Rising drug prices is an issue that can no longer be ignored, and serious efforts are now being made, by multiple different industry stakeholders, to deal with the problem. Bills focused on price cutting initiatives are being considered by lawmakers at the state and federal level; the FDA is working on speeding up generic drug development and approvals; several drug and device manufacturers have vowed to keep their annual price increases to single figures; and PhRMA has recently announced the launch a national campaign aimed at tackling issues associated with the cost of drugs.

To add to these early efforts, insurance companies are also now promoting price cutting strategies. As part of an initiative to align the cost of medication with the quality of medication, several insurers are entering into deals with drug companies that limit spending on ineffective treatments. These deals allow insurance companies to gain extra rebates, or even full refunds, if the drugs they buy and provide on their formularies do not help patients as promised.

This initiative will be particularly important for expensive, new-generation drugs that are approved to treat cancer and rare diseases. Drugs for these conditions are often left off insurance companies formularies because they are given FDA approval based on unclear or marginal evidence of effectiveness, due to that fact that few other treatment options exist for patients. Because the new deals will allow insurance companies to continually assess the effectiveness of these drugs, and claim money back on those that are not improving patient health, companies should be more likely to cover them.

Not only will this improve treatment access for thousands of patients, it will also benefit drug and device manufacturers, as more of their products will be covered and made available to patients. This will help companies sell more of the products they have spent millions of dollars developing. Furthermore, the healthcare system as a whole will benefit, as more patients will be able to afford their medication, and less money will have to be spent on avoidable hospital stays and doctor check-ups.

For this to work, however, the effectiveness of a given drug must be relatively easy to measure using electronic patient medical records. For example, for a new asthma drug, effectiveness could be indicated by reduced visits to the emergency room, while for a cancer drug, effectiveness could be indicated by a reduced growth of tumors over a given period of time. Before finalizing a deal, insurers and manufacturers will have to agree how effectiveness will be measured and what will constitute ineffectiveness.

Although these deals are by no means an overarching solution to the drug pricing problem in the US, they will contribute to the price-cutting efforts that are already being made across the industry. It is hoped that, as more insurance companies begin to demand these deals with pharma companies, this strategy will become the norm for the most expensive products in today’s market. Already companies like Eli Lily, Novo Nordisk, and Johnson & Johnson have recognized the value in this initiative and have entered into such deals with insurers.