Intended for healthcare professionals


Value based pricing: can it work?

BMJ 2013; 347 doi: (Published 11 October 2013) Cite this as: BMJ 2013;347:f5941
  1. James Raftery, professor of health technology assessment
  1. 1University of Southampton, Chilworth Science Park, Southampton SO16 7NS, UK
  1. raftery{at}

From next year the UK will use value based pricing to determine what it pays for new drugs. James Raftery explains what this will mean for drug companies, NICE, and the NHS

The idea of paying for “value” in healthcare was boosted by Harvard business strategist Michael Porter, who argued that healthcare should focus on value for patients, defined as “health outcome per dollar of cost expended.”1 Competition in the US healthcare system, he argued, had failed because it did not focus on value. Although aimed at the US system, his terminology was widely adopted. In the United Kingdom, new NHS policies were presented in value terms. Paying hospitals by activity was termed “payment by results,” and the system for paying family doctors for specified activities was titled Quality Outcomes Framework. Value based pricing for branded drugs, which will come into force in 2014, is part of this trend. Although the system was intended to improve access to new drugs, the decision to include wider societal costs in the assessment of value could have unintended consequences.

How are drug prices determined?

Drug companies publish prices based on the US market, which accounts for over half of world spending on patent protected drugs. Companies try to have the same prices in all countries, partly to avoid parallel imports, when drugs are bought in countries that have lower prices and exported to countries paying higher prices. However, because all but three countries (Norway, Switzerland, and Luxemburg)2 have lower income per head than the US, they struggle to pay US prices. Countries have responded with a variety of measures, including price controls, formularies, encouragement of generics, and, more recently, assessment of clinical and cost effectiveness. In those countries that host drug companies, the need for efficiency in healthcare, which implies lower drug prices, also has to …

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