Soaring Drug Costs Prompt Search for New Pricing Models

May 09, 2016

Soaring costs for many prescription medications — including promising new breakthrough drugs — is compelling pharmaceutical companies and insurers to look for new ways to provide the most effective treatments to the patients who need them.

The dilemma was explored during the Global Conference panel “Can We Afford to Cure Disease?” Increases in the cost of many prescription medications, including new “breakthrough” medications as well as older drugs, were the focus of media attention during 2015, moderator Caroline Pearson, senior vice president at Avalere Health, noted. Among the steps that should be taken to mitigate costs, panelists said, is a pricing model that takes into account the effectiveness of the medication.

For example, a 12-week course of Gilead Science’s new hepatitis C medications will cure the disease, but the treatment initially cost about $84,000, or around $1,000 per pill. Although negotiations with payers and the introduction of competing products have lowered the cost, the treatment is viewed by some payers (though not by all) as being worth a high price because of its effectiveness. Gregg Alton, executive vice president of Gilead Science, noted that 25 percent of patients currently covered by the Veterans Administration have been cured, and 100 percent are expected to be by 2020, which would be a stunning achievement.

Costs are more difficult to justify for new drugs that provide an incremental benefit over older, less-expensive existing treatments, panelists said. Providers also grapple with high-priced treatments that are needed by a small number of patients. Humana Chief Medical Officer Roy Beveridge noted that 50 percent of Humana’s budget for so-called “specialty drugs” (those typically administered in a doctor’s office or hospital rather than purchased at a retail pharmacy) is spent on 1.3 percent of its members with chronic conditions. All other cost centers, such as hospital care and physician visits, are transitioning from the traditional fee-for-service model to value-based payments. In Beveridge’s view, drug developers should be treated in the same fashion. Because Gilead’s hepatitis C drugs are so effective, Humana has found a way to cover them. But the benefits of many treatments are less clear-cut.

Peter Bach, director of the Center for Health Policy and Outcomes at Memorial Sloan Kettering Cancer Center, presented data supporting the argument that drug prices are increasing disproportionately to the benefits provided by new products. He was emphatic that the regular market mechanisms for finding prices for products have been “intentionally broken” for reasons such as patent incentives and regulation of insurance coverage. Bach created a tool called the Drug Abacus to “determine what the price of these drugs should be based on things we collectively agree constitute value and innovation.” Bach also noted that when patients pay a percentage of the cost of a drug out of pocket, it’s usually a percentage of the list price rather than a lower negotiated price that a hospital, physician or insurer would pay. Anthony Barrueta, senior vice president of government relations at Kaiser Permananete, said that pricing is making it harder and harder to maintain comprehensive coverage for its members. Drugs for rare diseases have always had a high price tag because of the small populations they serve, but it seems now virtually all products are priced the same way. “The system feels out of balance,” he lamented.

All panelists agreed that innovation is important, although it is challenging to define value. (An audience member asked whether patients have played a role in defining value, and Pearson noted that Avalere is working with the Milken Institute’s FasterCures center to develop a patient-centered value framework.) There was shared optimism about the fact that participants in the medical arena are finally grappling with these issues, although solutions for supporting and financing medical innovation, while achieving sustainable health-care spending, remain elusive.  Barrueta would like to see more dialogue among payers and developers before prices are set so the parties can get in sync about the value of new therapies. “This is a solvable problem,” he said. “But I haven’t seen the proposals to get us there.”

Watch the Full Discussion