No one is happy with the price of drugs nor how we pay for them: not patients, not the lawmakers who represent them, not physicians, not insurance payers and not drug developers. We are at a point where all stakeholders are fed up, and there’s bipartisan consensus that “something needs to be done.” The time is ripe for change.
Until now, there has been a lot of finger pointing, but the “blame game” leads nowhere. There is another path forward, one that, at last, relies on conversation and collaboration among stakeholders. We know current models determining and regulating prices are broken, and mechanisms that once limited prices simply no longer work. But to move forward, we must first understand what is driving price increases.
It’s estimated 30 percent of the rise in drug spending between 2010 and 2014 is attributable to greater use of new, higher-priced drugs. Prominent among these novel treatments are biologics and gene therapies, which are costly to develop, and with companies wanting to recoup costs and facing no meaningful competition, they command higher prices. Many of these drugs treat rare or orphan diseases, ensuring modest demand and, as a result, the price tags are even higher.
Insurers warn that without solutions to help them manage the cost of these drugs, some may move to exclude coverage. That’s bad; studies show that the more you restrict utilization, the worse the outcomes. While this won’t be common, it’s already happening; members of the United Food and Commercial Workers (UFCW) received notice in November 2019 that their plan would cease coverage of “any medical and/or prescription drug charges for or related to gene therapy, whether they have FDA approval, or are experimental.”
If we want to make sure life-saving therapies get to those who need them, we need to change the way we think about pricing. All stakeholders need to be invited to the table, and our conversation should not simply be about making drug prices cheaper; it must be about making pricing more fair. We must also collaborate on changing how we pay for drugs, moving from a fee-for-treatment approach to a value-based approach that pays for outcomes achieved. Finally, we need to take into account the receptivity and need for change of the stakeholders involved, with primary focus on meeting the needs of patients who rely upon these medications.
This is merely a starting point. Even if a drug works, payers could still be very much in trouble in covering the value-based price. For example, the Institute for Clinical and Economic Review (ICER), which works to ensure fair pricing and access, found that the value of a single shot of a gene therapy drug was between $1.2 million and $2.5 million. At those prices, a drug had better work, but even then, collapsing decades worth of potential cost-offsets into the single, one-time administration of a drug produces extraordinary upfront budget pressure on payers.
Further, a review of drug development pipelines shows that 60 percent of new molecular entities awaiting Food and Drug Administration (FDA) approval between 2020-2021 can be classified as “specialty pharmaceuticals.” The cumulative effect of paying for curative therapies across multiple conditions can only add more strain on the current shaky structure. That strain is showing, with only 5 percent of patients accounting for 50 percent percent of all health spending. Medicaid and employer-provided insurance also note that the top 50 prescription drugs, while only making up 8 percent of total prescriptions, account for more than 40 percent of their total spend. A survey of 31 Managed Care Organization (MCO) executives confirms that these payers are ready for change given their concern that growth of specialty drug costs outpaces that of non-specialty drugs.
Collaboration between stakeholders must consider that, with the uneven balance of development cost vs recouping, novel therapies can’t be paid for using current models, created decades ago to manage predictable costs of chronic conditions. Once we define a value-based price, we must consider a corresponding set of alternative reimbursement models, “precision financing” plans for precision cures, to ensure affordability and reimbursement. These measures can help ease costs so that all parties benefit and, most importantly, patients can access the medications they need.
We must also decide what kind innovation we want to incentivize. Society believes investing in tech has benefits and it accepts 35 percent percent margins on every iPhone or 42 percent profits by Twitter. What is a fair return for curing disease? Is a 25 percent percent net margin, like that which McDonalds posts, too much? Apparently. As internal rates of return approach zero in drug development, is cancer drug development or designing fast-food apps a more rewarding career path for innovators? COVID-19 has forced a broader acceptance that disrupting costly, inefficient, old-fashioned clinical trial models was very good for accelerating drug development. The drug pricing crisis must also disrupt our thinking and force us to accept that society must value innovation differently.
With growing pressure from all sides, value determination for prescription drugs in the U.S. is not going to be left to the invisible hand of the market. The new political climate on Capitol Hill, combined with the growing negotiation status of insurers, shows that the days of simply determining market demand as a function of price and choosing the profit optimizing point are gone. This is the opportune moment for legislators to reexamine regulation from the vantage point of all stakeholders, bringing them to the table to forge new legislation that brings order and sanity to the way that we value cures and how to pay for them.
Roman Casciano is the general manager and senior vice president of market access and HEOR and Real-world Evidence for Certara. He is an applied health economist and market access strategist who has led hundreds of engagements in the international market access and HEOR context related to product value demonstration.