Today’s Managing Health Care Costs Number is $120,000
Today is a pharmaceutical lobbyist’s nightmare. The Mayo Clinic Proceedingsreleased an article “In Support of a Patient Driven Initiative and Petition to Lower the High Price of Cancer Drugs” signed by 118 prominent oncologists, which highlighted the ever-increasing costs of new cancer medications. The New York Times, the Wall Street Journal, and Washington Postboth piled on with front page coverage.
Statistics from the Mayo article:
· Cancer drug prices increased by $8500 a year for the last fifteen years
· The cost for each additional life year increased from $54,000 (1995) to $207,000 (2013)
· The average cost for a new cancer drug is $120,000 per year
· Cost sharing is often 20-30%, meaning that the out-of-pocket cost of a cancer drug can often be more than median household take home pay
The oncologists who authored the Mayo article suggest these steps:
| Proposal | Implications |
| Create a post-FDA drug approval agency to suggest fair prices | The point of maximum leverage is probably before approval, so it would be better for the approval agency to consider “value.” It’s not clear how valuable it would be to “suggest” a “fair” price |
| Allow Medicare to negotiate drug prices | The Veterans Administration is able to get substantial discounts by negotiating independently. The fragmented pharmacy benefit management industry is less likely obtain substantial discounts. However, the recent hyperinflation is not for “commodity” drugs where Medicare could threaten to take a drug “off formulary,” but for specialty drugs where there is often no reasonable alternative. It’s also paradoxically harder for the biggest purchaser around to get very low prices, because manufacturers can offer small purchasers “marginal pricing” for incremental business, whereas they cannot be profitable if they offer to sell to their biggest customer for below their fully allocated costs. |
| Allow the Patient Centered Outcomes Research Institute to consider price and value in drug evaluations | It would be best to allow the FDA to do this –and to consider price when approving new medications. That still wouldn’t address the issue of runup of prices after initial approval. |
| Allow cross-border importation of drugs for personal use | The authors note that oral cancer drugs are often half the price in Canada. Cross border importation is always popular – but it creates friction (someone has to cross the border), and pharmaceutical companies are likely to throttle supplies in Canada if this increases. |
| Pass legislation to prohibit brand name drug companies from paying generic companies to delay launches of competing products | No complaints about this one. Pay for delay is anticompetitive, and we should use all available tools to prevent anticompetitive behavior |
| Reform the patent system | Prevent evergreening, where pharmaceutical companies are able to maintain brand exclusivity long beyond the initial patent. |
| Consider price when formulating guidelines | This is a groundbreaking suggestion – as we’ve historically been reluctant to consider price when formulating guidelines. Physician adherence to guidelines is not exceptionally high, but this could act together with patient price sensitivity to drive pharmaceutical companies to choose lower price points. |
The New York Times article pointed to efforts in multiple states to pass legislation mandating that drug companies “justify their prices.” None of this legislation has moved forward, and that’s no surprise. An accounting exercise alone isn’t going to solve our drug cost problem. Manufacturers don’t price their goods based on production or research costs – they base their products on how valuable they are to the purchasers.
An Executive Vice President of PhARMA told the NY Times: “Some drugs, for instance, can save money for the health system over all by keeping people out of the hospital.” That’s simply not true. Drugs are priced based on their value, and if a drug prevented a $20,000 hospital stay, it would likely be priced to account for that. See here for a reference about how even though the Hepatitis C drugs prevent liver transplants, they don’t save the system money. A drug that in total saved the system money would cost negative dollars per Quality Adjusted Life Year. There aren’t many such products- childhood immunizations and oral contraceptives are the only ones that come to my mind.
Many industry sources cite the Tufts Center for the Study of Drug Development calculation that each new drug costs $2.6 billion to bring to market, even though that number includes a huge charge for “opportunity cost” assuming the pharmaceutical company could otherwise obtain an 8% return. See here for a deconstruction of an earlier Tufts Center calculation of drug development cost.
The Washington Post notes that 7 states limit out of pocket payments – but this misses the point. Firstly, state regulations don’t apply to employer sponsored self-funded health insurance plans which cover 60% of employed Americans. Secondly, the problem is the total price – not just the out-of-pocket cost. Ironically, capping the out-of-pocket costs can lead to higher prices, when the pharmaceutical companies no longer fear patient price sensitivity.
It’s great that the oncologists, many of who themselves receive (or received) pharmaceutical sponsorship, have raised this issue, and made it a part of the public policy discussion. Patent reform and restricting anticompetitive behavior could help. I suspect that shaming drug companies through disclosure requirements isn’t going to make the difference, and the US is one of the few developed countries that doesn’t exert government price control over the pharmaceutical market.
