drug pricing 04 oct14

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Some thoughts on the rising cost of drugs


  • 1. Drug Prices in the US: How High Can They Go?- Issues and Discussion1October 2014

2. A talk on rising drug prices --- Why might you be interested?22As a patient You may be facedwith having to pay ahigh price for a drugtherapy. As insurance policiesshift more and moreof the cost burden topatients, this willbecome increasinglyand issue forindividual patients*As a healthcareconsultant Our clients make pricingdecisions and may want tounderstand our perspectives.We should be prepared todiscuss intelligently.As a citizen Even if you are not apatient, higher drugtherapy costs arepassed through to therest of us throughhigher insurancepremiums This will be an issuewith our federalbudget via Medicareand Medicaid 3. 33A thought experiment Imagine a drug therapy was developed that could cure 90% of all cancersFantastic, time to celebrate, right? But now imagine that the drug manufacturer decided to charge $500k for a course oftherapy*Would this still be a good thing?*This may not be as farfetched as you think. There are no formal price controls on drugs in the US, and apharma company is beholden to its shareholders to maximize value. 4. 44Questions / 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 pricescontinue to increase?o Political pressure leading to formal price controlso 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. 5. 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 curerate of 90%o The best alternative therapies cure about 40-70% of HCV, depending on genotype, and have55nastier side effectso A 12 week course of Sovaldi therapy costs $84k* Thus it has been called the $1000 a day drugo $5.8B in sales in the first 6 months of 2014 (basically the greatest pharmaceutical launchever) There are roughly 3.2 million HCV patients in the US, with annual deaths of 17,000 in2007 If all 3.2 million HCV patients get Sovaldi, this would generate revenues to Gilead of3.2M x 84k = $269Bo 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 muchsmaller populations (rare diseases, particular types of cancer, etc.), so their revenue impact is much smaller. 6. Ways to assess Sovaldi an HCV State Diagram In the absence of Sovaldi, a state diagram of HCV looks like this:*66Chronic HCVpatients candevelopcirrhosis andliver cancer,and some mayeventuallyrequire a costlyliver transplant.*Note: Precisevalues andprobabilities can beargued; the mainpoint here is toillustrate the idea ofthe state diagram 7. Ways to assess Sovaldi - Cost/Benefit (CB) Analysis (I). The state diagram can be used to calculate the % of patients in different states, at77different time periodsFor example, after10 years, 62% ofpatients are stillsuffering chronicHCV, 25% havecompensatedcirhossis, 1.7% haveliver cancer, and7.1% are deceased. Since there are annual costs associated with each of these states, one can calculatean expected net present cost for a newly diagnosed HCV patient.o In this example, the net present cost is around $40k 8. 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:88100%*Note: A more detailed analysis would include the small percentage that do not getcured, plus the additional costs of therapy associated with Solvadi (it typically isused in combination with ribavirin and interferon) which adds to the cost.Chronic Hepatitis C$84,000CuredBasically, 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 negativeQuestion: 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 mayeventually transition to Medicare, use of Sovaldi may shift costs from Medicare to current payers. 9. Ways to assess Sovaldi - Cost Effectiveness (CE) Analysis (I). 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 savedo This measure is appropriate for drugs that treat life-threatening conditionso E.g. if cost of therapy = $100,000 and it saves 5 years of life, then CE is $20,000o Another way to think of this is the cost of additional years of life --- lower is betterQuestions: Is this worth it? Is it worth $14k to save 1 year of life? And whoseperspective should be used? The individual? The government? Payers?99 From this table, we cancalculate that use of Sovaldisaves an average of 6 life-years* This means the CE for Sovaldiis about $14k*Technically, 6 discounted life-years 10. Ways to assess Sovaldi - Cost Effectiveness (CE) Analysis (II).1100 Some gross economic measureso In 2012 in the U.S., the GDP was $15.7 trillion and the population was 314 million, so $15.7trillion / 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