing systems, to identify the underlying fundamental and structural issues of the unique US drug pricing ecosystem. This approach has allowed us to suggest a set of putative interlinked changes that would address the ecosystem’s underlying flaws.

In our view, the US drug pricing ecosystem will inevitably undergo significant changes – these changes are likely to occur rapidly, resulting in a dramatically different pricing ecosystem. In other words, the debate is not just near-term (election induced) noise. The US drug pricing ecosystem has evolved (it was not built by design) in a direction that, if left unchecked, will shortly turn into a fundamentally broken system. A significant risk for the key constituents of the drug pricing ecosystem (i.e. patients, biopharma innovators and payers) are government measures, meaning new legislation that is unlikely to rapidly address the fundamental underlying causes of the problems but rather attempt to deal with the most prevailing symptoms and side-effects.

In order to prevent this outcome, we advocate a coordinated approach from the biopharma manufacturers and payers to drive course-correcting efforts, since this is likely the most effective and efficient path forward for both society and industry (although we do think legislative change may be a necessary part of the cure). In an efficacious drug pricing ecosystem, revenues from marketed branded drugs should reward innovative value, and more so motivate future innovative value to the multiple players in the drug ecosystem, in a fashion proportional to their direct contribution of value. The paramount risk of failure to address the current flaws in the system is the lessening of future innovation and advancement in therapeutics.

Within the report we provide data, analyses and arguments to support our view that, although prices of branded drugs are significantly higher in the US than in the comparative developed world, in totality how much the US heathcare system spends on drugs (currently) is not the problem. Rather the fundamental problem is with three central, and intimately linked, elements that have evolved in the last 10 years within the US drug pricing ecosystem, specifically: (1) non-value driven drug pricing, (2) low transparency across multiple parts of the ecosystem, and (3) high frictional costs.

Within our report we show that individual net and list drug prices do not necessarily reflect the value (i.e. cost/benefit) to the system due to a combination of non-value based pricing at launch, elevated and frequent price increases that are non-cost/benefit driven, and increasingly high drug rebates that fail to be fully passed through to the ultimate consumer (patients). The high price increases and much publicized “bad actors” in the US ecosystem are a symptom rather than a cause of the core problems. We also show that the “gatekeeper” job of the cost/benefit assessment has fallen onto PBMs. PBMs have a fundamental conflict of interest in asserting cost/benefit measures, due to the rebate/access conundrum. This conundrum results in excessively high frictional costs, as well as frequent financial incentivization that result in favoring drugs with subpar cost/benefit ratio. These three central problems are further compounded and enabled by the lack of transparency and choice across multiple parts of the ecosystem.

Our suggested solution is the “all hands on deck” approach, where biopharma manufacturers and payers work together to bring about drug pricing reform. A coordinated effort, if enacted with vigor and determination by the industries, could lead to a relatively fast and effective change to the current pricing ecosystem. The free market and consumerism based principles of drug pricing are unique to the US ecosystem, as all other countries have effectively socialized medicine. Whilst free markets principles are the right fundamental structure for pricing drugs and motivating further innovation, the current system has exploited the extremes resulting in a near broken system.

With regards to the biopharma industry, we advocate a move towards uniform and principled value (cost/benefit) bias for drug pricing and moving away from the current approach by pricing drugs based on “what the ecosystem can handle right now.” The key hurdle for success is how to accurately define value – which we broadly describe as either delivering a clinical benefit in a completely unmet medical need or significant increase in benefit/efficacy in comparison to marketed products. Value pricing already exists in many regions of the comparative developed world, and we believe the US healthcare system should move from a laggard to a leader position on value based pricing.

For the payer side of the industry, we advocate for increased transparency and choice in the prescription Rx element of insurance. Specifically, we propose a system, a consumer chosen Rx benefit, where the Rx element is broken out of the overall medical benefit and the consumer is empowered to make a selection out of a number of different bands of Rx coverage. Within each band of Rx coverage, the cost is directly proportional to level and breadth of Rx coverage. Under this system, rebates and the resultant conflict of interest, can be significantly reduced or eliminated.

Through combining the above suggested measures, the cost/benefit requirement of an effective drug pricing ecosystem moves primarily to the manufacturers, and frictional costs are reduced, and the “check” in the system is the consumer choice of the level of Rx cover.

We hope you find the report informative and thought-provoking. We further highlight that the report’s purpose is to act as a forum for continued debate. We welcome comments and questions to the coordinating author, Ravi Mehrotra ( and/or to any of the Partners at MTS.

Media Inquiries:
Argot Partners
Andrea Rabney
(212) 600 1902
Eliza Schleifstein
(917) 763 8106

Link to report: Principled Drug Pricing