Beyond Price Tags: Using HEOR to Balance Affordability and Innovation

Zeba M. Khan, RPh, PhD, Editor-in-Chief, Value & Outcomes Spotlight

Prescription drug pricing has become a lightning rod for public frustration, but underneath the politics of prescription drug pricing lies a harder question: What is the right price for health? Health economics and outcomes research (HEOR) does not resolve that moral dilemma, but by discussing drug prices in relation to clinical effectiveness, economic impact, and real-world outcomes, HEOR moves the debate from rhetoric toward measurable value.

Recent drug pricing reforms in the United States have crystallized the tension. The Inflation Reduction Act’s (IRA’s) Medicare provisions aim squarely at affordability, capping annual out-of-pocket spending for beneficiaries (around $2100) and imposing negotiated price limits on high-cost Part D drugs for conditions like diabetes and cardiovascular disease. These steps are designed to expand coverage and reduce financial toxicity for seniors who have long faced difficult trade-offs at the pharmacy counter.

Yet the same reforms have sparked deep concern about the future of innovation. A white paper published by the USC Schaeffer Center for Health Policy & Economics found that a 10% reduction in expected US revenues would be associated with a 2.5%–15% decline in pharmaceutical innovation, measured by clinical trial starts or new drug approvals. The Congressional Budget Office and others similarly project that lower long-run revenues will reduce the expected profitability of drug candidates and modestly decrease annual approvals over time.

The elasticity of innovation with respect to revenue is real but not infinite; a modest reduction in approvals may be a tolerable price for broader access to existing therapies, particularly when many launches bring marginal clinical improvement at premium prices.

Industry and trade organizations interpret these figures as a warning sign. Trade groups argue that shortening the period of market-based pricing and penalizing price increases above inflation will deter postapproval research, especially for new indications and secondary populations, and push companies to reorient portfolios toward products less exposed to early government price setting. They contend that policies such as Most Favored Nation (MFN) pricing and mandated Medicare “negotiation” will strip billions from manufacturing and research and development (R&D) in the United States, disproportionately harm small and emerging firms, and erode American leadership in this field as China’s share of global clinical trials climbs.

Reform advocates counter that high prices already delay or deny access for millions, and that expanding affordability through negotiation and caps is itself a public health intervention. In their view, the elasticity of innovation with respect to revenue is real but not infinite; a modest reduction in approvals may be a tolerable price for broader access to existing therapies, particularly when many launches bring marginal clinical improvement at premium prices.

This is precisely where HEOR is essential: not to choose a side, but to quantify trade-offs between affordability today and innovation for tomorrow.

The global picture is no less complex. International reference pricing (IRP)—where countries benchmark their drug prices against a basket of comparable peer countries—was intended as a straightforward cost-containment tool. In practice, it has created powerful spillovers. Manufacturers often delay or avoid launching in lower-price markets to prevent a single discounted list price from cascading into wealthier reference countries. Lower-income nations can paradoxically end up facing higher effective prices relative to their purchasing power, and uniform international price bands limit the flexibility needed for genuine tiered pricing.

Tying US drug prices to foreign benchmarks through MFN and IRP may sound like painless savings, but it threatens the engine of biomedical innovation. Because the United States is the global pharmaceutical industry’s main revenue engine, deep drug price cuts under MFN rules would sharply limit reinvestment in research. Economic modeling suggests such policies could halve global biopharmaceutical R&D spending and result in hundreds fewer innovative medicines reaching patients worldwide over the coming decade.

By reducing pharmaceutical company revenues, these policies become blunt tools that devalue fragile biotechs, discourage launching in countries with strict price controls, and push investment away from Medicare and high-risk science toward safer, commercial markets with fewer restrictions on government price controls. Patients will not feel the impact overnight, but they will feel the cumulative effects of fewer clinical trials, narrower pipelines, and fewer therapies a decade from now.

Smarter reforms would target affordability and transparency without weaponizing foreign prices or sacrificing the breakthroughs that patients, and our entire health system, depend on.

Value-based pricing (VBP) offers a more principled alternative. In VBP, prices are set to reflect the health and economic outcomes a treatment delivers, not simply the number of units sold. HEOR underpins this model, providing cost-effectiveness and budget impact analyses, real-world evidence of long-term effectiveness, and comparative effectiveness research to identify which options truly improve outcomes. Health technology assessment bodies, such as the National Institute for Health and Care Excellence in the United Kingdom or the Institute for Clinical and Economic Review in the United States, then use these data to translate clinical benefit into pricing and coverage recommendations.

This is precisely where HEOR is essential: not to choose a side, but to quantify trade-offs between affordability today and innovation for tomorrow.

VBP is not just a revenue tactic; it is a discipline that protects and propels innovation. By anchoring prices in the real economic and experiential gains a product delivers, it prevents transformative technologies from being underpriced and deprived of reinvestment. Those stronger margins are not windfalls; they are the fuel for future R&D, especially for high-risk, high-reward projects. Equally important, prioritizing value during development forces teams to design around what customers will truly pay for, aligning pipelines with meaningful impact rather than cosmetic features or me-too offerings.

In practice, VBP is most advanced for high-cost cell and gene therapies, where multi-million-dollar one-time treatments have made outcomes-based contracts almost unavoidable. Payers increasingly link payment to real-world performance, paying in full only if patients avoid hospitalizations, achieve remission, or meet other agreed outcomes. But the roadblocks are substantial: fragmented data systems, lack of interoperability, mistrust between payers and manufacturers, and heavy administrative burdens all limit widespread adoption. Many healthcare systems still run on fee-for-service logic, creating friction with value-based approaches.

Amid these competing forces, the role of HEOR is not simply technical—it is normative. HEOR techniques help drug developers target resources, design smarter studies, and de-risk decisions across the pipeline.

• Predictive modeling and risk stratification refine target populations and trial design.
• Cost-effectiveness and budget impact models, plus scenario (ie, an enhanced regulatory or testing pathway that grants a drug candidate additional benefits), sensitivity, and value-of-information analyses, help prioritize projects and quantify uncertainty.
• Discrete choice experiments and willingness-to-pay studies reveal which product attributes matter most to patients and payers, guiding feature selection and differentiation.
• Comparative cost-effectiveness analysis helps keep prices grounded in incremental value rather than marketing narratives.
• Real-world evidence reveals how drugs actually perform beyond clinical trials, especially in diverse and vulnerable populations.
• Value-based contracting and managed entry agreements align financial risk with therapeutic performance, while health technology assessment (HTA) processes formalize deliberation about budget impact, ethical goals, and fair access.
• Early HTA and payer feasibility assessments ensure innovations align with reimbursement realities, improving launch success and sustaining efficient, value-focused R&D.

The central question is no longer whether drug prices should change—they will—but how. If reforms rely on blunt instruments like rigid price caps or poorly designed reference pricing, they risk trading visible short-term savings for invisible long-term harms. If policy makers instead capitalize on HEOR and value-based frameworks, they can design pricing policies that make trade-offs explicit, protect access for today’s patients, and preserve incentives to tackle tomorrow’s unmet needs.

Evidence cannot tell us what we value most, but it can ensure we pay for what truly works and stop paying so much for what does not. This will ensure a better balance between affordability and innovation.

As always, I welcome input from our readers. Please feel free to email me at zeba.m.khan@hotmail.com.