High Drug Prices Can Be Lowered Without Government Controls

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(Bloomberg) -- There’s no good reason to pay a lot for prescription drugs that don’t work well. But that’s what lots of Americans are doing.

Some drug prices far outweigh any reasonable measure of the drug’s benefit. This is frequently the case for new cancer therapies. For example, the cancer drug Erbitux costs about $10,000 per month and extends life by an average of about three months when used to treat patients with recurrent or metastatic squamous-cell carcinoma of the head and neck. And the launch price of new cancer drugs is going up 12 percent a year even though the drugs aren’t getting commensurately better. In one recent estimate, the cost of extending a cancer patient’s life by one year is increasing by $8,500 every year.

QuicktakeDrug Prices

Some drugs for non-cancer conditions are also unreasonably expensive. The cystic fibrosis drugs Kalydeco, Orkambi and Symdeko each cost almost $1 million for each year of extended life in reasonably good health. (Though there is debate on this point, spending more than about $200,000 per year of life extension is generally considered pricey by health-care economists.)  

The mismatch of drug prices and benefits results from a peculiar confluence of American health-care practices, reinforced by American health-care politics. Though political leaders, including President Donald Trump, frequently rail against high drug prices, there has been no meaningful government action on the issue, something that could change with the president’s promised announcement on the issue.

The U.S. health-care system relies heavily on insurance companies. They help determine drug prices by deciding what they’ll cover and how. When faced with requests to pay extremely high prices for new drugs that don’t have good substitutes, they have only two choices: decline to cover the drug, or impose high cost-sharing and other restrictions on patients. Both approaches reduce patients’ access to the drug as well as the drug manufacturer’s potential profit.

There’s no formal mechanism to determine whether a drug manufacturer should accept a lower price for a larger market, which would in turn encourage insurers to cover the drug for more patients.

That’s because Americans have been reluctant to weigh the cost of a lifesaving drug against its practical benefits, as if doing so would become an unseemly exercise in putting a price on human life. Unlike speed limits, industrial-safety rules and other measures that trade off safety and cost — a 20-mile-an-hour speed limit on interstate highways would save many lives, after all — medical technology is thought to be exempt from cost-benefit calculation.

Now that’s beginning to change. Drug manufacturers and payers are starting to consider — and in a few cases, implement — innovative contracts that ground drug prices in the value those drugs provide. But not all such arrangements are as good as they seem.

Approved by the U.S. Food and Drug Administration in 2017, Amgen Inc.’s Repatha was the first of a new class of biologic drugs intended to reduce heart attacks and strokes. After accounting for the discounts that insurers obtain in negotiations with drug manufacturers, Repatha’s price was about $9,000 per year, nearly twice the average health-insurance premium for a working-age adult. But Amgen cut a deal with the insurer Harvard Pilgrim to rebate the price paid for the drug for any patient that had a heart attack or stroke while using it.

This deal sounds great — why pay for a drug if it doesn’t work? — but there’s less to it than meets the eye. About 7 percent of patients taking the drug are expected to have a heart attack or stroke, so Amgen won’t be on the hook for many rebates. The net effect of the outcomes-based contract is the equivalent to, at most, a few hundred dollars in price reduction. Amgen was probably convinced that this level of discount was worth the good publicity it got from the deal, but it’s peanuts relative to the $9,000 price tag.

This is typical of other contracts that attempt to link payment to the benefits provided. A survey of them in the Journal of Health Politics, Policy and Law pointed to another reason drug manufacturers may be reluctant to reduce prices to private insurers: regulations require Medicaid programs to receive discounts at least as large as those afforded to private insurers.

But the biggest problem is that it’s hard to generate enough reliable cost-effectiveness information to give insurers the leverage to say “no” to unreasonably expensive drugs. Any insurer that tries will open itself up to attack from pharmaceutical manufacturers and patient-advocacy organizations. By statute, Medicare cannot consider costs when it makes coverage decisions, so it has no incentive to lead in this area. Any insurer that does the work on its own to make cost-effectiveness part of its coverage decisions would be generating information at its own expense that another insurer could copy for free.

The nonprofit and privately financed Institute for Clinical and Economic Review  has proposed a way to solve that problem. Largely funded by the Laura and John Arnold Foundation, it is an independent organization that weighs the benefits of medical technologies against their prices.

For each new drug that comes to market, the organization conducts a clinical and economic analysis that’s available to the public. It then suggests to payers and manufacturers a price range that’s aligned with benefits and budgets.

There’s evidence that the exercise is helping insurers cut better deals. For example, Dupixent, the first cure for eczema, was expected to launch last year at a price of $60,000 per year of treatment. At a cost this high, many insurers would have imposed onerous cost-sharing requirements on patients before covering it.

Instead, Dupixent manufacturers Regeneron Pharmaceuticals Inc. and Sanofi sought a value-based price from ICER before setting the list price for the drug. Then, during negotiations with payers, the companies argued that the outside assessment established a fair price that warranted lower cost sharing and fewer barriers for patient access.

A similar story arose with Praluent, for high cholesterol. Regeneron and Sanofi struck a deal with the pharmacy benefits manager Express Scripts to reduce Praluent’s price to one that ICER believed aligned better with benefits. In exchange, patients will get easier access to the drug.

By providing cost-effectiveness analysis to the market, ICER is not facilitating what many patient advocates and drug manufacturers fear — reducing access to lifesaving treatments. Instead, it is helping to expand it through voluntary exchange in a market, not government price control.

Bringing information to the market that demonstrates that proposed launch prices are way out of line may shame drug manufacturers into coming to the bargaining table. Working with payers to remove barriers to access in exchange for lower prices helps seal the deal. It’s a carrot and stick approach that addresses the worst drug-pricing excesses. Finally.

  1. I have served on some of ICER ’s panels that assess clinical and cost effectiveness.

  2. Research for this column was also funded by the Laura and John Arnold Foundation, but it played no role in the selection of the topic or in approving or editing the work.

©2018 Bloomberg L.P.

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