Innovative Pricing Methods - Lessons from Pharmaceutical and Carbon Pricing

Session overview

Can social value be monetised? Defining the ‘value’ of a public policy has been notoriously challenging, but there have been some recent advances made in two very different domains - healthcare (e.g., value-based pricing) and climate / carbon (e.g., carbon pricing). CIPFA-GO Lab’s Value in Public Finance PLG invited our audience to join the conversation as we considered innovative pricing methods, their transferability and what this all meant for pricing social outcomes.

We welcomed experts from organisations such as the World Bank, HM Treasury, and Global Pricing Innovations to explore pricing practices.

We began the session by exploring pricing mechanisms for medicines and healthcare treatments. Along with the rise of advanced technologies in healthcare, research and development (R&D) costs for manufacturers have increased significantly. While these new treatments may bring benefits to population health and may offer long-term fiscal savings for the healthcare system, there are challenges around short-term affordability. These budget constraints and uncertainty have led to advances in pricing methods that enable closer alignment to value.

▪ Value-based Pricing: While there remains high variability in how medicines are priced and regulated across countries, value-based pricing can be understood as linking a price to value based on a range of quantitative criteria including clinical benefits and cost- effectiveness. Health Technology Assessment (HTA) agencies are responsible for evaluating the evidence and determining a threshold for payment and reimbursement. Where there is an emphasis on cost-effectiveness, a relative improvement in lifespan and quality of life measured by Quality-Adjusted Life Years (QALYs) is used to determine a threshold for determining cost-effectiveness.

▪ Innovative Payment Schemes: When there is insufficient evidence to assess clinical and economic effectiveness, payers and manufacturers have negotiated innovative risk- sharing agreements to pay for new and promising treatments and provide patients with expedited access. These arrangements can range from finance-based (e.g., discounts and caps) or value-based (e.g., outcomes-based agreements linking payment to achieved health outcomes), with may schemes combining a mix of the two. However, there has been a rise in value-based agreements, reflecting the technological advancements in data collection and management.

We then explored climate change mitigation policies, another domain in which there have been notable advances in pricing mechanisms. We discussed the use of carbon pricing in incentivising changes in the ways businesses invest and produce goods as well as how consumers adapt their behaviours in response to relative changes in price.

▪ Carbon Pricing: By placing value on negative impact caused by greenhouse gas emissions, carbon pricing creates incentives for changes in investment, production, and consumption. While it is not a panacea for climate change mitigation, it can be a cost- effective tool as a part of policy suite and has a potential to offer a multitude of benefits ranging from health to economic outcomes. 3 main instruments of direct carbon pricing (i.e., direct link between the price and emissions) are: 1) Carbon Tax (explicit price on emissions); 2) Emissions Trading Scheme (placing a limit on emissions and enabling the price to be determined by market dynamics of scarcity of allowances); and 3) Carbon Crediting Mechanism (voluntary mechanisms that values emission reduction). Suitability of each instrument depends on each jurisdiction’s readiness of tax frameworks, maturity of market and capacity.

▪ Current State of Carbon Pricing and its Challenges: There is a global momentum to adapt carbon pricing to mitigate climate change. However, the vast majority of carbon price is currently below the recommended USD 40-80 corridors in practice. Many challenges remain in communicating these reforms effectively, managing and addressing distributional impacts, and navigating implementation in regulated markets and asymmetrical ambition across the globe.



During the second part of the session, 3 experts provided their practitioner perspectives on outcomes pricing. We reflected on learnings in healthcare and climate policy and how they might be applied to other social policy domains (e.g., homelessness and employment support).

We first explored pricing practices for social outcomes from a perspective of stakeholders in outcomes-based contracts.

• As social policy programmes targeting individuals with complex needs (e.g., rough sleepers) must transcend pre-defined policy areas, there is a need for a range of personalised solutions unlike a medicine that treats a specific illness. There can also be a large variability in prices of an outcome depending on timespan of a policy programme. To draw lessons from advances from pharmaceutical pricing and carbon pricing that better align prices to value, outcomes pricing for social outcomes may benefit from an agreed method for calculating value of social outcomes, co-payment mechanisms across departments (e.g. through outcomes funds), and consideration of long-term impact and policy sustainability (e.g. multi-year budgeting similar to infrastructure projects) to overcome tendency of political short-termism.

Taking inspiration from carbon pricing and its use of market mechanisms, we then explored an innovative platform that creates a local marketplace for social impact (Rikx, currently piloted in Rotterdam, the Netherlands).

• The marketplace functions by bringing social enterprises, NGOs and other civil society stakeholders and their projects together onto a digital platform where their targeted social outcomes are listed. Interested parties including companies and citizens can then use the platform to purchase tokens to fund these ‘high impact’ projects. The price of each token (an outcome) is calculated by a group of experts through scoring various dimensions of impact (reach, depth, and durability) on a scale and evaluating its cost-effectiveness compared to existing social programmes. As a marketplace is currently at experimentation phase, challenges remain in exploring scalability of a marketplace for social impact and capturing long-term impact. It continues to seek new ways to expand and adapt these marketplaces in cities across the continent.

Finally, we explored how multiple dimensions of value are captured in official guidance to inform decision-making in practice.

• The recently updated Green Book of the HM Treasury in the United Kingdom provides guidance for appraisal based on the Five Case Model, which considers strategic (case for change), economic (social value), commercial (realistic and credible deal), financial (impact on the public sector budget) and management (realistic and robust delivery plans) dimensions. As highlighted in Green Book Review 2020, this holistic approach that goes beyond quantified metrics is necessary to ensure value for money of public expenditure. The guidance further encourages learning from piloting and testing, as well as embedding evaluation throughout the design and implementation of the programmes.