Tuesday, March 10, 2015

Bending the cost curve, up

Here's a quiet but powerful article that is an indictment of the oncology drug industry and public policy surrounding that industry.  It's called "Pricing in the Market for Anticancer Drugs," in the Journal of Economic Perspectives.*

The summary:

In this paper, we discuss the unique features of the market for anticancer drugs and assess trends in the launch prices for 58 anticancer drugs approved between 1995 and 2013 in the United States. We find that the average launch price of anticancer drugs, adjusted for inflation and health benefits, increased by 10 percent annually—or an average of $8,500 per year—from 1995 to 2013. We argue that the institutional features of the market for anticancer drugs enable manufacturers to set the prices of new products at or slightly above the prices of existing therapies, giving rise to an upward trend in launch prices.

This chart illustrates the phenomenon:

What are the institutional features of the market that make this possible?

Generous third-party coverage that insulates patients from drug prices, the presence of strong financial incentives for physicians and hospitals to use novel products, and the lack of therapeutic substitutes. Under these conditions, manufacturers are able to set the prices of new products at or slightly above the prices of existing therapies, giving rise to an upward trend in launch prices.

The phenomenon is aided and abetted by the Federal government:

By law, Medicare does not directly negotiate with drug manufacturers over prices for prescription drugs covered under the Part B benefit or the oral anticancer drugs covered under Medicare’s pharmacy “Part D” benefit. Section 1861 of the Social Security Act, which requires that the Medicare program cover “reasonable and necessary” medical services, precludes consideration of cost or cost-effectiveness in coverage decisions. Consequently, Medicare covers all newly approved anticancer drugs for indications approved by the FDA.


At the time of FDA approval, most drugs are on-patent, and so manufacturers are temporary monopolists. 


Insurers in states without these requirements and large employers that self-insure have more leeway to determine coverage policies, yet, in the rare instances where third-party payers have tried to place meaningful restrictions on patients’ access to anticancer drugs, they have relented under pressure from clinicians and patient advocacy groups.

*The authors are:

David H. Howard, Associate Professor, Department of Health Policy and Management, Rollins School of Public Health, and Department of Economics, Emory University, Atlanta, Georgia. Peter B. Bach, Member in the Department of Epidemiology and Biostatistics, Attending Physician in the Department of Medicine, and Director of the Center for Health Policy and Outcomes, Memorial Sloan Kettering Cancer Center, New York City, New York. Ernst R. Berndt, Louis E. Seley Professor in Applied Economics, Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts. Rena M. Conti, Assistant Professor of Health Policy, Departments of Pediatrics and Public Health Sciences, University of Chicago, Chicago, Illinois.


Barry Carol said...

Another problem, I think, is that patients who choose to fight their disease, especially cancer, aggressively even when their prognosis is dire and they have already lived a normal lifespan and then some are often glorified by society as brave and courageous. By contrast, those who opt to accept a terminal prognosis with grace and dignity and opt for comfort care only are seen as having “given up.” I really wish there were an effective way to change this mindset but I don’t have any good suggestions.

Paul Levy said...

An excellent point, Barry. My late friend Monique, who died of breast cancer, used to make the same point.

Anonymous said...

I have two comments regarding treatment prices, having worked at the headquarters of multi-national companies.

1 - The US is the only market where pharmaceutical, medical and information technology companies can charge at or above market prices for their products, while most other countries have some form of price control and/or where market prices are substantially lower as compared to the US due to their cost of living. The price differences I have seen in the past can be staggering. The result is that these companies often are able to recoup their investments almost solely in the US, and the rest of the world is like icing on the cake.

2 - Any time CMS tries to lower the cost of a treatment, medical professional societies and the vendors will create stiff opposition and the politics within the AMA/RUC becomes intense. It is not uncommon that an - often cheaper - and existing procedure is "thrown under the bus" in order to preserve or increase reimbursement for the more expensive procedure(s). I saw this happen up close.

Anonymous said...

I will play the devil.

The costs of doing business are gong up going up - pharma acquisitions that try to ascribe higher value of the sum over that of the individual parts summed together - these costs have to be absorbed by the products coming out soon rather than the later pipeline.

Plus, several of the drugs are a version of same-in-class compounds, which means the lifespan of the drug itself may not be too high, therefore the companies may be charging higher prices upfront.

Lastly, as it gets harder to develop drugs b/c of biology, complexity, etc, the general cost of innovation is going up. Drugs are different than an iPhone where a newer model may still rely on the basic iPhone, whereas for drugs, it is always starting from square 1.

Anonymous said...

There should be simple rule for drug purchases.

1) all drugs are purchased centrally to maximize buying power.

2) the central drug buying entity (call it Medicare Part B - plus plus) will pay no more for any drug the the lowest priced changed to any entity in another wealthy country (OECD countries plus)

therefore the U.S.no longer subsidizes drug development for the whole world.

If drug companies can no longer get the U.S. to subsidize drug development, they must increase prices to all other countries paying less than drug development costs plus costs of production and distribution, which is most of the world except the U.S. This could be limited to other rich countries.

We also should NOT be "green lighting" drugs that increase life expectancy by a week but take costs from 50K to 100K per month. To be clearer, if it currently costs 50K per month to keep someone alive an extra 5 years, it shouldn't cost 100k per month to keep someone alive for 5 years and 1 week.

We have to become much more pragmatic about these decisions.