Indication-Based Pricing: The Simplest Explanation You’ll Ever Read
Modern pharmaceutical products can be used for multiple purposes. For example, the same medicine may treat both asthma and atopic dermatitis. These different purposes are called indications. Over the coming years, many medicines will be multi-indication and likely to have different value propositions across indications. However, It is unlikely that the medicine will provide the same value to patients, providers, and health systems in all indications, making it tricky when people are trying to agree on a price.
The Problem with Uniform Pricing
Most health systems function on a ‘one price fits all’, sometimes called uniform pricing. Uniform pricing tries to simplify reimbursement by saying that health systems will pay the same regardless of what indication the medicine is attempting to treat.
This is a useful pricing model because it reduces the need to collect data which tells you exactly what condition is being treated every time a patient is prescribed a medicine.
Standard practice in many countries is to price based on the value created by the first “launch” indication, before reducing the price over time as new indications are brought to market as the patient population increases that the medicine can now access.
Introduction to Indication-Based Pricing (IBP)
What happens if the values of a medicine’s different indications are vastly different? Is it possible to find a single price that provides value to health systems and sufficiently reimburses manufacturers for their investments? In such a situation, the paradigm of indication-based pricing comes in.
Strategies for IBP
The value of multi-indication products refers to the therapeutic benefits a single pharmaceutical product offers for multiple medical conditions or indications.
Indication-based pricing is an alternative pricing paradigm that attempts to find strategies to align the price or prices applied to a medicine to the value created by each indication.
Example Strategies & IBP Case Studies
Weighted pricing: setting a price based on the weighted average of the values across all indications.
Differential discounting: applying different discounts based on the indication for which the product is used, whilst the list price remains constant.
Risk-sharing agreements: contracts between the manufacturer and payer that tie the price or reimbursement level to specific outcomes or other benchmarks. Beneficial for products with uncertain long-term value.
Product Pack Variation: individual medicine presentations are explicitly aligned to a single indication or similar indication, allowing different prices to be set based on medicine use whilst maintaining the typical payer desire for ‘one vial, one price’.
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Challenges and Barriers to IBP
Legislative Barriers: from national price-setting constraints to rigid health technology assessment protocols. For example, some countries have rules which stipulate an automatic discounting on the launch of a new indication regardless of the value created by this medicine use.
Data Collection Barriers: For some forms of IBP, gathering the correct data is another hurdle. Most countries now have electronic prescribing systems in place. Still, many of these systems don’t contain standards for entering indication information. Moreover, even if they do, the added administrative burden for local teams makes it challenging to collect consistent data.
Payer Barriers: With the number of treatments that now require assessment and reimbursement, naturally, health system payers prefer straightforward pricing schemes such as uniform pricing, and the intricacies of IBP have the potential to add complexity, seem cumbersome, and be unclear on the pay-off for countries.
IBP and Launch Sequencing
Effective sequencing is an essential step for all manufacturers in the launch of new medicines. Sequencing is the decision-making process by which indications are ordered so that when launched, they create a maximum return for a pipeline investment. Sequencing decisions are considered at both a global and a local level.
Pre-development sequencing: Determines the viability of global launch before clinical trial development. Manufacturers trade-off price, market size, and perceived value to prioritise indications for development and to set time frames for trial results to be released.
Post-development sequencing: Involves the order in which products and indications are launched in markets after research has been completed. While this is influenced by a multitude of clinical, economic, and ethical factors, manufacturers have been known to withhold launch in a market if policies don’t capture the value of individual indications.
Summary
IBP models can help reduce the risks and uncertainties involved with sequences, both pre and post-development, by providing several key advantages:
Tailored value assessment: IBP ensures that the returns on a product are commensurate with its therapeutic value across all indications, including those that follow the initial launch. This tailoring should reduce the need for manufacturers to have highly accurate, pre-launch, internal value assessments to launch with the highest-priced indication first.
Flexibility in resource allocation: IBP allows manufacturers to strategically allocate resources and focus on developing medicines for indications that can offer the most value. This approach not only enhances the efficiency of R&D efforts but also helps ensure that innovative treatments are brought to market in a timely manner.
Establishing a precedent for future investments: The implementation of indication-based pricing contributes to the development of a more refined and transparent pricing system. As the value and price of individual indications are assessed and established over time, this data can inform future pricing decisions and investment strategies, particularly in the context of pre-development sequencing.
Manufacturers can leverage this information to prioritise indications likely to offer the greatest return on investment, ultimately benefiting the healthcare system and the patients it serves.
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Author
Adam Meads
CEO & Head of Research Analytics, Verpora
LinkedIn
Adam began his career as a research analyst in banking and finance specializing in behavioural research and decision performance as well as buy-side data solutions. He moved into the life sciences sector as a consultant on health system data intelligence at NHiS Ltd (now part of Wilmington plc) before moving to run his own consultancy White Space Analytics (WSA). Following a merger between WSA and Verpora, Adam now leads Verpora’s initiatives in innovative pricing and VBA contracting strategy. He heads Verpora’s Research & Analytics function. Adam is a certified member of the British Healthcare Business Intelligence Association (BHBIA).
Disclaimer
Content in this article is based on secondary market research using externally sourced data available in the public domain. Opinions and commentary are those of the authors and do not reflect views of any commercial organisation or government body mentioned in the article. For any questions relating to the article please contact adam.meads@verpora.com.
