Regulatory approval is the final hurdle for health innovations. It’s what determines success or failure for the pharmaceutical company and can be the difference between life and death to a patient when it involves drugs such as anti-cancer and anti-HIV treatments. But the journey to market is a long and costly one; there is no magic pill.

In practice, developing a new drug is estimated to take 10 to 15 years, at an average cost of US$2.6 billion (factoring in the cost of failures). Collectively, the top 50 pharmaceutical companies alone spent an estimated US$167 billion on R&D in 2022.

Before new drugs reach markets, they are rigorously evaluated for medical efficacy and safety, as well as for the costs of treatment and care processes. By the end of phase III clinical trials, a drug may be granted full market access on the basis of strong positive evidence or denied when the outcomes are not sufficiently robust. But there are also drugs that fall in between – when the evidence is insufficient to decide one way or the other. 

In cases where regulators see value in exploring the health benefits of a new drug further to assess its effectiveness, it can be made available in the market while undergoing further evaluation. Such “conditional approval schemes” can help reduce uncertainty about a drug’s safety, medical efficacy or cost-effectiveness. This avenue to accelerate market access is not uncommon, as we see from the United Kingdom’s Cancer Drugs Fund and the Innovative Medicines Fund of the European Medicines Agency. 

But conditional approval schemes are designed on a case-by-case basis. There’s no set formula to determine how much data to collect, how to structure reimbursement for the new drug and how to reappraise the reimbursement approval and pricing decisions by the end of the scheme.

When it’s this close to the finish line, we need to better balance costs and health benefits in bringing promising drugs to market.

Aligning incentives for market access

A drug in phase III clinical trials would have been studied for several years, but not all drugs get that far. On average, only 52 percent of treatments pass phase I clinical trials, while 29 percent make it past phase II. For all the costs sunk into drug discovery and development, pharmaceutical and biotech companies are motivated to ensure their investments yield monetary rewards. 

Policymakers and public healthcare systems, on the other hand, are tasked to ensure that new health innovations are safe, have proven efficacy and are made available to improve public health – sometimes at an accelerated pace when warranted. In practice, the two parties don’t work in isolation and are, in fact, intertwined. A review of six countries reveals that Australia, France, Germany, Norway, Switzerland and the UK have centralised, state-level mechanisms designed to improve health value for money.. The exception is the United States. 

We propose rethinking the public-private boundary of assessing and potentially adopting new drugs in health systems. In a study with my collaborators*, published in Management Science, we use a stylised cooperative bargaining model to capture how the payer and company jointly reach pricing and data collection decisions. in pharmaceutical negotiations. The model offers a means to assess ways to align incentives: the social goals of public health systems and the financial objectives of pharmaceutical companies. We do this in a context which also informs the decision to use a conditional approval scheme or not in the first place. 

What our study reveals

We wanted to understand when conditional approval schemes would make sense and how pricing decisions affect incentives for drug development. Rather than assuming that public health systems or private firms hold all the bargaining power, we propose a collaborative bargaining framework in the form of a simplified market access evaluation model. 

In our study, we identified policies that suggest whether a conditional approval scheme is worth the effort – based on the expected value of information it could offer – or if access should be immediately granted or rejected. We also developed a method to determine if broad or limited access should be granted to new drugs under evaluation, considering their performance in phase III trials and the costs of terminating the scheme (should they fail to make the mark).

Further, we questioned the conventional approach to setting the interim price of drugs with conditional market access. Counterintuitively, we found that setting the price to achieve a targeted level of cost-health benefit – for example, as measured by the additional quality and quantity of extended life conferred by a new treatment – doesn’t necessarily deliver optimal outcomes.

When some jurisdictions impose a cap on the interim prices of drugs with conditional access – as the UK’s Cancer Drugs Fund has done – it can discourage the development of new drugs and lead to suboptimal conditional approval designs. Unsurprisingly, when prices are capped at levels below consumers’ willingness-to-pay thresholds, pharmaceutical and biotech companies are disincentivised to invest further. 

The power of collaborative negotiation 

In these situations, some form of risk-sharing, such as governments stepping up to share the financial risks with pharmaceutical companies, could move the dial. After all, governments helping to make full market access possible means that taxpayers might benefit from these drugs.

Interim prices during conditional access should go beyond conventional cost-effectiveness goals for a treatment and, instead, be set based on collaborative negotiations between governments and pharmaceutical companies. Adopting the value-based pricing principle that better health outcomes merit higher prices allows the parties to place a value on health benefits in a way that shares gains from improved health, as well as incentivises innovation with more attractive margins. 

Some governments are already recognising the power of collaboration. The Department of Health and Social Care (representing the UK, Scotland, Wales and Northern Ireland governments), the National Health Service in England and the Association of the British Pharmaceutical Industry have publicly recognised the importance of collaboration between the public and private sectors. Such engagement is not only necessary, but crucial in delivering improved healthcare and supporting the pharmaceutical industry so that it can continue to innovate.

A collaborative approach to pharmaceutical pricing and access decisions could help prevent poorly calibrated reimbursement and pricing. This can go a long way towards improving healthcare, health value for money and incentives for the development of effective treatments. 

*Ozge Yapar, Indiana University, and Noah Gans, The Wharton School.