Innovative Drug Pricing via “Netflix Model”

Louisiana seeks “Netflix model” for hepatitis C drug pricing

In January 2019, the Louisiana Department of Health sent out a solicitation seeking a pharmaceutical manufacturer partner on a so-called “Netflix pricing model” for hepatitis C treatment. Evoking the name of the technology giant has drawn a lot of attention to a trend towards an innovative way of paying for medications. To understand how this model works and what benefits it provides, one need only look to the land Down Under.

Australia pioneered subscription-based pricing model for hepatitis C

In 2015, Australia inked a deal with four manufacturers of new direct-acting antivirals (DAAs) for hepatitis C treatment that boast cure rates approaching 100%. Under the terms of the deal, Australia paid a lump sum payment of US$766M in exchange for an unlimited supply of DAAs for five years. Prior to this, Australia severely rationed access to these new drugs due to their high cost. However, over 47,000 Australians have been treated in the first two years of the program. As a result, Australia has realized a per-patient cost of less than $8,000 or one-seventh the pre-deal cost.

Subscription-based pricing benefits both Australia and hepatitis C drugmakers

The beauty of Australia’s agreement lies in the benefits to both parties. On one side, the Australian government has a fixed cost for DAAs that provides predictability to an often-uncertain healthcare budget. On the other side, the manufacturers expect to realize comparable financial benefit from this deal, primarily due to the low production cost of DAAs. While unclear, manufacturers may also be able to reduce marketing and sales costs, as the Australian government is incentivized to support awareness and utilization. Most importantly, both sides benefit from a dramatically higher number of patients able to be treated and avoid the long-term challenges of living with hepatitis C.

Success of hepatitis C pricing model relies on four factors

Several key facts about hepatitis C treatment clarify why this pricing model works and provides a framework for other conditions that may benefit from a similar model.

  1. Per-patient payment is untenable for many payers due to the high cost of DAAs and the large population of hepatitis C patients.
  2. Curing hepatitis C can be extremely valuable to payers due to the high long-term cost of care for hepatitis C payments, particularly future liver transplants.
  3. Hepatitis C drugs are relatively cheap for the manufacturers to make, notwithstanding the high initial development costs.
  4. Manufacturers face fierce competition in the hepatitis C market.

Together, these facts provide the right mix of incentives for both government payers and pharmaceutical manufacturers to agree to a flat-fee pricing model. As a result, other diseases with analogous market conditions may find promise in a similar pricing model.

Alternative innovative pricing models likely needed for commercial payers

Lastly, it must be noted that flat-fee pricing primarily interests government payers, like Australia and Louisiana. Commercial payers, such as Aetna or Express Scripts, often experience high member turnover, making it difficult to recoup the high initial cost of treatment over the life of the patient. Therefore, alternative, innovative pricing models are needed to meet the needs of these key stakeholders. Despite this, the Australia example shows a promising trend toward payers and manufacturers working together to develop new pricing models that allow patients to access much-needed medications.

-Michael Koskulics

Learn more about Herspiegel Consulting at www.herspiegelconsulting.com

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