Call it a civilized clash of the titans. In a two-person panel at America’s Health Insurance Plans’ (AHIP) annual conference in Austin, Texas, on June 8, representatives of the health insurance and pharmaceutical industries went at it.

Eric Schultz, president and CEO of Harvard Pilgrim Health Care, Inc., was cordial but not happy. He told David Ricks, chairman, president and CEO of Eli Lilly and Co., that pharmaceutical companies should reveal how they arrive at their drug prices. He said he feels certain that behind closed doors, manufacturers base prices on “what the market can bear,” in some cases.

Because of that, Schultz said he would like to see regulators put more pressure on companies to show their hand on drug pricing. The current scenario holds a double standard, he implied. “Certainly, in the health insurance world, we are held accountable,” he said. “We have to lay out the component parts [of our pricing]. It’s a pain in the neck. It takes a lot of resources and time. But frankly, we owe it to the people we serve.”

Third Party Should Determine Drug Value

Schultz said he believes the industry needs a third-party organization like the Institute for Clinical and Economic Review (ICER), composed of physicians, academicians, ethicists and appropriate researchers, to come up with the value of a drug, based on what it should cost, the drug’s potential impact on a person’s life and multiple other variables.

Ricks was not opposed to the third-party suggestion. He noted, however, that drug pricing is a matter of uncertainty and risk. Consumers — particularly baby boomers and millennials — have become more demanding, in that they expect new and better drug therapies. The research and development is not cheap, Ricks said. Because pricing is based in part on clinical trial data, sometimes there is a difference between how the manufacturer and the insurer interpret the data. That difference of opinion is what constitutes risk. “It’s not fair for pharma to always take on the risk,” he said.

“At the end of the day, we’re faced with two choices right now,” Ricks said. One is to continue on the current path — and for manufacturers, that’s a difficult one. Increasingly, health insurers are saying they can’t afford new drugs, and they’re not sure about their benefits. When that happens, “nobody wins,” he said. The patient doesn’t get the new therapy, health plans won’t be able to achieve their goals of making members healthier, and innovators are stuck with no market for their products.

The second choice would be to pursue value-based pricing agreements, which allow pharmaceutical companies to share the risk with health plans, Ricks said. Pharmaceutical associations are pushing for more use of these arrangements, he added. Yet despite the promise of value-based deals, government barriers continue to get in the way, including pricing rules for pharmaceuticals and some of the ways the HHS Office of Inspector General enforces kickback statutes, he said.

Schultz did not share the same enthusiasm for value-based agreements, although he wasn’t opposed to them. It’s not necessary to have a value-based contract for every drug between every pharmaceutical manufacturer and health plan, he maintained. These contracts have come about when drugs have faced competition. “We should negotiate even if there isn’t a competing drug coming out,” he said.

Negotiation is complicated, Schultz said. Health plans are continually looking for the right medication for the right patient, even if there are relatively few patients who actually would benefit from the drug. Clinical trials data sometimes aren’t reliable enough because the FDA rushes the approval process in some cases. Schultz said he understands and agrees with that process, but it also makes it more difficult for health insurers to estimate the value of the drug, which makes negotiation more difficult.

Ricks said when the FDA more readily approves alternative medications, that encourages innovation and brings down prices through competition. Hepatitis C drug pricing is an example of this, he said.

All in all, Schultz argued that “the economic model for drug pricing is all wrong.” The current model allows pharmaceutical companies to arbitrarily set prices. He acknowledged the benefit of having new drug therapies available and touted the pharmaceutical industry’s role in saving lives. He cautioned, however, “We shouldn’t throw out the baby with the bathwater. The prices of these new drugs are unsustainable.”

Schultz also had a bone to pick with rebates, which allow drug companies to set the initial price of a drug, then offer health plans a rebate, or discount, off that. Setting a rebate at 40% sounds good, unless the cost of the drug is high in the first place, he said. Additionally, yearly price increases pose problems. For many generic brands that have been around for a while, the price is going up 10% to 15% a year, according to Schultz. Rebates are “completely meaningless” in this kind of environment, he said. “Until we can negotiate prices differently, in moving away from these rebates, we are going to have a continuing challenge.”

In the end, Schultz said the differing perspectives between health plans and pharmaceutical manufacturers come about, in part, because “we don’t have enough conversations.” But he is hoping to remedy that. Harvard Pilgrim has been meeting with pharmaceutical companies to ask about how they measure the value of a particular drug, “Believe it or not, this hasn’t been done before,” he said.

Ricks agreed. “I think we have a lot in common,” he said. “Now is a good time to look at innovation in payment models and collaboration between actors on the private side.”