Performance Pay For Drugmakers

Originally published by Think Progress on March 17th, 2011. To go to the Think Progress website please click here

You tend to find the most interesting political stories in business sections, since there’s less of a commitment to “balance” and more of an effort to explain what’s actually happening. So I really liked this piece by Naomi Kresge and Allison Connolly about new German legislation to introduce performance pay for pharmaceutical companies that want their medicines to be eligible for coverage:

AstraZeneca (AZN) recently set the price of its new Brilique blood thinner, which it hopes will become its next blockbuster drug, at €1.69 ($2.38) per pill in Germany. Whether it will be allowed to maintain that price in Europe’s largest drug market remains to be seen. The British drugmaker, insurers, and German regulators are bracing for a yearlong battle over the medicine’s value, the first test of a new pricing law in Europe’s biggest economy.

What makes the legislation so wrenching for Big Pharma is that drug companies previously needed to show only that a drug was safe and worked better than a placebo. Now the onus is on companies to prove not just that a drug works but that it is actually worth more than older therapies. If a drugmaker can’t convince German regulators that its compound has greater efficacy or additional benefits, then it cannot charge more than rival medicines already on the market.

Established institutions generally dislike any change to their existing compensation systems, because things are naturally run by people who are well-adapted to the current system. But this is a change that not only should save some money by reducing expenditures on bad drugs, it should also change the nature of the drugs that get into the pipeline over the long term. Right now companies have a lot of incentive to let marketing and intellectual property considerations drive R&D. If you can produce a new drug in a category full of generics, get the patent, and market it to health providers as “new” and “better,” then you’re in a position to make money whether or not it’s actually new or better. Patients tend to trust what doctors tell them (even if it’s totally wrong) and practicing medical doctors aren’t research scientists doing independent inquiries into whether these things really are new and better.

But if pharmaceutical companies actually make more money with drugs that are actually better than they do with drugs that they just market better, this changes incentives and research priorities. The question, as ever when trying to design incentive programs, is whether or not the people in charge of doing the assessment actually know what they’re doing and have a workable system in place.


Keywords: drugs, pricing