Risk & Compliance

Drug Prices: Costly Cures

An American fight over expensive new treatments has global implications.
Economist StaffJune 9, 2014

Drug-company executives, investment analysts, doctors and academics swarmed into Chicago between May 30 and June 3 for the year’s biggest meeting on cancer. Treatments for cancer account for more than 30 percent of pharmaceutical firms’ early-stage research and are being revolutionized.This would seem good news. For Steve Miller, the meeting was also alarming. “We are very concerned about a lot of the different products that were presented this weekend,” he says.

His cause for concern is price. Dr Miller is the chief medical officer for Express Scripts, America’s biggest pharmacy-benefit manager (PBM), hired by insurers and employers to control the drugs costs for the patients they cover. In America a melanoma drug from Bristol-Myers Squibb costs nearly $120,000 for a course of treatment. And it is not just cancer treatments that are worrying. An $84,000 drug for hepatitis C, sold by Gilead, another American firm, has caused outrage among politicians and insurers. On May 28 the drug inspired a coalition ranging from doctors to trade unionists to launch a campaign against “unsustainable and abusive” prices. For drug companies this raises a ghastly specter: that America might, at last, begin to act like the rest of the world.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

European countries have long scrutinized drug prices, a practice that has intensified of late. Germany, for example, has a new way of judging the costs and benefits of medicines. National health systems use their clout to win big discounts. Cancer-drug prices are 20-40 percent lower in European countries than in America, according to IMS Health, a data and consulting firm. Emerging markets offer limited respite. Spending on drugs is growing there, but many governments balk at companies’ prices. India has rejected applications for drug patents or weakened them so that local firms can make cheaper copies.

drug pricesBy comparison, America has been a drugmakers’ paradise. It has no universal, nationalized health service. For the majority of Americans who have private insurance, drug companies negotiate separately with various PBMs and insurers. The government does pay for drugs for the elderly and the poor, but even the suggestion that it might consider a treatment’s cost prompts hysteria over rationing. Barack Obama’s health reforms created a group to compare the benefits of drugs, but it is explicitly barred from applying a standard of cost-effectiveness, as is done in Britain.

Given all this, as well as America’s size, it is little surprise that the country is the drugmakers’ honeypot. Its spending of $328 billion in 2012 was more than one-third of global drug sales and more than twice the spending of France, Germany, Italy, Spain and Britain combined (for a population of roughly the same size). John Castellani of PhRMA, a giant drugs lobby, argues that American prices subsidize innovation that benefits patients elsewhere. Indeed Gilead is negotiating lower prices for its hepatitis C drug, Sovaldi, in poor countries. In allowing those prices Gilead assumes it will get higher ones in America.

Those paying the bill, however, are increasingly restless. Although drugs for some ailments are going off-patent and thus getting cheaper, costly new treatments for others will greatly increase the amount spent on those diseases (see chart above). Sovaldi is a “tipping-point,” says Dr. Miller. To date, most extremely expensive drugs have been for small groups of patients, such as those with a rare genetic disease. In contrast, about 3.2 million Americans are estimated to have hepatitis C. If each was given Sovaldi at current prices, the cost would exceed $250 billion.

So valuable, Sovaldi

“To say that Sovaldi has low value is not very accurate,” huffs Gregg Alton, a Gilead executive. After a 12-week course, he points out, patients are essentially cured; they will avoid the suffering and costs of hepatitis C, such as liver transplants. Brian Solow of OptumRx, a PBM owned by UnitedHealth, America’s biggest insurer, counters that a new medicine for Alzheimer’s would also transform treatment. But as about 5 million Americans have the disease, it is doubtful that insurers would be able to afford a high price.

The uproar over Sovaldi suggests that drugs will henceforth be held to a higher standard: if insurers are reluctant to pay for highly effective medicines they will probably reject mediocre ones, such as cancer drugs that extend life by just a few weeks. Already, PBMs and insurers are testing new ways to guide Americans to cheaper drugs. Express Scripts is encouraging doctors and patients, “when clinically appropriate,” to wait a year or so until rivals to Sovaldi come to market. UnitedHealth is paying some doctors a capped price for cancer treatment, to discourage them from prescribing drugs that bring little benefit. WellPoint, another insurer, will shortly start paying bonuses to doctors who prescribe cancer drugs recommended by the insurer.

Such moves are minor compared with the cost controls seen in Europe. But America’s market is so crucial to drugmakers that even the hint of change inspires panic. “You run the risk of stifling innovation,” warns PhRMA’s Mr Castellani. It is hard to know if this is an empty threat — the link between research spending and drug prices is as linear as a Gordian knot. However, the status quo looks increasingly precarious. “If we don’t change the basic pricing structure of pharmaceuticals,” argues Dr. Miller, “this system will collapse.”

©The Economist Newspaper Limited, London, June 7, 2014

Enhanced by Zemanta