If the U.S. presidential primaries continue their current trajectories, the two contenders come autumn will have at least one thing in common: a stated desire to do something about high drug prices. Maybe you believe them, and maybe you think they’re blowing smoke up our nether regions. But momentum is momentum. With consumers, doctors, and politicians riled up and many people in industry nodding in agreement, the status quo of drug prices does not seem sustainable.
The way it generally works now: Drug companies set list prices but negotiate the prices downward, in secret, with a scrum of insurance companies and their middlemen (but not, importantly, with Medicare). Drug makers offer a variety of reasons for starting the bidding high. For example, R&D is expensive, especially with all the costly, failed programs that never come to market; some drugs, like the new wave of hepatitis C drugs, may save society from paying for future health crises by curing or preventing previously chronic diseases; others offer treatment options for patients who previously had none. Sometimes, though, companies don’t reveal the rationale behind the prices they charge.
None of this would be a national debate if the products in question were handbags or airline tickets. But drugs are critical to those who need them, and they generally don’t have a lot of competition. Even when competition finally arrives, as the Washington Post noted in an article on the pricing history of the leukemia drug imatinib (Gleevec), companies can sometimes shrug off price pressure.
Some drug industry representatives feel unfairly singled out by the attention, pointing out that other healthcare sectors are bringing financial pain, too. True enough: A Kaiser Family Foundation/New York Times poll last fall asked Americans who have had trouble paying medical bills about the sources of those problems. About two thirds named doctor visits, diagnostic tests, and lab fees, while just over half said prescription drugs. When asked what represented the largest share of their bills, drugs were much farther down the list.
The federal Centers for Medicare and Medicaid Services (CMS) say U.S. spending on prescription drugs in 2014 was $305 billion. Hospital costs were $978 billion, and spending in clinics and doctor offices was $615 billion. In coming years, drugs are projected to take up a bit more than 10 percent of U.S. healthcare budgets. But whether that’s too much, not as much as you’ve been led to believe, or somewhere in between, it seems changes in drug pricing and spending are inevitable. Ideas are coming from all angles these days. Which are actually possible, and which are just plain pie in the sky?
Since Hillary Clinton (no surprise) and Donald Trump (surprise!) have both said Medicare should be able to negotiate drug prices directly with drug companies, let’s start there. (For a refresher on the implications of that negotiating power, and why Medicare doesn’t have it, read this.)
It will take a Congressional vote to make it so. That seems to put the onus on Republicans, who likely would look askance at a Clinton administration push. If they still control both houses, that is; this topsy turvy political season isn’t over yet. (And believe it or not, there have been moments of recent bipartisan comity over Medicare.)
But insiders say 2017 could bring, well, anything.
“People of all political stripes are thinking of ideas,” says Michael Werner, an attorney at DC firm Holland & Knight and cofounder of the Alliance for Regenerative Medicine, the lobbying arm for part of the biotech industry. “The issue is really now in play, not just among critics of the industry but all the stakeholders.”
Adding to the hurlyburly is the CMS proposal to make changes to a different part of Medicare’s drug purchases. The so-called Part B program, which governs drugs administered in hospitals and clinics including many cancer and autoimmune treatments (as opposed to Part D’s retail prescription drugs), pays doctors the average sales price plus six percent of the drugs they administer. The six percent, say critics, encourages doctors to choose higher priced products and provides incentive for drug makers to start with higher prices. “The costlier the drug, the more the physician makes. It’s crazy,” says David Howard, an associate professor of health policy and management at Emory University in Atlanta. “I do think it encourages companies to set higher prices. It’s not the only factor, but on balance it pushes prices up.”
CMS wants to cut the add-on fee to 2.5 percent plus an extra $16.80 per day of treatment. Its proposal is for a five-year pilot program to test the new scheme against the current scheme, looking at its effect on prescription patterns, health outcomes, and spending. The pilot could also include several other strategies that the private insurance sector is already experimenting with, including pay for performance—which we’ll describe in a moment.
The Part B pilot wouldn’t kick in until after a two-month public comment period ends in May, and forces on either side are lining up.
Meanwhile, several groups have begun their own assessments of the actual value drugs bring to society, with the idea that such calculations could eventually form the basis of a more rational pricing system. The Boston-based nonprofit Institute for Clinical and Economic Review, or ICER, has weighed in with complex analyses of the costs and benefits of several drugs, including the new wave of hepatitis C treatments, two competing anti-cholesterol drugs that were approved last year, and a heart failure medicine that could be a big test case for creative pricing.
Philanthropists Laura and John Arnold of Houston have put more than $14 million into ICER and other groups doing similar work. ICER said last year the Arnold Foundation money will lead to reports on 15 to 20 drugs in the first two years. Coming soon are evaluations of obeticholic acid, an experimental liver disease treatment from Intercept Pharmaceuticals (NASDAQ: ICPT), and of eight treatments for multiple myeloma.
There won’t be a single U.S. authority handing down value assessments, like the U.K. government’s powerful National Institute for Health and Care Excellence. But different groups will likely proliferate and put pressure on the drug companies. “Their existence directly affects the pricing of biopharmaceutical products,” write the authors of a recent drug pricing report from EY—formerly known as Ernst & Young. “That’s because these different assessments provide credible pricing alternatives that manufacturers must address head on when trying to justify a product’s value.”
To counter that pressure, you’ll hear some drug makers talk about “transparency” as they begin to lift the veil on their internal calculations of their products’ worth. Alnylam Pharmaceuticals (NASDAQ: ALNY) CEO John Maraganore told Xconomy in January that as his company progresses its most advanced drug, patisiran, through the clinic he will talk publicly about pricing strategy. “This is not something we will hold back on,” he said.
In addition to talking openly about pricing, some companies are thinking creatively about the problem as well. Take Novartis, for one. The heart failure drug that ICER evaluated is a combination of the agents sacubitril and valsartan, marketed as Entresto by Novartis. At launch last year, the Swiss drug giant pledged to tie reimbursement for the drug to the savings of keeping people out of hospitals—one of the first attempts to use a “pay for performance” scheme for a major pharmaceutical product. Novartis knew it would be tough to sign up insurers.
But the company in late January announced its first two pay-for-performance deals, later revealed to be with Cigna and Aetna, which start with a “fairly modest” rebate to the list price that goes up or down based on the reductions in hospitalizations. (The rebate, as most deals between drug makers and insurers, is confidential. But those inclined to speculate might start with ICER’s final report on Entresto in December, in which it recommended that the list price of $4,560 a year should be cut 9 percent, to $4,168, “to prevent an excessive cost burden on the health care system.”)
Amgen (NASDAQ: AMGN) of Thousand Oaks, CA, also struck a recent pay-for-performance deal with the health system Harvard Pilgrim after the launch of evolocumab (Repatha), which blocks a protein called PCSK9 and helps patients flush excess cholesterol out of their blood streams. Evolocumab is going head to head with alirocumab (Praluent) from Sanofi (NYSE: SNY) and Regeneron Pharmaceuticals (NASDAQ: REGN). Both launched last year with list prices around $14,000 a year. They’ve only been approved for a relatively small group of people who can’t lower their cholesterol enough with statins and diet. Insurers will only reimburse for that use, and sales so far have been slow.
Everyone, including doctors wondering how aggressively to prescribe the PCSK9 drugs, is waiting for massive “outcomes” studies with tens of thousands of patients to show not just that they lower cholesterol but that they actually make people healthier and save lives.
That makes the PCSK9 drugs a fascinating test case. With products that purport to be big advances, drug makers might not be able to charge the prices they want until they show longer-term “real world” outcomes—not just positive data in smaller clinical trials.
Pfizer, which is also developing a PCSK9 inhibitor, Amgen, and Sanofi have the wherewithal to run huge trials. But what about small biotechs testing medicine in small patient populations? Some of the biggest pricing questions concern cutting-edge gene therapies and other treatments that have scant clinical track record. Many of them are held out with the promise of a long-lasting treatment—such as many of the hemophilia treatments currently in development.
The first test could come next year, when Philadelphia’s Spark Therapeutics (NASDAQ: ONCE) hopes to gain approval for a gene therapy to cure rare forms of genetic blindness. (Dutch firm UniQure (NASDAQ: QURE) has had its gene therapy for an ultra-rare liver disease approved in Germany with a reported price of more than $1 million, but it will not ask for approval in the U.S.)
High six figures… nine figures… Could once-unthinkable prices for once-unimaginable cures work if companies prove that insurers would save far more on the hospitalizations, surgeries, and other health costs avoided?
At a regenerative medicine meeting in San Diego last October, a panel of payers discussed new approaches to drug pricing. The prospect of paying for cures brought up a fascinating exchange. The moderator Arturo Araya is in charge of the cell and gene therapy business unit at Novartis, and he asked the panelists what will happen when companies present insurers with short term data, gleaned from a few years of clinical testing, and ask them to pay high prices that reflect long term value—that is, pay for a cure. “What will you need to see?” Araya asked.
John Fox, the VP of medical affairs at Priority Health, which has 640,000 members and is based in Grand Rapids, MI, replied with another question. “What if the treatment fails? Am I on the hook for another one? If your therapy doesn’t last as long as you thought it would, what’s your skin in the game?”
Noting the complicated potential for massive costs and transformative outcomes, panelist Michael White, the director of clinical pharmacy services at Blue Cross Blue Shield of Tennessee, called gene therapy the “dark cloud with the silver lining.”
There are other obstacles. Americans tend to bounce from insurer to insurer, what policy analysts call “churn.” It’s a big problem. Even if a drug proves to be a cure, the insurer paying six or nine digits upfront isn’t likely to reap the benefits of that cured patient way down the line. The question then becomes, can the payments be spread out over time? Sangamo Biosciences (NASDAQ: SGMO) CEO Edward Lanphier has been thinking about this problem a lot. His company is the farthest along with a gene editing therapy—a treatment for HIV in Phase 2 testing—and has just begun clinical testing with what it hopes will be a cure for hemophilia. Having tools to track people as they churn from insurer to insurer won’t be the hard part, Lanphier says, but he wonders about grayer areas—compliance, for example. If, as some have proposed, regular payments are tied to a person staying “cured,” then who decides when a person is no longer cured? What if the person stops coming to his monthly or quarterly checkup? Or, as John Rother of the National Coalition on Health Care, puts it, “What do you do with someone who has lung cancer but continues to smoke, or someone cured of hepatitis C who gets reinfected through drug use?”
Last month Andrew Lo, a finance professor at MIT’s Sloan School of Management, and David Weinstock, a researcher and physician at the Dana-Farber Cancer Institute in Boston, floated an idea that addressed several questions around paying for cures, whether one of the hepatitis C drugs now available, a T cell immunotherapy that has knocked out leukemia in early clinical trials, or a still-experimental gene therapy.
Make loans available for patients who are eligible for curative therapy, they proposed. The loans would be gradually paid back, and only if the therapy works. Other financial mechanisms, such as finding deep-pocketed guarantors for the loans, would also theoretically entice lenders to participate. The idea wouldn’t correct the pricing problem, Lo and Weinstock admit. But it could give some patients access to otherwise unattainable therapies, buying time for better solutions to emerge.
“It’s better than the status quo which is the patient doesn’t get the drug or the patient goes into bankruptcy,” Weinstock says. Wait a second. The solution to bankruptcy from medical debt is… debt? Emory’s David Howard and others found that element of the proposal and many others to be headscratchers.
Lo and Weinstock cite a study that shows 62 percent of all U.S. personal bankruptcies in 2007 were related to medical expenses, and three-quarters of those filing for bankruptcy had some form of health insurance, “which underscores the need for a more efficient health care loan market,” they write.
“Our ulterior motive,” Lo says, “is to shame politicians into passing the necessary legislation to cover these therapies through insurance, and it seems that the best way to do this is to have patients ‘mortgaging their health’ through the private sector.”
(Lo has experience running seemingly far-out ideas up the healthcare flagpole. In 2012 he sketched out the idea of a several-billion-dollar “megafund” that would buy and develop a portfolio of drugs, a version of asset financing on steroids. Three years later, this happened.)
Lo and Weinstock want to convene a conference this fall to flesh out the loan idea. Whether their brainchild actually grows into a loan program or not, elements of it are common to many of the creative ideas now in play, so the conversation should be welcome. For many, the question isn’t if changes are coming, it’s when.
“It behooves us and others to think about annuity models, loans, pay-for-performance, to go through them all and cross-match them with what needs to change with [federal] policy,” says Werner, adding that his Alliance for Regenerative Medicine is not yet leaning one way or another. “We need to get those ideas on the table by the end of this year, so when the federal government takes up drug prices, we’ll have proposals out there.”