Recommendation 1. Promote value-based pricing and use of cancer drugs.

Drug prices have increased dramatically in the United States over the past several decades, particularly for cancer drugs (Figure 1).1 A given drug has multiple prices and costs, including:

• List price set by the manufacturer;
• Negotiated prices paid by wholesalers, pharmacies, pharmacy benefit managers, insurance plans, hospitals, and healthcare practices; and
• Patients’ out-of-pocket costs.

List prices for drugs are driven largely by what the market will bear, although manufacturers take into account a number of factors, including development costs, clinical efficacy, prices of other drugs on the market, and expected rebates.2-4 Drugs pass through a series of “middlemen”—wholesalers, pharmacies, pharmacy benefit managers, hospitals, and healthcare practices—before reaching patients. Prices paid by these entities are determined through a complex and opaque system of negotiations, discounts, and rebates.5 Patients’ out-of-pocket costs depend on their insurance status and benefit plan structures. In some cases, these costs may be offset by patient assistance programs (see Resources and Research Needed to Address Financial Toxicity in Recommendation 3).

This complex process has resulted in drug prices that often do not reflect the benefits experienced by patients. Steps must be taken to better align drug prices and costs with their value. Achieving better alignment could improve the quality of cancer care; create incentives for development of innovative, effective new drugs; and help address increases in drug spending that are threatening to put high-value drugs out of reach for some patients.

A Value Framework Is Needed to Facilitate Value-Based Pricing

The Panel heard from many stakeholders that some form of value-based drug pricing should be adopted. However, there is no broadly accepted framework in the United States for determining whether cancer drug prices are aligned with their value. Defining the value of drugs is difficult, in part due to the different perspectives among stakeholders regarding the component of value (Figure 3). Despite these challenges, value frameworks that consider cost already are being used in several countries—including the United Kingdom, Canada, Australia, France, and Germany—to inform decisions about pricing, reimbursement, and government subsidization.6 The United States, with its multiplicity of healthcare systems and payers, has been reluctant to incorporate cost and cost-effectiveness into value assessments, particularly in oncology.7 Cost can no longer be ignored if the U.S. aims to balance a robust innovation pipeline with care that is accessible and affordable for all cancer patients. The Panel agrees with the National Academies of Sciences, Engineering, and Medicine (NASEM) that methods for determining the value of drugs should be tested and refined.8

Some efforts are under way—including those by the Institute for Clinical and Economic Review (ICER) and the Memorial Sloan Kettering Drug Pricing Lab9 (see Frameworks for Population-Level Assessment of Drug Value)—to develop value frameworks for use in the United States, but none of these is yet widely accepted or used. Limitations noted for one or more of these frameworks include lack of patient-centeredness, lack of systemwide perspective, inadequate provisions for updates as new data are obtained, lack of transparency about methodologies, and failure to engage all stakeholders.10-12

Developing and implementing a widely accepted value framework for cancer drugs is a critical step toward value-based pricing. An ideal framework would integrate information on clinical outcomes, toxicities, impact on quality of life, and costs. Multiple forms of evidence should be taken into account, including, but not limited to, patient-reported outcomes, results from randomized clinical trials, and real-world evidence (as appropriate). Such a framework would inform negotiations between drug manufacturers and payers and also could guide development of value-based payment models and benefit designs that promote selection of high-value drugs by physicians and patients, both of which are discussed later in this section.13 Robust value assessments could help ensure that manufacturers are financially incentivized to produce drugs that provide substantial benefit to patients and enable payers to make informed decisions about coverage based on value. Value assessments also could inform shared decision making among patients and providers and potentially improve patient outcomes (Recommendation 2).

NASEM should convene a committee to review the strengths and limitations of value frameworks being developed and/or used in the United States and other countries and determine whether these frameworks could be used to assess cancer drug value in the United States. The committee should take into account the guiding principles for value frameworks identified by the Panel (see Guiding Principles for Value Frameworks) and others.12,14-17 A range of stakeholders and experts should be included on the committee (see Stakeholders and Experts). Any identified opportunities to improve upon existing frameworks should be reported. If warranted, NASEM should develop a new framework for assessing the value of cancer drugs. In addition, the committee should recommend ways in which existing or new value frameworks should be tested and implemented. The U.S. healthcare and health insurance landscapes are distinct from those in other countries, which may have implications for value assessment processes and establishment of appropriate thresholds for value. Value thresholds should be high enough to encourage innovation in drug development.

Some policy makers and organizations have advocated changes to the Medicare Modernization Act (P.L. 108-173) that would allow the Secretary of the U.S. Department of Health and Human Services to negotiate drug prices for Medicare Part D, which currently is prohibited.18 However, it is unclear whether the Secretary would be able to achieve significantly greater savings than currently negotiated by private Part D plan sponsors.18,19 Negotiations between both public and private payers likely would be supported more effectively by developing a framework to assess drug value. The Panel also heard from several workshop participants that coverage mandates requiring Medicare and commercial insurance plans in many states to cover all U.S. Food and Drug Administration (FDA)-approved cancer drugs undermine negotiation of value-based prices.20-22 While this may be true, the Panel is concerned that eliminating current mandates may compromise patients’ access to high-value cancer drugs if other safeguards are not in place. State and federal policy makers should continue to monitor the landscape of cancer drug pricing to determine whether changing circumstances warrant eliminating or modifying coverage mandates. Narrower mandates based on drugs’ value may serve patients better than the current system.

Outcomes-Based Pricing for Cancer Drugs Should Be Explored

Outcomes-based risk-sharing agreements (sometimes called performance-based risk-sharing agreements) link payment for a drug to patients’ outcomes.23,24 Under these agreements between payers and manufacturers, manufacturers are not paid or are paid less when patients do not achieve established clinical and/or quality-of-life outcomes. Outcomes-based pricing for cancer drugs may be appealing for a few reasons:

• High-cost cancer drugs pose a financial risk for payers.
• Many cancer drugs receive accelerated FDA approval based on surrogate endpoints.
• Manufacturers may be interested in providing incentives for use of these drugs to expand the evidence base of their drug’s efficacy in clinical settings.

To date, outcomes-based pricing has been used most widely in countries with single-payer healthcare systems (e.g., Europe, Canada, Australia).23 However, interest in outcomes-based pricing has increased in the United States in recent years. A recent review of U.S. risk-sharing agreements since 1997 found that nearly two-thirds had been announced or initiated in or after 2015.25 About 20 percent of these agreements involved cancer drugs. Interest in risk-sharing agreements is expected to increase with the growing availability and use of high-priced drugs and the mounting emphasis on accountable care.26 The Centers for Medicare & Medicaid Services (CMS) recently announced it is working actively with stakeholders on innovative payment arrangements, which may include outcomes-based pricing for drugs.27 Novartis announced it is collaborating with CMS to make outcomes-based pricing available for its recently approved novel cancer gene therapy, tisagenlecleucel.23,28 Private payers also have expressed interest in outcomes-based pricing and are exploring ways to more closely align prices with patients’ outcomes.23,29

Outcomes-based pricing has potential to improve alignment of drug price and value. It also may encourage manufacturers to invest in research to identify patient subgroups most likely to respond to their drugs, which could further increase value. However, linking price to outcomes does not guarantee value-based prices, even when patients respond to a drug. The price still may be higher than warranted for the level of benefit. It also does not ensure higher quality of care, lower overall costs for payers, or lower out-of-pocket costs for patients.30,31 Payers and manufacturers must resolve several challenges when negotiating outcomes-based risk-sharing agreements, including defining meaningful outcomes and addressing lack of control over how a drug will be used by physicians and patients.23

More research is needed to determine the impact of outcomes-based pricing on value, quality, and costs for patients, providers, and payers, as well as the most effective and efficient ways to structure these agreements in various situations. For example, regulatory factors may vary depending on whether agreements involve public or private payers.32 Public and private payers and manufacturers should develop and pilot-test outcomes-based risk-sharing agreements for cancer drugs. These agreements should be structured to ensure that patients’ out-of-pocket costs also are tied to outcomes. Evaluations should be rigorous and transparent, and results should be disseminated consistently to inform future efforts.

Payment Models Should Incentivize Providers to Use High-Value Drugs

The ways in which providers and healthcare organizations are paid influence choices about healthcare and how care is delivered.33 Under the prevailing fee-for-service payment model in the United States, providers are reimbursed largely based on the individual services and products they deliver. Current payment policies may create incentives for providers to deliver more services, prescribe more drugs, and/or prescribe higher-priced drugs.34,35 For example, Medicare Part B reimburses for most covered drugs based on the average sales price plus a 6 percent add-on, which means that providers’ revenue is higher for higher-priced drugs. The 340B Drug Pricing Program—which significantly increases the profit margins of certain drugs at participating hospitals—also creates financial incentives to prescribe more drugs or higher-priced drugs.36

Drug payment policies based on volume and price have garnered significant attention, but efforts by CMS and the Medicare Payment Advisory Commission to modify incentive structures have faced strong resistance from physician groups, drug manufacturers, and patients.37,38 Opponents have argued that the ultimate goals of increasing quality, lowering costs, and improving patients’ experiences will more likely be achieved by comprehensive oncology payment reform rather than through targeted reform of drug payment policies.39 Physicians and hospital systems should be incentivized to recommend the highest-value treatment based on patients’ clinical presentation and preferences, free of financial incentives to use higher-priced options. Implementation of drug payment reform faces many challenges, including the potential for targeted changes in drug payment policies to negatively impact other aspects of care. As such, the Panel recommends that drug cost and value be considered and addressed within the larger context of cancer care payment reform.

Ongoing healthcare reform efforts in the United States include alternative payment models (APMs) that reward providers for providing high-quality, cost-efficient care rather than reimbursing them based solely on the volume of services delivered. An oncology-specific APM—the Oncology Care Model—currently is being pilot tested (see Oncology Care Model).40 The American Society of Clinical Oncology41 and the American Society for Radiation Oncology42 also have developed oncology APMs. Private payers have been experimenting with new ways to pay for cancer care with the goal of promoting quality of care while reducing costs.43

Aligning provider incentives with value is a laudable goal, but producing meaningful improvements in the complex and fragmented realm of U.S. healthcare will continue to be challenging. Changes should be informed by evidence, and unintended consequences should be identified and addressed. This requires careful and thorough evaluation of several payment models. Public and private payers should develop and test alternative payment models that support delivery of high-quality cancer care, including high-value drugs. Oncology-specific APMs should promote use of high-value cancer drugs and support future innovation by: 44,45

• Providing incentives for evidence-based care (e.g., clinical pathways);
• Encouraging first-line use of the least-costly treatment option if two or more equally effective regimens are available;
• Allowing flexibility to appropriately tailor treatments to individual patients’ needs and preferences;
• Incorporating mechanisms to enable rapid adoption of innovative drugs as evidence is generated; and
• Facilitating patients’ participation in clinical trials.

APMs should take into account how a treatment regimen will impact other healthcare spending (e.g., hospitalization, surgery, other drugs). Consideration should be given to how payment models will be implemented in clinical settings. Programs should be adaptable to fit clinical workflows in multiple settings. Providers’ and patients’ experiences also should be taken into account when programs are being evaluated.

Insurance Plans Should Promote Patients’ Use of High-Value Drugs

As drug costs have increased in recent years, many insurance plans have established drug tiers with different cost-sharing structures (patient out-of-pocket requirements) to steer beneficiaries toward preferred drugs. Most new cancer drugs are included in specialty tiers with high cost-sharing requirements; many plans require patients to pay coinsurance of 25 to 50 percent of the drug’s cost.46,47 High cost-sharing can contribute to financial toxicity and, in some cases, cause patients to forego recommended or cease efficacious care.48-52

Value-based insurance design (VBID) offers a more patient-centered approach to insurance benefit design by aligning patients’ out-of-pocket costs with the value —not the costs—of drugs and services. For example, highly effective drugs, even high-priced ones, would be available to patients at low or no cost.

VBID programs implemented by private and public payers have led to some improvements in treatment adherence and lowered patient out-of-pocket spending for chronic diseases, such as asthma, diabetes, and hypertension.53 However, the potential for VBID to improve adherence to and affordability of cancer drugs has not yet been evaluated. VBID may be well suited to cancer care due to the increasing role of high-cost specialty drugs and the growing capability to use biomarkers to match drugs with patients most likely to benefit.54,55 Public and private payers should develop and test VBID programs that promote patients’ use of high-value cancer drugs. In addition to reducing or removing financial barriers to high-cost specialty drugs when these treatments are the best option for cancer patients, payers should consider increasing out-of-pocket costs for low-value drugs and services. This strategy could increase quality of care and help cover the cost of VBID programs.56,57 Policies and regulations should be modified as needed to enable testing and implementation of VBID programs.

VBID should be applied to both infused and oral chemotherapies. Dramatically different benefit designs for drugs based on mode of administration is not consistent with value-based pricing and incentives. Cost-sharing also should be structured fairly. The Panel is troubled by the fact that Medicare Part D beneficiaries pay coinsurance based on drug prices that do not take into account the rebates paid by manufacturers to pharmacy benefit managers, which often are substantial.58 Medicare Part D and other insurance plans should calculate patients’ coinsurance based on the expected net price for the drug after rebates. Benefit plans also should include out-of-pocket spending limits to help protect patients from financial toxicity (Recommendation 3).

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