Hospital Drug Pricing Optimization

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Project ThumbHospital Drug Pricing Optimization
Clients:
Development Stage Brand Drug Company
Description:

A company with a hospital-oriented, orphan drug in Phase III trials sought VOI’s assistance in preparing its commercialization strategy. Among other things, this included finding a profit-maximizing price across multiple different market segments with substantially different volume needs and price sensitivities. Internal debate had evolved into two camps: one favoring a low price to foster adoption rates and the other favoring a high price to speed the time-to-profitability.

As is usually the case with pricing, the optimal level is a function of many interrelated variables, the values of which are generally unknown. Pricing is further complicated in the institutional environment because hospitals are reimbursed on a diagnosis-related group basis. In the absence of a New Technology Add-on payment, this means that drug costs are paid out of the fixed, pre-set DRG amount, leading hospitals to reject therapies that represent a significant financial burden. Adding another layer of complexity is the fact that DRG rates vary widely between hospitals based on location, population served, and many other criteria.

Put simply, the challenge was to find a single price that worked best across all segments while meeting the client’s financial needs and also remaining attractive to the highest possible portion of hospital formulary committees. Monte Carlo analysis, one of VOI Consulting’s specialties, is perfectly suited for this type of multi-variable, unknown value problem.

VOI created a model with all key variables and defined interrelationships. Unknown variable such as segment price elasticities were assigned probability distributions instead of single-point values and price points across a range of several thousand dollars per unit were sampled equally across 100,000 different iterations. Analysis of the results clearly showed an upside-down U-shaped profitability curve with low profits on both the low and high ends of evaluated prices and a peak in lower-middle range.

Results:

The resulting profit-maximizing price was higher than some team members had expected and lower than others had hoped. The product is still in the clinical trial phase but the price point identified through VOI’s Monte Carlo analysis is expected to provide the appropriate balance between product adoption and mid-term company profitability.

Categories:

Orphan drug pricing, brand drug pricing, hospital drugs, forecasting, modeling, Monte Carlo analysis, risk-based analysis, new drug planning. DRGs, Medicare, Medicaid, CMS.

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