drug pricing 04 oct14
DESCRIPTION
Some thoughts on the rising cost of drugsTRANSCRIPT
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Drug Prices in the US: How High Can They Go?- Issues and Discussion
October 2014
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A talk on rising drug prices --- Why might you be interested?
As a patient
• You may be faced
with having to pay a
high price for a drug
therapy.
• As insurance policies
shift more and more
of the cost burden to
patients, this will
become increasingly
and issue for
individual patients*
As a healthcare
consultant
• Our clients make pricing
decisions and may want to
understand our perspectives.
We should be prepared to
discuss intelligently.
As a citizen
• Even if you are not a
patient, higher drug
therapy costs are
passed through to the
rest of us through
higher insurance
premiums
• This will be an issue
with our federal
budget via Medicare
and Medicaid
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A thought experiment…
● Imagine a drug therapy was developed that could cure 90% of all cancers
Fantastic, time to celebrate, right?
● But now imagine that the drug manufacturer decided to charge $500k for a course of
therapy*
*This may not be as farfetched as you think. There are no formal price controls on drugs in the US, and a
pharma company is beholden to its shareholders to maximize value.
Would this still be a good thing?
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Questions / Issues that arise
● As drug prices continue to increase, how will this impact different stakeholders?
o Payers (including the federal government)
o Individuals (patients as well as healthy others)
o Physicians and health care providers
● What limits are there to drug prices? What dynamics might play out as prices
continue to increase?
o Political pressure leading to formal price controls
o Payer revolts / negotiations (including new contracting schemes)
o Physician and HCP interventions
● How should we value a new drug? What are different ways to assess its cost/benefit,
and which ways are more “appropriate?”
o How do (and how should) such different economic analyses impact the drug price?
These are complex questions (and certainly deserving of more than a single discussion).
My focus today is on the last bullet, with some thoughts on the first two.
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A real world example not too different from our thought experiment
- the case of Sovaldi
● Sovaldi (marketed by Gilead, and approved in Dec 2013) is a HCV therapy with a cure
rate of 90%
o The best alternative therapies cure about 40-70% of HCV, depending on genotype, and have
nastier side effects
o A 12 week course of Sovaldi therapy costs $84k*
− Thus it has been called the “$1000 a day drug”
o $5.8B in sales in the first 6 months of 2014 (basically the greatest pharmaceutical launch
ever)
● There are roughly 3.2 million HCV patients in the US, with annual deaths of 17,000 in
2007
● If all 3.2 million HCV patients get Sovaldi, this would generate revenues to Gilead of
3.2M x 84k = $269B
o The total spending on all prescription drugs in the US was $208B in 2013!!!
*Note: There are other drugs with prices in the same range of Sovaldi, but these tend to be drugs that treat much
smaller populations (rare diseases, particular types of cancer, etc.), so their revenue impact is much smaller.
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Ways to assess Sovaldi – an HCV “State Diagram”
● In the absence of Sovaldi, a “state diagram” of HCV looks like this:*
Chronic HCV
patients can
develop
cirrhosis and
liver cancer,
and some may
eventually
require a costly
liver transplant.
*Note: Precise
values and
probabilities can be
argued; the main
point here is to
illustrate the idea of
the state diagram
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Ways to assess Sovaldi - Cost/Benefit (CB) Analysis (I).
● The state diagram can be used to calculate the % of patients in different states, at
different time periods
For example, after
10 years, 62% of
patients are still
suffering chronic
HCV, 25% have
compensated
cirhossis, 1.7% have
liver cancer, and
7.1% are deceased.
● Since there are annual costs associated with each of these states, one can calculate
an expected “net present cost” for a newly diagnosed HCV patient.
o In this example, the net present cost is around $40k
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Ways to assess Sovaldi - Cost/Benefit (CB) Analysis (II).
● In the presence of Sovaldi, to first order, the “state diagram” of HCV looks like this:
100%
*Note: A more detailed analysis would include the small percentage that do not get
cured, plus the additional costs of therapy associated with Solvadi (it typically is
used in combination with ribavirin and interferon) which adds to the cost.
Chronic Hepatitis C$84,000
Cured
Basically, for a cost of $84,000,
all patients get cured*
● Cost/Benefit = Average Cost w/o Solvaldi – Average Cost w/Sovaldi
= $40,000 - $84,000
= ($44,000)
Conclusion: Cost/Benefit is negative
Question: Does this mean that Solvadi is overpriced?
An interesting side note. Use of Sovaldi shifts the cost upfront, and so there is a time element in this analysis as well. Indeed, since older HCV patients may
eventually transition to Medicare, use of Sovaldi may shift costs from Medicare to current payers.
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Ways to assess Sovaldi - Cost Effectiveness (CE) Analysis (I).
● From this table, we can
calculate that use of Sovaldi
saves an average of 6 life-
years*
● This means the CE for Sovaldi
is about $14k
● Cost/Benefit only looks at the financial picture (e.g. what the payer burden is).
● A more complete analysis will also include the value of lives saved
● Cost Effectiveness (CE) is defined as Cost of Therapy / life-years saved
o This measure is appropriate for drugs that treat life-threatening conditions
o E.g. if cost of therapy = $100,000 and it saves 5 years of life, then CE is $20,000
o Another way to think of this is the “cost of additional years of life” --- lower is better
*Technically, 6 discounted life-years
Questions: Is this worth it? Is it worth $14k to save 1 year of life? And whose
perspective should be used? The individual? The government? Payers?
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Ways to assess Sovaldi - Cost Effectiveness (CE) Analysis (II).
● Some gross economic measures
o In 2012 in the U.S., the GDP was $15.7 trillion and the population was 314 million, so $15.7
trillion / 314 million = $50,000 is the GDP per capita.
o In other words, on average, each person in the US creates $50,000 worth of value each year
● Thus, from a purely macroeconomic, societal-level perspective, if a drug has a CE <
$50,000, then it is “worth it”
o Sovaldi has a CE = $14,000. In other words, use of Sovaldi “buys” society additional years
of life at a cost of $14,000. Since, on average, another year of life creates $50,000 worth of
economic value, it is “worth it.”
● To reiterate, this is purely a gross economic viewpoint.
o One’s personal valuation of an additional year of life (for yourself, for a loved one, for a
stranger, etc.) will be different, and will be subjective, because each of us place value on not
just economic measures.
● Even just looking at economic value is complicated, because different individuals can
contribute wildly different economic values to society.
o What are the appropriate ethics, if any, to apply here? Some of these issues must already
arise in medical situations such as determining whom gets priority for transplant organs, etc.
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Ways to assess Sovaldi - Cost Utility (CU)
● Cost Utility is a more nuanced measure of Cost Effectiveness, in which its not just the
number of life-years saved that is considered, but the quality of those life-years
saved.
● Specifically
o CU = Cost of Therapy / Quality life-years saved
o Quality life-years saved = Quality Factor (Q) x life-years saved, and Q is a value between 0
and 1
1= completely healthy, full quality
0 = no quality of life (e.g. life is saved, but patient remains in a coma)
● For Sovaldi-treated HCV patients, there are few side effects, and they are basically
fully recovered.
o Therefore, Q ~ 1 for Sovaldi, and CU ~ $14,000
● The problem with Cost Utility is that the determination of the Quality Factor Q is
subjective, and so Cost Effectiveness is more often used as a benchmark.
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Overview of Pharmacoeconomic Measures
Measure Definition Comments
Cost/Benefit (CB)
D Expected Health Care Costs (Using new therapy vs not using new therapy)
• Purely an economic measure• Expected cost impact of drug• This is most closely related to the Payer
perspective, and most closely related to impact on insurance premiums
Cost Effectiveness (CE)
Cost of Therapy / Life-Years Saved
(Cost of “buying” another year of life)
• Useful for therapies that treat life-threatening conditions
• Units are $, and lower values are better• Rule of thumb economic cutoff is $50,000,
as this is roughly the GDP per capita in the US. If CE< $50,000 then “worth it.”
• This measure is most closely related to value to society, and thus the Government’s perspective
Cost Utility (CU)
Cost of Therapy / Quality Life-Years Saved
or
CE/Quality Factor, where Quality Factor is a number between 0 and 1
• Basically the same as CE, but takes into account the quality of life-years saved. E.g. a year of life severely disabled is not worth the same as a year of life fully functional
• Assessment of quality factor is problematic (how to quantify?)
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So which of these measures do pharma manufacturers use in pricing their
products in the US?
Measure Definition Comments
Cost/Benefit (CB)
D Expected Health Care Costs (Using new therapy vs not using new therapy)
• Purely an economic measure• Expected cost impact of drug• This is most closely related to the
Payer perspective, and most closely related to impact on insurance premiums
Cost Effectiveness (CE)
Cost of Therapy / Life-Years Saved
(Cost of “buying” another year of life)
• Useful for therapies that treat life-threatening conditions
• Units are $, and lower values are better
• Rule of thumb economic cutoff is $50,000, as this is roughly the GDP per capita in the US. If CE< $50,000 then “worth it.”
• This measure is most closely related to value to society, and thus the Government’s perspective
Cost Utility (CU)
Cost of Therapy / Quality Life-Years Saved
or
CE/Quality Factor, where Quality Factor is a number between 0 and 1
• Basically the same as CE, but takes into account the quality of life-years saved. E.g. a year of life severely disabled is not worth the same as a year of life fully functional
• Quality Factor is subjective, so CU is not as objective as CE
To first order, none of these measures are used
The FDA ’s legal standard for approval is merely to determine if a drug, device or
test is “safe and effective.” Cost is not considered in the approval process, and so
pharma companies basically price on “whatever the market will bear.”
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Factors in US drug pricing
How are products already on the
market—branded, OTC, generics,
devices—priced for similar or
identical indications? What is the
competition charging per day, per
month, per regimen?
To what extent can price help the marketing
department differentiate this product relative to
the competition? If the data proved superior in
safety or efficacy or dosing convenience, then a
premium price is not only justifiable but also
preferable from a positioning standpoint.
Price elasticity market research (with
physicians, hospital formularies, patients,
etc.) can inform the optimal price to
maximize revenues.
How will insurers, patient advocates and the
government react to the price? Does the
company have a 'patient access' program
that provides the product to poor patients for
free, or at a substantial discount, to
counterbalance a premium price charged on
the free market?
Note that none of these factors is related to pharmacoeconomic measures. They are basically
factors to consider to maximize revenues (and thus profits).
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So basically we have a free market system for drug pricing. This works for many
other products --- what’s the problem?
● Issue 1: Unlike most other markets, in healthcare, those that get the benefit
don’t bear the cost.
In this sense, the healthcare market is similar to the
market for children’s toys.
Children want more and more toys and patients want
more and more therapies as neither are directly
bearing the cost for it.
*This is probably a stronger sentiment in the US with our strong tradition and culture of individualism and individual
rights. Indeed, in other countries governments do hinder access to some forms of healthcare --- e.g. NICE in the UK
has withheld approval of Avastin in multiple indications based on pharmacoeconomic analyses.
● Issue #2: Health is qualitatively different from other “products.”
Its one thing for a parent to deny a child a toy, but it seem an altogether different thing for a
payer or government to deny a patient their health
There is a sense that we all “deserve” health*
● Issue #3: Pharmaceutical products have patent protection, granting market
exclusivity, so its not a completely free market.
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The forces pushing toward higher drug prices far outweigh those pushing against
Drug PricesHigherLower
Patients don’t bear the cost of drug, so they
have high demandPrice controls? This is
against free market
principles. Politically
dangerous to propose that
government get involved
in price setting
Pharma companies want to maximize profits
Patent protection give market exclusivity to
manufacturers
Non approval of drugs
based on price? This is
also politically dangerous -
-- “death panels”, etc.
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What might the future bring? What factors may be brought to bear vs increasing
drug prices?
● Physcian groups are creating new treatment guidelines that incorporate cost factors
o An ASCO task-force is in the process of creating a scorecard that evaluates drugs on cost
and value, in addition to efficacy and safety/tolerability – ready by late 2014
o But should physicians be stewards of the larger society as well as of the patient in the
examination room?
● Payer revolts
o Express Scripts is forming a coalition to refuse to use Sovaldi after a competitor hits the
market (and is priced lower).
o Will BMS and others with new HCV therapies price lower to get this business, or will they
tacitly collude with Gilead and price similarly to Sovaldi?
● Novel contracting schemes
o These are nascent, but include schemes where the first several doses of a drug are provided
free, and only if there is clinical progress will later doses be charged.
● More patient responsibility for cost of therapy
o As insurance moves toward higher copay, higher deductible policies, patients will become
more like consumers and pick and choose between providers and therapies, driving
healthcare costs downward. Its likely, however, not to impact the costs of life-threatening
disease therapies as much as others.
o This has probably slowed the uptake of Sovaldi already
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APPENDIX
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2020
Our dysfunctional healthcare system (I)
• We spend far more on healthcare than other countries, even after adjusting for relative wealth.
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• Furthermore, our spending on healthcare is rising to unsustainable levels
Our dysfunctional healthcare system (III)
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• Despite the high level of spending, life expectancy at birth is far below the trend line
Our dysfunctional healthcare system (II)