Tuesday, June 10, 2014

The New War on Drugs

No, I'm not talking about the illegal drug market, which "only" generates revenues of around $100b annually (although other estimates put it much higher).  I'm talking about prescription drugs, which account for about $300b of health care spending each year.  Concern about rising expenditures on prescription drugs is nothing new, of course, but recent blockbuster drugs have raised those concerns to new levels.

The flashpoint for the concern lately has been a drug called Sovaldi, manufactured by Gilead Sciences, which is used to treat Hepatitis C.  The good news is that Sovaldi is, by all accounts, remarkably effective, completely curing patients 90% of the time.  The bad news is that it costs an eye-popping $1,000 per pill -- and typically requires 84 pills per patient.  With some 3.2 million Americans diagnosed with Hepatitis C, giving them all Sovaldi could cost an astonishing $200b.

Gilead argues that these initial costs don't take into account savings from avoided treatment costs down the road, such as liver transplants.  That is a valid argument from a global, long-term perspective, but health plans and state Medicaid agencies are somewhat shell-shocked by these unexpected costs (and may no longer be covering the impacted patients if/when any saving accrue).  AHIP (indirectly) blasted Gilead, asking the rhetorical question: "But what happens when the innovators take advantage of the system to drive their prices to unsustainable levels?"

A recent post in Health Affairs by Tricia Newman, Jack Hoadley, and Juliette Cubanski estimated that Sovaldi alone could raise Part D premiums 2-8% -- and they warn that these estimates "might be conservative."

Merck apparently thinks so.  They are salivating so much about Gilead's success that they just agreed to buy a rival developer of Hepatitis C drugs (Idenix Pharmacuticals) for $3.85b -- over three times their market value just last week.  Idenix doesn't even have any products yet on the market, but is reputed to have several promising treatments for Hepatitis C.  Others are following.

Our health care system can survive Sovaldi, $1,000 a pill or not.  The trouble is, it's not the only expensive drug out there. 

Some cite the threat from a new class of cholesterol drugs called PCSK9 inhibitors.  These drugs could shift up to 20 million Americans from relatively low cost generics to these new drugs, which are expected to cost thousands of dollars a year.  And, unlike Sovaldi, they don't even cure the problem, so become an ongoing new cost.

Or take the Lucentis versus Avastin controversy.  Both drugs are manufactured by Genetech, both can be used to treat macular degeneration, but they have vastly different costs: $2,000 per dose for Lucentis versus $55 for Avastin.  Yet Genetech only sought FDA approval for Lucentis to be used for macular degeneration.  A new study in Health Affairs estimates Medicare could save $18b over the next ten years -- and consumers some $5b in copayments -- if Avastin was always used.  Cynics (and count me as one of them) believe that both Genetech and ophthalmologists prefer Lucentis because they make more off the more expensive drug, a suspicion that the recent CMS release of Part B data doesn't do much to refute.

Another specialty that the CMS release highlighted was oncology, where new drug treatments continue to increase life expectancy -- but at higher costs.  As The Economist reports, some experts worry about the affordability of the next generation of cancer drugs.  For example, a new cancer drug (ramucirumab) sold by Eli Lilly costs over $7,000 per injection, with injections needed every two weeks, for as long as the patients live.  That could make Sovaldi look like a bargain.

The Economist cites Express Scripts' annual Drug Trends Report, which shows the average cost for a cancer drug in 2013 was $4,023 -- 22 times more than in 1997.   I'm pretty sure that is more than CPI, even the medical portion.

Vanity Fair -- not your typical health care publication -- ran a provocative article last December The Drugs That Cost More Than Your House. They list five "orphan" drugs, used for rare diseases, that all cost over $300,000 per patient per year (making their title true, at least in my case).  The rationale for the high cost of orphan drugs is that otherwise the small potential market wouldn't justify the development costs, but you have to have some sympathy for the patient or patient's health plan that gets stuck with those bills.

I mean, let's face it, the pharmaceutical industry has been ahead of its health care brethren in many ways for a long time.  For one thing, they were for-profit, investor-owned and national (international) from the start, while most other players -- providers and health plans -- were still largely local non-profits or (very) small businesses.  They were using electronic eligibility, benefits, and claims decades ago, when everyone else was still paper-based.  They led the charge for direct-to-consumer advertising in health care, pouring money into it and reaping the benefits from increased consumer demand (on average, according to IMS Health, each American now fills an astonishing twelve prescriptions per year!).

While most other players in health care have become glumly used to fee schedules and/or per-case prices, and are moving towards global payments/capitation/risk-sharing, pharmaceutical manufacturers still mostly get discounts off of charges, using Average Wholesale Prices (AWP).  Even the pricing that consumers see -- and which their copayments/coinsurance are based on -- is misleading, due to the behind-the-scenes rebates that the large purchasers get.  Throw in formularies, tiered coinsurance, pre-authorization, and other innovative approaches health plans and PBMs have tried, and consumers' confusion is complete.

It's fairly well accepted that the U.S. has some of the highest prescription drug prices in the world (just as we do for most units of health services).  The drug manufacturers argue that their pricing reflects the arduous FDA approval process, that they have a short window before generic competitors offer "me-too" drugs, and that our prices have to fund the R&D that other countries' tougher negotiating on prices won't support (in contrast, Medicare is expressly prohibited from doing the same, a policy that costs taxpayers tens -- or perhaps hundreds -- of billions each year). 

Their arguments strike me a little like the schoolyard bully telling you he can't beat up the other kids, so he's going to need your lunch money.  Or, to paraphrase one of the candidates from the 2012 Presidential campaign, we need to borrow money from China to help pay for our high drug costs so that Chinese consumers don't have to pay higher prescription drug prices.

Something is wrong here.

Frankly, I am deeply suspicious of a pricing approach that is based on charges, mitigates those with up-front discounts and hidden after-the-fact rebates, yet still produces profit margins on the order of close to 20% , making the pharmaceutical industry one of the most profitable industries, according to Fortune.  That's all great for their investors but not, perhaps, for consumers.

I am not an advocate of government price-setting (if for no other reason than if those would-be federal negotiators were better than the pharmaceutical lobbyists, we won't have the Medicare prohibition in the first place).  But we don't have a good strategy on pharmaceuticals: compared to other countries we have more patients on more expensive drugs that offer less demonstrated value relative to other options.  Nor is that unique to prescription drugs; we could say the same or similar about other medical technology and treatments.

We certainly want strong R&D, and we want to protect consumers against catastrophic expenses, whether they are due to prescription drugs or any other medical.  But we got into this mess by having the pharmaceutical industry work with health plans behind consumers' backs to set prices, passing the costs along in the form of higher premiums/taxes. It's the medical-industrial complex I've referred to previously (Always Fighting the Last War), and it's led us to these absurd, Pentagon-like prices for things that should be less expensive. 

We have direct-to-consumer advertising but not direct-to-consumer pricing or purchasing.  Like a lot of other parts of the health care system, I'd start there.  

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