Value-Based Medication Pricing

December 2016, Vol 4, No 12 - The First Word
Donald J. Dietz, RPh, MS

Last month, the American Medical Association (AMA) announced that it is supporting value-based pricing for medications. The AMA supports initiatives “aimed at changing the fundamentals of prescription drug pricing without compromising patient outcomes and access.”1 The association also “seeks to blunt growing pharmaceutical spending rates by tying drug prices to an optimal balance of benefits and costs.”1

According to AMA President Andrew Gurman, MD, “This transformation should support drug prices based on overall benefit to patients compared to alternatives for treating the same condition. We need to have the full picture to assess a drug’s true value to patients and the health care system,” he said in a press release.1

The new AMA policy calls for drugs to be priced based upon the value of the drug. In my estimation, market value is the basis used today to price prescription medications. Consider how newly approved drugs for the treatment of patients with hepatitis C virus (HCV) infection were initially priced at approximately $100,000 for 1 course of therapy. The treatment, however, is curative and provides value over previous, less efficacious treatment options, which have largely now gone by the wayside. As subsequent competing anti-HCV drugs entered the market, competitive forces led to the slashing of the cost of HCV treatments by approximately 50%. This has resulted in manufacturers lowering the list prices for drugs or providing hefty rebates to remain in a preferred formulary position. I believe that the value of the drug is considered by brand-name drug manufacturers when establishing the drug price. I do acknowledge that, with some drugs, recent price increases have been excessive.

Unintended Consequences

However, I am concerned about the law of unintended consequences, whereby the actions of the AMA could lead to government involvement, which, after further consideration, may be their objective after all. Government intervention in pricing would be unanticipated, and have unintended market results. Let us examine 3 examples, focusing on the value of generic drugs, the impact of research and development (R&D), and lifestyle medications.

Generic drugs
First, consider the value situation from a generic drug standpoint. The value of a weekly course of amoxicillin 500 mg for the prevention of a serious infection is surely worth more than the $10 to $20 price at a retail pharmacy. Similarly, a 1 month supply of many generics on a discount generic drug list is clearly worth more than the $4 to $10 charged. Market competition enables pharmacies to purchase these drugs for pennies per unit, and dispense a 1 month supply for less than the cost of a meal at Applebee’s. Would the price of life-sustaining generic medications increase under this policy?

Research and development
Second, consider the need for new drug R&D. The United States is the world leader in new drug innovation, creating 57% of new chemical entities from 2001 to 2010, according to a Milken Institute report.2 Under this new AMA policy, will R&D receive proper funding to continue to finance the next generation of innovative, life-saving medications?

Pharmaceutical manufacturers state that a portion of their sales for innovator, brand drugs is reinvested into their R&D for future drug development. Because the Tufts Center for the Study of Drug Development estimates that it costs $2.6 billion to develop a new drug, reinvestment is clearly necessary, and this is a viable pathway for funding.3

Lifestyle medications
Third, lifestyle medications that treat nonthreatening and cosmetic conditions, such as baldness, wrinkles, and erectile dysfunction, are often not covered by insurance. Consumers pay for these medications out-of-pocket. The price established by manufactures is not prohibitory for those consumers, who see value in the drug and make a personal decision to pay for these medications.

It is interesting that the AMA is focusing solely on prescription drug prices. According to the Centers for Disease Control and Prevention, prescription drug costs are only approximately 10% of the nation’s health expenditures.4 Is there not value in focusing on the costs of hospitalization or medical care, which account for a larger component of overall healthcare expenditures?

Helping Patients Lower Their Costs

Pharmacists should anticipate patient inquiries about the increasing costs of prescription drugs. In addition to the awareness created by this new AMA policy, consumer awareness is increasing as a result of the recent media coverage of the rising drug prices. The number of questions about drug pricing will increase in January 2017, based on new benefits coverage, changes in formulary status, deductible changes, and price increases that often occur in early January.

A pharmacy can take several steps to help patients lower their out-of-pocket costs, including:

  • For commercially insured patients who use brand-name drugs, evaluate the availability and eligibility of patients to use a copay offset program to lower their out-of-pocket costs
  • Evaluate generic or lower-cost alternatives that could be suggested to physicians and patients
  • Suggest that your patients evaluate their qualification for patient assistance programs, through which patients can obtain their medication at low or no cost. In most cases, patients need to submit income and tax information to qualify for patient assistance programs. Patients may obtain their medication directly from the manufacturer or via a designated pharmacy, and although it is never desirable to lose a prescription, this may be the best option for some patients.

Finally, when communicating with patients about the cost of their prescription medications, I recently read a worthwhile article in the Journal of General Internal Medicine that addressed how physicians can speak to their patients about medication costs.5 The article focused on the value of empathetic communication in acknowledging the cost of the medication and the impact of costs on the patient. It describes how the use of “we” statements can express partnership around cost concerns.5 For example, “Let’s see if we can find an alternative medication that will work as well, but not be so expensive for you.”5 “I wish” statements are another opportunity to acknowledge the emotional impact of financial difficulties and help humanize the process.5 An example of an “I wish” statement would be, “I wish that there were a less expensive alternative to treat your condition, but given the severity of your illness, this really is the best option to get you better more quickly.”

When faced with an expensive copayment, deductible, or noncovered medication, it is okay to ask patients whether they are comfortable with the cost before preparing the prescription. It is much easier for the pharmacist and the patient to find out about prohibitory medication costs before filling prescriptions. It also promotes dialogue, whereby patients can express whether they are uncomfortable with the out-of-pocket cost of the medication.


In summary, we should expect the clamor about rising prescription costs to increase, not diminish, in the future. Pharmacists are the frontline healthcare professionals who deliver the price to the patient. It is important to keep current with drug price increases, benefit changes, and policies that affect prescription pricing. Even more important is being able to help our patients in an empathetic manner, and, where possible, assist in managing their prescription costs so that they can obtain and be adherent to their medications.


  1. American Medical Association. AMA Supports Changing the Fundamentals of Drug Pricing. November 15, 2016.
  2. Accessed December 14, 2016.
  3. DeVol RC, Bedroussian A, Yeo B. The global biomedical industry: preserving U.S. leadership. September 2011.
  4. Accessed December 16, 2016.
  5. Graham J. Crisis in pharma R&D: it costs $2.6 billion to develop a new medicine; 2.5 times more than in 2003. Forbes. November 26, 2014. Accessed December 14, 2016.
  6. Centers for Disease Control and Prevention. Health expenditures. Accessed December 15, 2016.
  7. Hardee JT, Platt FW, Kasper IK. Discussing health care costs with patients. J Gen Intern Med. 2005;20:666-669.
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Last modified: December 20, 2016
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