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A white paper from The

Economist Intelligence

Unit Healthcare

Value-based healthcareThe implications for pharma strategy

March 2014

value-based healthcareThe implications for pharma strategy

1 © The Economist Intelligence Unit Limited 2014© The Economist Intelligence Unit Limited 2014 1

Foreword 2

Executive summary 4

Introduction 7

The pinch-point: Reimbursement decisions 9

Overcoming the barriers: Preventing HTA rejections 12

Hard bargains: The effect on prices 17

Market polarisation: The effect on revenue 20

Planning for value: The effect on R&D 23

Out into the real world: Working with providers 27

Conclusion 30

About EIU Healthcare 32 Our approach 33

Acknowledgements 34 Contact details 34

Contents


succeedING IN a value-based eNvIroNmeNtNew business models to thrive in the future of healthcare

2 © The Economist Intelligence Unit Limited 2014

Foreword


Dr Vivek Muthu, healthcare director at The Economist Intelligence Unit

“Prepare for Opportunity” reads the strapline of The Economist Intelligence Unit. By this, we mean that—through research and professional insight—we help our clients to navigate the complexities of changing global markets.

In healthcare and life sciences, the future holds unprecedented challenges and opportunities for all stakeholders: industry, providers, payors, insurers, patients and policymakers. The old dichotomy between supply and demand is being replaced by the concept of an ecosystem. Cost pressures are intense; old models are being strained, while, at the same time, technology, data and science transform what is possible in terms of innovation and efficiency. Need and demand for healthcare services escalate, with each market requiring a different approach.

If there were ever a time to prepare for opportunity in healthcare, it is now. In recognition of this, The Economist Intelligence Unit has created, through acquisition and organic development, a global healthcare practice. Over the last two years, we have integrated into our business two specialised consultancies: Clearstate, a healthcare-specific market insight and intelligence business; and Bazian, a clinically led consultancy dedicated to evidence-based medicine, epidemiology, health economics and outcomes. We have meshed these together with our extant analytical, econometric and strategic-consultancy divisions.



The result is a practice that provides customised research, analysis and recommendations in the following areas:

l Strategic advisory: analysing global and local trends and mapping these against clients’ priorities.

l Market insight and intelligence: with global expertise and a unique focus on emerging markets

l Value optimisation: helping industry clients to develop propositions, products and services for a market where value is the emerging currency.

l Population-health-management solutions: helping payors, insurers and their partners to build healthcare ecosystems that optimise value.

In line with our business direction, we are developing a series of white papers to stimulate thought, discussion and feedback. This white paper, second in a series on value-based healthcare, discusses perspectives on what the concept of value—in all its aspects—means for the pharmaceutical industry, now and in the future.

I hope you will find this a thought-provoking discussion. I also hope that, through this means, we can garner your feedback on what we have said and what we have omitted to say. It is impossible, when analysing complex trends and predicting an uncertain future, to be both comprehensive and unerringly prophetic. There will be things that you will endorse, things that you won’t, and things you will wish we had said.

Please — let us know. This paper is intended to start a conversation. Please send comments/feedback to: [email protected]

Dr. Vivek MuthuDirector, EIU Healthcare



Executive summary


Value-based healthcare (VBH) promises to revolutionise our use of healthcare funding, by ensuring that healthcare expenditure is linked to patient outcomes. Yet, while the arguments in favour of this approach are widely accepted, for many pharmaceutical companies, the implementation of VBH has started to feel like a direct attack on their current business models. This report looks at the implications of this trend for pharma companies, and outlines how they can shift corporate strategies in order to cope with, and eventually thrive in, this environment.

For pharma companies and medical-technology (medtech) suppliers, the main implication of the trend towards VBH has been to raise the barriers to reimbursement. As well as gaining marketing authorisation, companies now have to invest heavily in proving the value of their product to health technology assessment (HTA) agencies, insurers and payors. This has added another layer of regulatory risk into the innovative pharmaceuticals business, reducing the chances that the sales of any one drug will justify the research and development (R&D) investment that went into it.

Moreover, the HTA process is changing as the demand for cost-efficient healthcare increases and measures of value become more sophisticated. This adds to the strain on pharma companies’ business models, as they struggle to keep track of the changing requirements and how each agency or payor interprets the rules. The poor alignment between regulations for marketing approval and those for HTA complicates matters still further.

The HTA also has implications for how pharma companies invest in R&D. As currently interpreted by HTA agencies, the drive for VBH tends to depress the prices of drugs and restrict reimbursement. As a result, only cheap generic drugs and high-value innovative drugs—notably orphan drugs



(developed specifically to combat a rare disease) and cancer treatments—have seen much revenue growth over the past few years; the middle of the pharmaceuticals market is being squeezed.

To overcome these problems, pharma companies need to:

l Manage R&D pipelines with value in mind, focusing investment on those candidates most likely to succeed in measures of economic evaluation, societal value or sheer innovation. They should use value assessment and modelling at an early stage, and ensure joined-up thinking between the R&D and commercial teams.

l Design clinical trials and conduct post-marketing surveillance to ensure that information and data are gathered as efficiently as possible, making this process more cost-effective.

l Stay well-informed of developments that may affect new product value, including regulatory changes, approval and reimbursement decisions for rival products and changes to recommended clinical pathways.

l Work with payors and HTA agencies to determine which information will need to be gathered and submitted at each stage.

l Take the initiative in terms of designing offers, ensuring there is also upside potential if outcomes are better than expected. Offers may include risk-sharing deals, pilot programmes and restricted geography.

l Improve the value proposition through more accurate targeting. This may include use of screening or companion diagnostics to identify those patients who would benefit the most.

l Get involved in partnerships with providers, in order to improve real-world patient outcomes. This may include help with ironing out variations in care, and improving adherence.

Beyond this lies the most difficult task, which is to ensure that pharma products do indeed offer value for money. This is easier said than done, given that much of the low-hanging fruit from R&D investment has already been gathered and that most new drugs offer only incremental improvements to existing ones. Nevertheless, patient outcomes can only improve if pharma companies focus their efforts and investment on diseases where they have a chance of really adding value.



However, the onus should not just be on pharma companies to cope with the new requirements as best they can. If the world is truly to benefit from the shift to VBH, co-operation, rather than antagonism, is what is needed. Insurers and HTA agencies need to work harder to ensure that their interpretation of their own rules is consistent and that their focus is on value, rather than price. International efforts to align regulations would help to reduce the burden on companies. Providers, meanwhile, would benefit from real-world partnerships with industry, using the latter’s experience to help interpret patient data and improve care pathways.

After all, VBH should not just be a question of containing costs; it should also be about improving patient outcomes. A combined approach would help that notion become a reality.



© The Economist Intelligence Unit Limited 2014 7


Introduction

At the theoretical level, the debate over value-based healthcare (VBH) has largely been won. Healthcare will no longer be paid for by volume—the number of operations, the quantity of pills—but by its value to the

patient and to society at large. Few can argue with this basic proposition at a time when healthcare budgets are under increasing strain.

At the practical level, however, there is still plenty to debate: how VBH is defined, how it is implemented, and what its effects will be. Implementation of VBH may take several forms, affecting all three sides of the healthcare sector, as well as the patient:

l On the payor side, there are measures to encourage patients to use health-care funds in a rational way, maximising their health gains. In the US, for ex-ample, value-based insurance design sets co-payments and premiums to direct patients towards the most cost-effective care.

l For providers, such as hospitals and clinics, value-based-reimbursement models create incentives for them to deliver high-quality, rather than volume-driven care, while bringing down costs. This has involved a shift away from fee-for-service payment schemes, towards those involving a mix of capitation, diagnosis-related groups, and (as rolled out under Obamacare) bundled pay-ments.

l Finally, for suppliers to the healthcare sector, including pharmaceuticals companies or medical-equipment makers, health technology assessment (HTA) now determines reimbursement in many markets. A handful of markets also have value-based pricing, which links the price of the drug or treatment directly to patient outcomes.



For patented pharma producers in particular, the devil is in the detail. The ways in which VBH is implemented directly affects producers’ revenue, whether through price controls or reimbursement decisions, or indirectly, through its effects on healthcare providers. Moreover, while the payback on R&D has always relied on good patient outcomes in clinical trials, the hurdles they have to jump in order to ensure strong product sales are rising. VBH, therefore, adds another element of regulatory risk into what is already a risky business.

VBH will also provide additional costs at a time when revenue flows are already under pressure from patent expiry, the increased complexity of research, and fiercer competition from emerging-markets producers. These factors have caused turmoil in the industry, from the mega-mergers of 2009 to the thousands of job cuts affecting administrative, R&D and, above all, marketing staff across the world. The challenge of cutting additional costs and realigning businesses to cope with the demands of VBH is not one that will easily be met.

Yet, the direction of travel appears to be set: although the details are developing, the shift towards VBH is gathering pace. And, as with any market shift, there will be companies that fare better than others in this new environment, including some that will positively thrive. This paper explores what the shift towards VBH means in practice for pharma companies and medical-device companies, and how they should adapt their corporate strategy to survive in this environment.

Some companies will fare better than others from the shift to value-based healthcare, while some will positively thrive.

at its heart, vbh involves a simple equation: value = outcomes/costIn practice, it involves complexity on several levels:

defining parameters

Which outcomes? (survival, quality-adjusted life year [QALY], patient experience, economic benefits, societal benefits)

What is included in “cost” (price of treatment, total care, patients’ own costs)?

Any exceptions (societal priorities, rare diseases, age groups, end-of-life care)?

Providing evidence

Are data on outcomes robust enough?

Are data on costs robust enough?

Are we using the right comparators?

Is different evidence needed in different markets?

Implementing decisions

Will this involve a rethink of care pathways?

How will providers/suppliers be paid?

Will provider-supplier relationships change?

effect on innovation

Is VBH a race to the bottom on pricing?

How do we demonstrate value for ground-breaking treatments?

Will it prevent new treatments being developed or marketed?




The pinch-point: Reimbursement decisions

For most pharma companies, the point at which VBH impinges most directly on their business is when a decision is taken about whether a product qualifies for reimbursement, whether under private insurance policies or

under national healthcare services. In many countries, argues Dean Summer-field, managing director, Europe for Consulting at Quintiles, a biopharmaceutical services organisation, gaining marketing authorisation is now only the first step in getting a drug to market. If the pharma company cannot then prove product value for reimbursement or pricing purposes, sales will be severely limited. This adds considerably to R&D risks.

In some ways, pharma companies have had plenty of time to get used to this additional barrier. Professor Finn Kristensen of the European network for Health Technology Assessment (EUnetHTA) dates VBH back to the emergence of health economics and what was to become evidence-based medicine in the 1970s. As academics began to explore ways to minimise the cost of healthcare, they needed to find objective ways to measure the medical, social, ethical and cost implications of drugs and treatments.

The first practical steps came in the US in the 1980s, where, despite continuing reluctance at federal level, some insurers or managed-care organisations started using HTA to determine which treatments and drugs would be covered. Europe followed suit, establishing the earliest HTA agencies, such as the National Institute for Health and Care Excellence (NICE) in the UK, in the 1990s. By 2004 the European Commission (EC) was calling healthcare-technology assessment “a political priority".

In the past five years, however, the roll-out of HTA has accelerated in the US, in Europe, in Latin America and, most recently, in Asia. This acceleration has been driven by several factors, including the financial crisis, which severely affected the government budgets available for healthcare, particularly in Europe. The pressure on

The roll-out of HTA has accelerated in the past five years as healthcare budgets come under increasing strain.




pharma budgets that followed has encouraged wider adoption of VBH techniques, in order to make the available funds go further.

In other countries, more positively, the increased cost-awareness has gone hand-in-hand with progress towards universal healthcare. As countries as diverse as the US, Indonesia and China try to expand access to healthcare, they have also been anxious to minimise the rise in expenditure. The global wave of patent expiries and the emergence of cheaper generics, including those manufactured in emerging markets, has fed into this, putting the onus on pharma companies to justify their prices.

The International Network of Agencies for Health Technology Assessment (INAHTA), which is 20 years old, now includes 57 member agencies from 32 countries, covering both developed and developing markets across the globe. These members swap notes, as do unaffiliated agencies in countries such as China or units within health ministries in Eastern Europe.

In some cases, countries that have not yet fully developed the capability will take wholesale recommendations from bodies such as NICE concerning cost-effectiveness. For pharma companies, getting NICE endorsement is, therefore, crucial. This is a role that NICE has embraced with the establishment of NICE International, which advises countries from Ghana to Kazakhstan on HTA methodology and implementation.

Bodies such as the EUnetHTA, INAHTA and scientific societies in the field assist with this roll-out of ideas, aiming to bring together theory, new data, best practice and data projects in order to develop and harmonise the workings of

The global spread of HTA

Source: The Economist Intelligence Unit.

Other HTA agencies identified by the International Society of Pharmaco-economics and Outcomes Research (ISPOR)HTA agencies affiliated to INAHTA

Additional countries involved in NICE International projects



HTA agencies. EUnetHTA is currently working on a three-year programme under the EU’s Cross-Border Healthcare Directive, which came into force in 2013, in order to strengthen pan-EU collaboration on HTA.

Even so, HTA still covers a wide variety of practices and regulations, even within relatively homogenous markets such as the EU and US. Moreover, until now there has been little progress in aligning the information requirements on safety and efficacy required for marketing authorisation, together with those needed to prove value. The result is that pharma companies have to deal with a mishmash of different policies that sometimes appear to be developing in different directions.

This adds to the cost burden and paperwork facing pharma companies, as they aim to get their treatments past these additional barriers. It also makes it far harder for them to think about the effects of VBH and HTA on their business strategies. Given the rapid changes in approach, the effect has been an additional squeeze on prices and sales, at a time when pharma companies are already under pressure. Many are still struggling to adjust.

hta in IndonesiaIndonesia’s Ministry of Health set up an HTA agency in 2003 to help the government address budgetary concerns in the healthcare sector. Its work has become more important as the country rolls out a universal healthcare system that aims to cover every citizen under one non-profit healthcare fund, the Social Security Administering Body, which started work in 2014. The aim is to provide health insurance to all of Indonesia’s 250m citizens by 2019, up from less than half at present.

The main form of HTA in Indonesia comprises the formularies and the Essential Medicines List, which incorporate pharmacoeconomic evidence in order to decide on drug reimbursement. First of all, the drugs must be registered and approved for distribution in Indonesia by the National Agency for Drug and Food Control. A screening committee then draws up a list of new drugs proposed by hospitals. An expert panel reviews the list, carries out cost-effectiveness analysis and drafts a new formulary. A national meeting of stakeholders approves the final national formulary.

To have their products included in the formularies, therefore, pharma companies generally need to have them widely prescribed and used in hospitals, convincing both doctors and hospital administrators of the efficacy, safety and cost-effectiveness of their products.



Overcoming the barriers: Preventing HTA rejections

Given these differences in approach, it is vital that pharma companies ful-ly understand the criteria that each HTA agency, insurer or payor will use when deciding whether to reimburse or pay for particular treatments.

One standard approach involves evaluating the price of a treatment against the extra quality-adjusted life years (QALYs) it offers. Some agencies then apply a straightforward threshold of, for example, US$30,000 per added QALY, only funding drugs whose prices put them below that threshold.

Yet, it is increasingly acknowledged that QALYs have limitations. They do not, for example, guarantee the affordability of treatment. Even a cost-effective drug may swallow a large proportion of healthcare funds because of the number of patients involved or the length of treatment. Some HTA agencies also, therefore, require information on the potential budgetary impact of each drug. Others, such as Sweden, incorporate an estimate of a drug’s social impact in terms of productivity gains for the patients and, consequently, the overall economy.

Such measures bring their own problems, because they are weighted heavily in favour of the most productive age groups, but they begin to give a broader reflection of value. The extent of innovation, the burden of illness, consumer quality of life, convenience (both for providers and patients) and ethics can also be taken into account.

In systems that use the QALY threshold, there may, however, be occasions when the threshold is breached, for social, political or humanitarian reasons. By 2010, NICE decisions had led to UK National Health Service (NHS) patients not gaining access to several new cancer drugs that were available elsewhere in Europe, despite a decision to allow higher thresholds for end-of-life care. When it came to power that year, the coalition government set aside a special cancer fund of £200m (US$335m) to pay for some drugs that failed cost-effectiveness tests. Last year, the lifetime of the fund was extended. Denmark has a Council for

Despite extra funds for high-cost drugs, HTA agencies still prevent many drugs from qualifying for reimburse-ment.



the Introduction of Expensive New Hospital Drugs, which aims to facilitate the use of effective, but costly, treatments.

Despite these extra funds, HTA agencies undoubtedly still prevent many drugs from gaining reimbursement, thereby restricting their sales. NICE's high-profile rejects include Roche’s Avastin (bevacizumab) for ovarian cancer, Novartis’s breast cancer treatment Afinitor (everolimus), and Pfizer’s Inlyta (axitinib) for kidney cancer. Parexel, a contract research organisation, estimates that NICE has recommended 314 of the 535 drugs presented to it for evaluation between 2000 and 2013, a 59% success rate.

But Pfizer and other companies have been highly critical of the number of rejections. After another of its products, Xalkori (crizotinib) for lung cancer, was rejected in mid-2013 Pfizer estimated that the agency had recommended only 31% of the drugs presented to it for evaluation since 2005, and only one out of 12 cancer drugs in 2013. Given that NICE’s recommendations are not only adopted by the NHS in England, but also by other countries, a negative decision is a huge setback for the drug developers involved.

Germany’s HTA agency, the Institute for Quality and Efficiency in Health Care (IQWiG), has been even more restrictive. Parexel estimates that, since its inception in 2004, it has classified 70% of the drugs it reviewed as “benefit not proven”. Since the Act on the Reform of the Market for Medical Products (AMNOG) was passed in 2011, its attitude seems to have become even more stringent. Similar trends can be seen in the US, where Express Scripts, CVS Caremark and Humana have decided against covering certain drugs. As of January 2014, the list of exclusions at Express Scripts covers 48 drugs (see table below).

To avoid becoming one of the rejects, pharma companies can:

l choose valid comparators. The crucial point for pharma companies is that HTA requires them to prove value against all other courses of treatment. This differs from the standards for phase-III clinical trials, where they need to prove efficacy compared with the standard current treatment. The evidence from successful submissions suggests that early discussion of populations and comparators is vital, because manufacturers’ initial choices are often rejected.

NIce decisions from 2000-13 No. %

Positive decisions 314 59%

Outright negative decisions 80 15%

Restriction, non-submission, etc. 141 26%

Total decisions 535 100%

Source: Parexel.



The choice is particularly difficult in therapy classes, where there are big vari-ations or rapid innovations in treatments. In some cases (see below) a wide choice of comparators is needed.

example: ABILIFY® (aripiprazole) for moderate to severe manic episodes in adolescents with bipolar I disorder. Marketed by Otsuka (US), it was authorised by the US Food and Drug Administration (FDA) in November 2002 and by the European Medicines Agency (EMA) in June 2004. It was recommended for NHS coverage by NICE in July 2013, despite a lack of head-to-head studies. Instead, Otsuka offered network meta-analysis based on a network containing aripiprazole, olanzapine, risperidone, quetiapine and a placebo.

l Improve targeting. The burden that a drug places on healthcare budgets, and its cost-effectiveness, can be vastly improved by better targeting. This reduces the number of non-respondents and minimises unnecessary side effects, not to mention the cost and time involved in unnecessary care. An increasing number of regulatory approvals, particularly in oncology, rely on companion diagnostics, which can also help with HTA.

examples: Herceptin® (trastuzumab) for breast cancer, marketed by Roche/Genentech, has become the core treatment for HER2-positive breast-cancer patients. Roche’s Avastin (bevacizumab) is used for HER2-negative patients. Glivec/Gleevec (imatinib), a Novartis treatment for chronic myloid leukemia, relies on companion tests for the Philadelphia chromosome and proto-oncogene c-Kit.

l offer true innovation. This is the hardest requirement to match, yet some of the drugs that achieve it can sail through recommendations, as the example of Jetrea (below) shows. HTA is not intended to stand in the way of innovation; indeed, its proponents argue that it is the only way of putting a true value on innovations that really affect patient outcomes. By contrast, marginal improvements, such as those sometimes used to extend patent protection, often score poorly on cost-effectiveness measures.

example: JETREA® (ocriplasmin) for vitreomacular traction and macular hole. Developed by ThromboGenics (Belgium) and marketed by Alcon (Switzerland), the treatment was authorised by the US FDA in October 2013 and by the EMA in March 2013. In August 2013 it became the first innovative new drug deemed to have “significant added value” by IQWiG. This was followed by a positive recommendation for NHS coverage by NICE in October 2013.



l offer a risk-sharing deal. Many companies at risk of a rejection offer a deal that explicitly links the price or budget paid for a particular drug with patient outcomes. That means the drug’s manufacturer takes on some of the risk if the drug is not as cost-effective as billed. This may be done via a cap on total costs, with the manufacturer funding all expenses beyond that, or by pegging prices to specific outcome measures, or via a trial period during which the drug is jointly funded and outcomes are monitored. The Netherlands has set up a specific mechanism to implement the last of these options, with pilot co-funded programmes running for three years, in what is a real step towards VBH.

examples: Sutent (sunitinib) for metastatic or advanced renal cell carcinoma, marketed by Pfizer, which offered one free cycle of treatment to patients in countries including the UK, Italy and Germany.

l offer lower prices. On the face of it, the easiest way of getting past the HTA barrier would seem to be by offering a rebate on the price, thereby increasing the cost-effectiveness of the product. Many pharmaceutical companies have done just that, although examples are rarely publicly disclosed. Sometimes ne-gotiations may result in a trade-off across a drug manufacturer's portfolio, with a cheaper deal on one drug used to offset the price of another. In some cases, negotiations over price continue after the first rejection for reimbursement, eventually resulting in a positive outcome.

drug class excluded medications covered alternatives

antineoplastic/immunosuppressant

Biologics—injectable tumour necrosis factor antagonists and other drugs for inflammatory conditions

Cimzia, Simponi, Stelara, Xeljanz

Enbrel, Humira

autonomic and central nervous system

Interferon beta medications for multiple sclerosis Betaseron Avonex, Extavia, Rebif

Long-acting opioid oral analgesics Avinza, Exalgo, Kadian morphine sulfate ER, oxymorphone ER, Nucynta ER, Opana ER, Oxycontin

cardiovascular

Angiotensin II receptor antagonists and diuretic combinations

Edarbi/Edarbyclor, Micardis/Micardis HCT, Teveten/Teveten HCT

Candesartan/hydrochlorothiazide (HCTZ), irbesartan/HCTZ, losartan/HCTZ, valsartan/HCTZ, benicar/HCT

diabetes

Blood-glucose meters and strips Abbott (FreeStyle, Precision), Bayer (Breeze, Contour), Nipro (TRUETrack, TRUETest), Roche (Accu-Chek)

Lifescan (UK) (OneTouch)



drug class excluded medications covered alternatives

Dipeptidyl peptidase-iv inhibitors and combos Jentadueto, Kazano, Nesina, Tradjenta

Janumet, Janumet XR, Januvia, Kombiglyze, Onglyza

Incretin mimetics (glucagon-like peptide-1 agonists)

Victoza Bydureon, Byetta

Insulins Novolin

Apidra, Novolog

Humulin

Humalog

ear/nose

Nasal steroids Beconase AQ, Omnaris, Rhinocort Aqua, Veramyst, Zetonna

Flunisolide, Fluticasone Propionate, Triamcinolone acetonide,

Nasonex, QNASL

endocrine (other)

Androgen drugs (topical testosterone products) Fortesta, Testim AndroGel, Axiron

Growth hormones Nutropin/Nutropin AQ, Omnitrope, Saizen, Tev-Tropin

Genotropin, Humatrope, Norditropin

Immunological

Interferons PegIntron Pegasys

obstetrical and gynecological

Ovulatory stimulants (follitropins) Bravelle, Follistim AQ Gonal-f

ophthalmic

Antiglaucoma drugs (ophthalmic prostaglandins) Zioptan Latanoprost, travoprost, Lumigan, Travatan Z

respiratory

Epinephrine auto-injector systems Auvi-Q Epipen, Epipen JR

Pulmonary anti-inflammatory inhalers Alvesco, Flovent Diskus/HFA Asmanex, Pulmicort Flexhaler, Qvar

Pulmonary anti-inflammatory/ beta agonist combination inhalers

Advair Diskus/HFA, Breo Ellipta

Dulera, Symbicort

Beta-2 adrenergics (short-acting inhalers) Maxair Autohaler, Proventil HFA, Xopenex HFA

ProAir HFA, Ventolin HFA

urological

Erectile dysfunction oral agents Levitra, Staxyn Cialis, Viagra

Source: Express Scripts.





Hard bargains: The effect on prices

Given the hard bargaining stance of HTA agencies and payors, many pharma companies have come to see VBH as merely a way to drive down prices. Yet, given the number of other factors in play—including the

euro crisis, global recession, medical innovation, changing disease profiles and the patent cliff—it is difficult to gather evidence of whether or not this assumption holds true. Moreover, many countries operate their HTA schemes in conjunction with an international reference-pricing system, which compares the price of each drug with its price in a basket of other countries. This argu-ably distorts the results and undermines the VBH effect.

Nevertheless, HTA agencies do affect prices, as is shown by the differing approaches of IQWiG and NICE. Under AMNOG, pharma companies launching in the German market can still set their own prices freely for the first year. After that, they have to submit evidence of real-world outcomes to IQWiG, which will decide whether the drug offers additional benefits. If it does, there is a negotiated process of price-setting with the sickness funds. If it does not, then prices are set in line with similarly effective treatments, including generics.

NICE, in theory, does not set prices; it only decides on reimbursement. In practice, however, NICE’s cost-effectiveness threshold gives pharma companies an incentive to lower their prices in order to improve their chances of a positive ruling. The same could be said of the agreements struck by US health insurers and pharmacy benefit managers, which often have the effect of forcing a “voluntary” price-cut.

The UK government has formalised this process with its new Pharmaceutical Price Regulation Scheme (PPRS), introduced in November 2013, which sets a ceiling on the total pharmaceuticals sales for NICE, keeping total spending flat in 2014-16. Again, this is voluntary, but pharma companies that do not join



in will be subject to a mandatory 15% rebate. As part of the deal, however, the government has backed away from plans to introduce value-based pricing to the UK in 2014. Instead, if all goes to plan during the consultation period, it will extend NICE’s value-based assessment process to incorporate burden of illness and societal impact.

Pharma companies have generally seen the current situation as a reprieve. Despite the cuts under the PPRS, many anticipated that value-based pricing would push down prices still further. Certainly, reports suggest that Germany, which used to have some of the highest branded-drug prices in the world, now has some of the lowest and, given that Germany’s prices are used in international-reference pricing schemes in many other countries, this trend recurs elsewhere.

Recently, the German government seemed to have acknowledged industry complaints that prices are in danger of falling too low. In February 2014 it cut the mandatory 15.5% rebate demanded on all prescription drugs under AMNOG to just 7%. Japan, too, has recognised that its pricing scheme is weighing too heavily on innovation, and is looking at ways to introduce an innovation premium.

However, the evidence from Sweden is that VBH alone does not always drive down prices. Sweden was one of the first countries to introduce value-based pricing, in 2002, when it decreed that patented drugs must undergo a value assessment in order to get a listing under the pharmaceutical-benefits system. Even so, the government says that the system leaves Sweden’s patented-drug prices among the highest in the EU. It has, therefore, stepped in this year with a new mechanism, capping the price of older, off-patent innovative medicines in cases where there is not enough competition to bring prices down naturally.

Prescription price index (Jan 2008=100)


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20

40

60

80

100

120

140

160

180

200

0

20

40

60

80

100

120

140

160

180

200Consumer price indexGeneric drugsBranded drugs

201320122011201020092008

110.67

188.49

49.76

HTA often brings down prices, yet many payors have also imposed extra price cuts.



Evidence from the US, moreover, suggests that the pricing pressures of the past few years have had a distinctly mixed effect on pharmaceuticals prices. According to the annual Drug Trends Report from a pharmacy benefit management company, Express Scripts, the prices of branded drug have risen strongly since 2008, above the general rate of consumer price inflation (CPI), while generic drug prices have plummeted. Although there are signs that the decline in the price of generic drugs tailed off after the 2012 peak in patent expiries, in effect, the market has polarised.



Market polarisation: The effect on revenue

This polarisation in prices is leading to a marked difference in the amount spent on these different classes of drugs in the US. For traditional thera-pies (for diabetes, high cholesterol, pain and so on) utilisation rose slight-

ly in 2012, yet a drop in prices owing to increasing generic competition meant that overall spending fell. The only exception was for diabetes medicines, where both price and utilisation rose.

Meanwhile, for specialty drugs (such as those for inflammatory conditions, cancer, multiple sclerosis, etc.) utilisation fell in 2012, but the soaring unit costs of the specialty drugs pushed up spending sharply. Overall spending, therefore, also rose. This was particularly true for oncology drugs and those for respiratory conditions, where unit costs had risen by 22% and 26%, respectively.

The trend is at its most extreme in the case of orphan drugs. Because of their special status, these have often been excused from cost-effectiveness tests,

US pharma pricing and utilisation (commercial sector) (% increase/decrease, 2012)


-5

0

5

10

15

20

-5

0

5

10

15

20Overall spendUnit costUtilisation

Traditional therapiesSpeciality drugs

-0.4

18.7 18.4

0.6

-2.2-1.5



but that is starting to change. NICE, for example, is soon expected to take over responsibility for making recommendations on orphan drugs, after a consultation process. This is partly a reaction to the increasing amount being spent on orphan drugs in many markets, driven by very high prices. The drug eculizumab, for example, is reported by the OECD to cost Canada C$2.4m (US$2.2m) per QALY. Quintiles’s Mr Summerfield is convinced that this trend cannot continue, and that orphan drugs will no longer be quite the lucrative niche products they have been in recent years.

For payors, this market polarisation has huge implications. On the positive side, it means that the falling price of drugs with generic equivalents is freeing up funds to pay for more innovative medicines. In particular, it is funding new oncology drugs that are turning cancer into either a curable disease, or a manageable chronic one.

reimbursement in denmarkDenmark provides an example of how reimbursement decisions can lead to pricing polarisation, even in countries without a formal value-based pricing system. Pharmaceuticals pricing in Denmark is free—one of the few such markets left in Europe—but there are two mechanisms to decide on drug reimbursement. For pharmaceuticals outside hospitals, there is a nine-person Council for Reimbursement, which decides on cost-effectiveness. If companies want to provide economic analysis as part of their submission, then there are guidelines (drawn up in 1998), but this is not obligatory.

For hospital drugs, there is another mechanism. Five regions buy through a wholesaler called AMGROS, which negotiates the price they will pay, for example for a cancer drug, under guidance from the Council for the Introduction of Expensive New Hospital Drugs. In general, Denmark’s rules emphasise the need for budget analysis and cost-benefit analysis, with evidence coming from the companies. For monitoring, there is a reassessment mechanism for the Council to investigate particular disease areas and review its decisions.

Nevertheless, the freedom to set prices means that Denmark gets quicker uptake of innovative drugs than many other EU countries, despite its small market size. The country can afford this partly because Denmark also has very strong regulations for generic-drug reimbursement. If there is a generic equivalent, then only the price of the generic will be reimbursed and patients have to pay a top-up if they want a non-generic.



On the negative side, however, a smaller group of patients is now gobbling up an increasing amount of the pharmaceuticals budget, in a way that could cause tensions.

The implications for pharma companies are not wholly positive, either. Given the slowing of approval rates for marketing authorisation, an increase in global competition, and the relatively low chances of their products’ being recommended for reimbursement, the risks to expensive R&D efforts have increased. Although a few drugs may now secure extremely high prices, the chances of underperformance are also far higher.

There are markets, of course, where HTA has not yet developed. Many emerging and developing markets still operate largely as free markets. Reimbursement in these markets is normally dependent on a list that is often heavily skewed towards generics, while competition from local generics producers is strong. But, in the more affluent developing markets, or those with a sizeable middle class, a shift in disease profiles means there is still plenty of scope to sell patented pharmaceuticals. And, while the prices may not be as high as in developed countries, they are high enough to justify conventional marketing techniques for traditional mid-market therapies. In effect, these markets offer an opportunity to conduct business as usual, albeit in a riskier setting.

However, the polarisation of VBH markets and the increased uncertainty of getting over regulatory hurdles—allied with other market trends—has increased the pressure on pharma companies to cut costs. And, as they look to replace the revenue they have lost to patent expiry, they also need to take into account the ultimate value of their drug candidates at a far earlier stage in the R&D process, to ensure that funds are focused on those projects with the best chance of yielding good sales.

As drug prices polarise, a smaller group of patients is now gobbling up an increas-ing amount of pharmaceu-ticals spend-ing.

Average annual growth in pharmaceutical spending (% in nominal US dollars, 2014-18 forecast)

Source: The Economist Intelligence Unit.

0

2

4

6

8

10

12

14

16

18

20

0

2

4

6

8

10

12

14

16

18

20

ChinaRussiaUkraineEgyptIndiaPolandIndonesiaMalaysiaThailandRomaniaSouthKorea

World





Planning for value: The effect on R&D

When planning their R&D spending and product portfolios, pharma companies used to concentrate on clinical needs and promising re-search avenues. Market potential and unmet needs only became a core

consideration later, together with the likelihood of gaining regulatory approval. Companies like GlaxoSmithKline and Pfizer have gone a long way towards pruning their R&D spending to focus on core areas of expertise, where they see consider-able long-term sales potential (see box on page 24).

The shift to VBH entails another rethinking of the role of R&D and how it will feed into future revenue. That is a process that is only partially completed. “We have not yet got to the point where R&D takes into account the payors’ willingness to pay for the incremental benefits of the product,” says Mr Summerfield of Quintiles. “The embedding of these value concepts is not consistently done in portfolio planning.”

Most in the industry agree that there is a real need for considerations of value to come at a far earlier stage in the drug-development process. Given the levels of R&D spending—nearing 20% of sales revenue at many leading patented-drug companies—that would reduce the risk of candidates’ getting approval, only to fall at the reimbursement hurdle.

Instead of using financial metrics to measure the value of portfolios, therefore, customers should focus on measures of value to customers, such as:

l preliminary burden-of-illness assessments;

l pricing and reimbursement regulations for this class of drug, as well as payor attitudes;

l market potential, including pricing norms for this class of drug;

l potential competitors, including requirements for comparators;



how pharma companies have restructured r&dGlaxosmithKline: In 2008 the company moved to focus its in-house R&D resources on a handful of high-value areas of strength, including vaccines, respiratory disease, oncology, diabetes and HIV. To this end, it spun off other research projects, such as its gastrointestinal operations, to form small biotech entities backed by private-equity firms. It also established semi-autonomous Centres of Excellence in Drug Discovery. The aim was to trim costs and invoke an entrepreneurial spirit, while R&D productivity has become a core performance measure for the company. GSK’s approvals in 2013—including Breo Ellipta (fluticasone furoate/vilanterol) and Anoro Ellipta (umeclidinium/vilanterol) for respiratory disease, Tafinlar (dabrafenib) and Mekinist (trametinib) for melanoma and Tivicay (dolutegravir) for HIV—made it the industry leader, accounting for 19% of US FDA nods that year.

Pfizer: The company has restructured its research division in order to focus on the most promising R&D areas: immunology and inflammation, oncology, cardiovascular and metabolic diseases, neuroscience and pain, and vaccines. One effect has been to cut Pfizer’s R&D budget (although it is still one of the largest in the industry). In 2012, Pfizer secured three FDA approvals, more than any other drug developer, but only one drug was approved in 2013—Duavee (conjugated estrogens and bazedoxifene) for menopause-related problems. The company does have several drugs in late-stage development, however.

bristol myers-squibb (bms): In recent years, BMS has shifted its focus towards biotech drugs, which can command higher prices and are less prone to generic competition than traditional pharmaceuticals. BMS is now honing its operations still further, having announced in November 2013 that it would end research into diabetes, hepatitis C and neuroscience. It will now concentrate its efforts on areas that it believes offer more promising growth prospects, including HIV, hepatitis B, oncology and immunoscience. The company sees significant opportunity in immuno-oncology and it is at the forefront of development in this area, although others, such as Merck and Switzerland’s Roche, are also making progress.

astraZeneca: Facing a particularly steep patent cliff, the company has announced 5,000 job cuts in its R&D department in 2013-16, as part of a restructuring expected to save US$800m a year by 2016. The company also recently announced plans to close its Bangalore R&D centre, ending research into neglected tropical diseases, tuberculosis and malaria. The chief executive has outlined five areas of growth: Japan, emerging markets, respiratory drugs, Brilinta (ticagrelor, a blood thinner) and diabetes. In December 2013, AstraZeneca bought BMS’s share of their diabetes joint venture. This was followed by an announcement of two partnerships to boost AstraZeneca’s oncology research programme.

l information requirements for clinical trials, and how best to align value assessments with clinical assessments;

l routes to market, including consultations with payors or HTA agencies;

l requirements for post-launch monitoring.



Regulations change, however, as does the competitive landscape; drug classes that may be lucrative at the moment may not be by the time a drug has been through the six-to-ten-year process of getting to market. Meanwhile, in some cases, there is a fundamental lack of information. For example, a number of companies are looking to develop products for underlying causes of cardiovascular disease and hypertension. Yet in the process, it becomes less clear how to measure the social burden, identify the standard of care and determine the value to the patient.

Some countries are making significant efforts to fill this gap in understanding by establishing disease registries, which monitor the performance of patients. One example is Singapore, which in 2007 created a compulsory system for reporting data on patients suffering from cancer, renal failure, stroke, acute myocardial infarction and other diseases. The country also has a pioneering e-health initiative in the area of diabetes.

Electronic medical records, although more costly and complex to set up, will also deliver similar levels of information, which will help to inform the research process, as well as HTAs, care guidelines and outcomes reporting. In some cases, for example in the UK, countries are trying to move to a situation where medical records are available to researchers by default. Even so, “The challenge is the access to data, and interpreting that data with meaningful results,” says Bob Reese, senior vice-president at Philips Healthcare.

There is another challenge: that of deciding which information it is appropriate to gather at each stage of the R&D process. This comes back to the disparity between the regulations for marketing approval and the requirements of value-based assessments—a necessary disparity, given their differing aims, but still a costly one for pharma companies. There is a clear need for regulators, HTA agencies and insurers to work together to align these two processes, a need that EUnetHTA, for one, is responding to. According to Professor Kristensen, EUnetHTA is already working with the European Medicines Agency on better ways to co-ordinate the approval and HTA processes.

The biggest challenge, however, may be the need to devote a larger share of R&D budgets to the two ends of the process. In recent years, a large share of companies’ R&D budgets has been devoted to improving or replacing existing products, in order to combat the effect of patent expiry, yet the evidence so far suggests that VBH will not value incremental improvements particularly highly. That is one of the factors prompting many countries to strengthen their links with researchers in universities and basic-research institutes, whether through open-innovation websites or through partnerships. This will increase the chances of securing a truly innovative drug, although it will do little to reduce the risks of early-stage research for pharma companies.

The biggest shift, however, has been in the amount of spending that goes towards the later stage of the process, when companies not only have to get drugs through

There is a real need for con-siderations of value to come at a far earlier stage in the drug-development process.

A larger share of R&D budg-ets is being spent towards the end of the development process, as companies try to prove value.



phase-III trials and the marketing-approval process, but also have to collect evidence to support economic evaluations. For many, this process continues beyond the launch and the marketing roll-out, and into the care setting, as they devote more attention to monitoring real-world outcomes.

Allocation of R&D investments (% by stage)

Source: PhRMA, Annual Membership Survey 2013 (percentages calculated from 2011 data).

Phase I(clinical trials)

8.7

Uncategorised3.5

Phase III(clinical trials)35.7

Pharmacovigilance(Phase IV)9.8

Approval8.3

Pre-human/Pre-clinical

21.5

Phase II(clinical trials)

12.5





Good clinical-trial outcomes are not enough for a drug to succeed. Increas-ingly, the onus is on pharma companies to prove that they are matched by real-world outcomes in the population catered for by each payor or pro-

vider. Post-phase-III monitoring is now taking a rising share of pharma company revenue, as companies seek the evidence they need to prove the value of their treatments. This is particularly important in cases where there is a risk-sharing deal that explicitly ties the drug manufacturers’ revenue to outcomes.

The risk for pharma companies, however, relates to the fact that they do not control the actual delivery of their products, and, in most countries, there are vast variations in the standards of care. A recent study from the British Medical Journal Publishing Group found that, of 3,000 treatments, only around one-third definitely had beneficial effects. However, patients may report lower outcomes or worse side-effects for reasons that have nothing to do with the value of any pharmaceutical product or medtech equipment involved, and are caused instead by poor standards of care or inappropriate treatment routes.

For this reason, some pharma companies are starting to forge links with particular providers or insurance funds (either directly or through intermediaries) in order to inform and monitor the care process more closely. This also gives them the opportunity to gather the real-world data they need to prove value. Medtech companies, which already operate in closer partnership with hospitals and clinics, are even further ahead on this. Philips Healthcare, for example, recognised several years ago that it had to focus more on long-term relationships with providers, rather than on short-term sales. The role of Mr Reese at Philips Healthcare has involved building up partnerships whereby the company can advise on care pathways, often under a risk-sharing deal that also allows for product development.

Pharma companies, too, can take the opportunity to use their own data or their insights into provider data in order to offer guidance, as well as adding to their own

Out into the real world: Working with providers

Pharma companies need to get more involved in real-world use of their products, to help improve outcomes.



store of information. There are several established ways in which they can improve outcomes in the real world:

l Improving patient adherence and compliance. The World Health Organi-zation (WHO) estimates that only 50% of patients with chronic diseases in the developed world adhere to their treatment recommendations, and the estimates are even lower in emerging markets. This non-adherence pushes up death rates and leads to increased costs in treating complications. At provid-er level, bolstering adherence can involve patient support, such as follow-up calls, text messages and advice lines, which pharma companies can provide.

l Improving delivery and convenience. Improving adherence often depends on minimising side-effects, even minor, but uncomfortable, ones. It may also involve the delivery method. The race is still on, for example, to develop an oral insulin capsule that can withstand the digestive system, so that some of the world’s 380m Type-2-diabetes patients can avoid the need for injections. In January 2014, Israel’s Oramed announced successful phase-IIa trials for an oral insulin pill, while Novo Nordisk of Denmark has also held early-stage trials. The introduction of innovations, such as hand-held devices or heat-resistant drugs, can help too, particularly in emerging markets reliant on primary care in remote locations.

Improving patient flowsOne of Philips Healthcare’s new breed of long-term partnerships involves Westchester Medical Center in Valhalla, NY, a 635-bed tertiary hospital. It has an academic medical centre and significant outpatient care, and is aligned with 30 other hospitals in the region to provide tertiary and quaternary care to patients in need of complex care.

Philips works with data at departmental and patient level, looking at the clinical protocols and pathways used, particularly for invasive procedures. The company’s clinical leadership worked with the hospital clinicians to gain insights into the data they were gathering. “Our tool allows dynamic modelling, so we could show them what the impact of any changes would be,” says Mr Reese.

Philips then helped to redesign the patient flow, for example in the cathlab, in order to improve outcomes. The work allowed the hospital to identify trends in readmissions and develop strategies to improve the quality and continuity of care for these patients across the region.



l Shaping treatment pathways. By helping to identify the data required to be collected, and the implications of that data, pharma companies can help to establish when and how their drugs need to be used to gain maximum effect. Mr Reese gives the example of sepsis treatment, which is one of the top diag-nostic codes in many countries. By capturing metrics such as temperature, white-blood-cell count and underlying health status, it is possible to identify those patients most at risk as soon as they enter the system. This means that doctors can take action to prescribe antibiotics at a certain point in the clini-cal pathway, to avoid later problems and thereby deliver greater clinical value.

In order to secure the partnerships needed for some of this work, pharma companies have to dispel some of the mistrust among clinicians, who are cautious about interference. Companies may also need to undergo a huge change in internal culture. Pharma companies have already drastically scaled back their traditional sales and marketing teams and budgets in response not only to patent expiry, but also to new regulations and codes of practice, such as the Sunshine Act in the US, which limit their interaction with clinicians.

Yet, links with clinicians are becoming all the more crucial because, to be truly effective, VBH has to measure the full cost of a care pathway against the full patient outcomes. As a result, the way that providers are paid will change, and so will their relationship with suppliers. Traditional sales techniques are useless in this new environment, which relies on long-term collaboration, as payors, providers, medtech and pharmaceutical companies work together to improve patient outcomes.



Conclusion


In the past few years, the focus on cost-cutting has threatened to make the relationship between pharma companies, on the one hand, and regulators and payors, on the other hand, far more antagonistic. But it is too easy to see the

shift to VBH as simply a way to clamp down on pharmaceuticals spending. Pa-tients, society at large, and policymakers all have an interest in ensuring that care (including pharmaceuticals) continues to improve. Value has two sides: costs and outcomes. To minimise the first and maximise the second, it is better for all sides to work in partnership. This paper has explored the role that pharma companies can play in that process as they adapt their corporate strategies to cope with the shift to VBH.

Overall strategic recommendations:

l Manage R&D pipelines with value in mind, focusing investment on those candidates most likely to succeed in measures of economic evaluation, societal value or sheer innovation. Use value assessment and modelling at an early stage, and ensure joined-up thinking between the R&D and commercial teams.

l Design clinical trials, post-marketing surveillance to ensure that information and data are gathered as efficiently as possible, making this process more cost-effective.

l Stay well-informed about developments that may affect new product value, including regulatory changes, approval and reimbursement decisions for rival products, and changes to recommended clinical pathways.

l Work with payors and HTA agencies to determine the information that will need to be gathered and submitted at each stage.



l Take the initiative in terms of designing offers, ensuring there is also upside potential if outcomes are better than expected. Offers can include risk-sharing deals, pilot programmes and restricted geography.

l Improve the value proposition through improved targeting. This may include use of screening or companion diagnostics.

l Get involved in partnerships with providers, in order to improve real-world patient outcomes. This may include help with ironing out variations in care, and improving adherence.

Pharma companies have no reason to assume that VBH will necessarily eat into their margins. Despite the price cuts and austerity budgets of the past few years, the impetus in terms of overall pharmaceuticals spending is still upwards. Demographic trends, lifestyle shifts, patient demands and a recovering global economy all suggest that, if adjustments have to be made, then they will at least be made within the context of a growing market. The process of shifting to value-added healthcare will take time and it will be far from easy, but, for most pharma companies, there are opportunities to be taken.



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AcknowledgementsThe development of this white paper benefited significantly from the input and support provided by the expert team including:

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