July 24, 2015

Can Data Bring Reason to Drug Pricing?

By Molly Knobler and Tim McCormack

As far as purveyors of all things pharmaceutical go, Walter White isn’t looking so bad these days.  Well, at least his prices were competitive.  With major pharmaceutical companies putting astronomical and ever-increasing price tags on frequently life-saving medications, patients and insurers, including state and federal government payers, are finding themselves looking for new options and opportunities to check prices and influence physician prescribing patterns.  Aggregation and analysis of the costs and benefits of various prescription drugs seems like a promising way to do just that.

Pressure has been mounting to check the prices of prescription drugs.  In 2014, U.S. spending on pharmaceuticals hit a high of $374 billion.  Federal and state governments, through Medicare, Medicaid, and other government-funded healthcare programs, carry a significant part of this cost.  And this cost is rising – in no small part due to the increasing prevalence of very high-cost medications for life-threatening conditions.

Pharmaceutical company Gilead made waves in 2014 when it brought to market a treatment for hepatitis C, Sovaldi, that boasts a remarkable cure rate, but came with a price tag of $84,000 per course of treatment (or $1,000 per pill).  With three million hepatitis C patients in the United States – many reliant on government healthcare programs such as Medicaid, the Veteran’s Administration, or prison insurers for coverage, such that taxpayers bear the brunt of these costs – the price of treating all of them would total almost as much as the country spends on drugs annually.

Earlier this month, drug manufacturer Vertex Pharmaceuticals won approval from the FDA for a two-drug therapy called Orkambi expected to be used to treat approximately one-half of the 30,000 Americans who suffer from cystic fibrosis.  The price: $259,000 per patient per year.  No need to get out your calculator – that’s another $3.9 billion in drug costs each year.

These prices are unsustainable.  The companies are willing to price the drugs lower in other countries (where the risk of unauthorized generics coming in and undercutting them is significantly higher) and to offer assistance to patients in covering co-pays (to ensure the prescriptions get filled).  But the cost to insurers, including government insurers in the U.S., remains sky-high.

Drug companies often justify these prices by reference to high research and development costs –  not just the costs to fund the successful drugs but all of the research that goes into unsuccessful drugs as well.  But this starts to sound like a tall tale when pharmaceutical executives are walking away with millions in bonuses (the Vertex executives are up for $57 million in bonuses in 2017) or the company reaping the benefits of these astronomical prices isn’t the company that developed the drug (Gilead purchased the company that developed Sovaldi).

Situations in which equally effective medications exist at significantly lower prices are even more galling.  For example, Genentech manufactures and sells two drugs, Lucentis and Avastin, which have been found to be equally effective in preventing blindness.  Lucentis is FDA-approved to treat wet macular degeneration and costs about $2,000 per injection.  Genentech has never sought FDA approval for Avastin for this indication (Avastin is currently approved to treat various cancers), despite FDA encouragement to do so, likely because it costs only $50 per injection.  More than half of doctors use Avastin off-label to treat macular degeneration because of the research showing that the drugs are equally safe and effective and because of Avastin’s significant price advantage.  But the decisions by remaining doctors to continue using Lucentis, at the strong urging of Genentech, costs Medicare about $1 billion every year.

In response to prices that seem to bear no relationship to the drug’s development and/or manufacturing costs, “pharmaceutical cost transparency bills” have been introduced in six state legislatures in the last year.  The aim of the bills is to force companies to justify their prices, by sharing information about their development, marketing, and/or manufacturing costs.  But industry experts and insiders question whether this information about research costs is even relevant to the price of the drugs.  As Len Nichols, healthcare economist at George Mason University, told the New York Times, “The past R&D cost is really kind of a red herring.”  A drug developer echoed this sentiment, telling the Times anonymously, “Honestly, there is no science to it” and “[w]e all look at each other and keep pace with each other [in setting prices].”

In the absence of greater competition, a significantly harder factor to address, particularly in the patented world of pharmaceuticals, an arguably more promising project was announced earlier this week.  The Institute for Clinical and Economic Review announced that it will begin releasing reports comparing the clinical effectiveness of drugs, their prices, and potential impact on the U.S. healthcare system and broader economy.  The reports will correlate how drug prices are linked to the drugs’ ability to improve the health of patients.  Based on these reports, the agency will set a value-based benchmark for pricing.

The New York Times article cited above provides further evidence that this may be the way to go.  John Rother, Chief Executive of the National Coalition on Health Care, told the Times that his group hoped to introduce transparency legislation in Congress that focused on how drug companies estimate the value of their drugs, not the research and development or marketing costs.

Value-based pricing makes sense economically.  It also has the benefit of providing useful information to prescribers.  Without information about drug efficacy and value, doctors are often left with little to go on other than the promotional materials from drug manufacturers (and, unfortunately, too often the financial inducements from these same companies).  Providing doctors with expert-vetted information about the potential benefits, and relative costs, to their patients, of various prescription choices may very well affect prescribing habits for the better.  More than this will be necessary to rein in exorbitant prices for necessary medications, but it seems to be a step in the direction of helping payers, patients, and prescribers better and more fully assess the true value of these medications.

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