The Drug Price Reform Debate

The high cost of specialty drugs that cure hepatitis C and treat specific forms of cancer has sparked heated criticism. Value-based pricing is an alternative—but it may be impractical.

The marketing of an ever-growing number of new drugs that come with eye-popping price tags is spurring a drive to develop value-based pricing models.

"Pricing is the issue," says Samuel Nussbaum, MD, executive VP for clinical health policy and chief medical officer for Indianapolis-based WellPoint, Inc.

He says the healthcare industry faces an unsustainable cost trend for so-called specialty drugs such as medications that are targeted at specific forms of cancer capable of treating relatively small pools of patients annually.

"It is expected that these specialty drugs alone will cost more than all drugs used today in five years," he says, noting that the total annual cost for clinical drugs is currently about $330 billion and the annual cost of specialty drugs alone is forecast to rise to $400 billion in five years. "There will be no other room for everything else."

Nussbaum believes public officials and all stakeholders in the healthcare industry have to find a way to finance the most effective specialty drugs, while holding the line on drugs that deliver a marginal benefit. "It's absolutely appropriate to expect those drugs will cost a lot of money to develop," he says. "If there is a breakthrough therapy, we're all for it. But if you have a drug that is precise but doesn't necessarily provide a major clinical benefit, it doesn't hold the same power."

'Too difficult to measure'

Alexander Bastian, a healthcare practice leader at market research firm GfK Bridgehead, says establishing value-based pricing models for drugs is a daunting challenge.

In particular, an impending avalanche of "personalized" medications has caught the healthcare industry off guard, most notably in oncology, he says.

"The average size of a patient population has reduced to 200 or 300 patients in cancer care," Bastian says, whereas earlier generations of oncology drugs were marketed to several thousand patients annually. "Fewer patients are being treated with more resources per head, and society has not come to grips with that yet."

Establishing performance-based models for drug pricing is highly desirable but extremely difficult to implement. In the United Kingdom, Bastian says efforts to establish performance-based pricing for oncology drugs hit several roadblocks. "The administrative burden and the time to make that work was sapping resources from the system," he says. "It's too difficult to measure. They have backed away."

To construct performance-based models for drug pricing, it is critically important to be able to follow the effectiveness of medications over time. "You have to have a closed network, where you can have that life as long as possible," he says.

Another key to establishing performance-based pricing models is transparency. "Right now, if you go to a payer with a drug in development, you can get consultations but the consultations are nonbinding," Bastian says. "Rules can change after two years of development. It de-incentivizes pharma from adopting new models."

WellPoint's approach

In July, WellPoint adopted a relatively modest approach to value-based drug pricing in oncology.

The health plan's Cancer Care Quality Program gives oncologists a financial incentive to use cancer drugs that have a proven track record of effectiveness. "We know there is a wide variation of care," Nussbaum says. "We know there are variations in effectiveness of care. … We scanned the literature to find the best 'pathways' of care."

In the Cancer Care Quality Program, oncologists receive a one-time $350 payment for adopting a treatment plan that is consistent with the health plan's approved pathway of care. On top of that one-time payment, oncologists also receive $350 per-month-per-patient payments as long as patients are receiving treatment that is consistent with the pathway of care.

"We think that is an incredibly more responsible way for doctors to pay for care, and for us to pay for care that is more responsible and affordable," Nussbaum says.

He says it is too early to evaluate the effectiveness of the program, which was launched in July in Georgia, Indiana, Kentucky, Missouri, Ohio, and Wisconsin.

Developing value-based models

Harold Miller, president and CEO of the Center for Healthcare Quality and Payment Reform, a research and advocacy group in Pittsburgh, says the healthcare industry has barely scratched the surface in value-based drug pricing.

"There are many examples of drug pricing that are ostensibly value-based," he said. "Pharmaceutical companies routinely introduce improved versions of drugs and ask for higher prices for those drugs than the previous versions because they perform better in some way, according to the drug company. Health plans routinely place drugs into different cost-sharing tiers based on the health plan's assessment of the value of the drug, which means the health plan, not the drug company, determines the value-based price the patient pays.

"However, what is generally missing today is having the difference in price or cost-sharing between two drugs be directly proportional to the difference in the value of the drugs. For example, a drug manufacturer may charge a lot more for a drug that delivers only slightly better results than another drug, so the difference in price exceeds the difference in value; while the patient may be expected to pay the same copayment for each, which means the difference in price to the patient is less than the difference in value."

Peter Bach, MD, director of the Health Outcomes Research Group at Memorial Sloan-Kettering Cancer Center in New York, proposed "indication-based" drug pricing in the Journal of the American Medical Association earlier this month.

"When costs are essentially the same but benefit differs widely, value is not the same," Bach wrote. "One crude metric of value is the cost per year of life gained. Using Medicare reimbursement rates, the cost per year of life gained with nab-paclitaxel is estimated at $145,000 in breast cancer and $400,000 in [metastatic non-small lung cancer], as measured by the change in median survival."

Bach notes significant reforms would be necessary for adoption of indication-based drug pricing.

"The health care system does not and cannot accommodate indication-based pricing," he wrote. "Oral agents for treating cancer, such as erlotinib (Tarceva), are distributed from pharmacies to patients. The parties that buy and then distribute these medications to pharmacies do so in bulk, and manufacturers do not know which patients are receiving their drugs for which indications. Pharmacies do not necessarily record the indication, even if the prior authorization process required by the insurer does."