As we pointed out in our last newsletter, U.S. spending on prescription drugs rose only 1.3% in 2016, according to a Dec. 6 Health Affairs article written by statisticians and economists in the Office of the Actuary at the Centers for Medicare and Medicare Services (CMS). That was by far the smallest rise in any health-care category.
The growth rate for drug spending declined dramatically in 2016 from the previous two years (which were distorted by new drugs that cure Hepatitis C, for which there was pent-up demand) and was more in line with the 1.2% average annual growth rate from 2010 to 2013.
These figures offer a powerful rejoinder to politicians and pundits who single out the price of drugs as the culprit for rising health-care costs. But the rejoinder is even stronger when you realize that these numbers on spending don’t tell the whole story. The spending figures reflect changes in the price of drugs, yes, but also the volume of drugs used and the mix of drugs used, as newer products are introduced and older products become available in generic form.
“Revenue growth has been driven by new products and volume growth from existing products; price has been a net negative driver,” said a September report from the QuintilesIMS Institute.
Specifically, the report found that growth in the use of existing drugs averaged 2.6%, increases in revenues from new drugs averaged 3.8%, and prices of existing drugs rose 3.3% but declined an average of 2.5% when newly available generics are included. Yes, declined . The lifetime trajectory of most drug prices, unlike the prices of other goods and services, is downward. Over time, new drugs face competition, both from branded competitors with medicines that attack the same disease, and from makers of generics, which reach the market when patents expire.
New Medicines and Total Drug Spending
Let’s focus on the effect of new drugs on total spending. Consider an intractable disease – for example, a form of cancer for which there has not been an adequate treatment. Now assume that a new drug is discovered that substantially increases the life expectancy of someone afflicted with that cancer. Suddenly, a number of patients – assume 50,000 – at last have a beneficial treatment for their disease. Say that the drug costs $2,000 a month. Thus, over a year this medicine adds $1.2 billion to total spending on health care. Rather than a loss to society, this spending is an enormous gain, extending and enhancing the lives of people with the disease.
Now let’s do some back-of-the envelope calculations. Altarum Institute’s Health Sector Economics Indicators brief for Dec. 15 was headlined: “New CMS data reveal lower health spending growth, led by prescription drugs.” During the past three years (Nov. 1, 2014, to Oct. 31, 2017, the period covered in the report), spending on prescription drugs rose from $307 billion to $351 billion. That is an increase of about $140 per American. These figures, however, do not include the cost of medicines administered in doctors’ offices or hospitals.Estimating those amounts for the three-year period, based on history and forecasts, brings the total increase per capita to around $180; let’s just round it up to $200, or less than $70 a year.
So here’s the question: Is it possible that new drugs alone, approved over the past three years, justify the increased costs? No doubt.
Over the three years, the Food & Drug Administration approved 124 new medicines. Here are a few examples , each from a different pharmaceutical company: Entresto (developed by Novartis), a treatment for chronic heart failure; Ibrance (Pfizer), for certain kinds of breast cancer; Keytruda (Merck), for non-small-cell lung cancer; Epclusa (Gilead), a cure for Hepatitis C; Tecentriq (Genentech), an immunotherapy for lung and bladder cancer; Ocrevus (Roche), a drug that staves off disability for multiple-sclerosis patients; Venclexta (AbbVie), for leukemia; Syndos (Insys), for treatment of anorexia associated with AIDS and nausea associated with chemotherapy; and Dupixent (Regeneron and Sanofi) for eczema.
Huge breakthroughs are occurring in cancer. Last year alone, the FDA issued 16 oncology approvals, medicines that fight cancers of the blood, breast, lymph nodes, ovaries and more. A report in June by America’s Biopharmaceutical Companies, in conjunction with the American Cancer Society, found that 248 immuno-oncological drugs are now in development. The medicines harness a patient’s own immune system to fight cancer, the way that system fights bacterial infections.
Overall, since 2000, some 500 drugs have been approved by the FDA, and, currently, nearly 7,000 medicines are in development, about three-quarters of them considered “first in class” treatments. Not all of these drugs will make it to market (the process is long and expensive), but the ones that do will provide a boost to health that is worth a lot more than $70 a year.
A New $850,000 Drug
Still, it is disingenuous to ignore the high price tag for individual medicines. Luxturna, for example, was approved on Dec. 19. Developed by Philadelphia-based Spark Therapeutics, it’s described by the FDA as the “the first directly administered gene therapy approved in the U.S. that targets a disease caused by mutations in a specific gene.” Luxturna treats children and adults with an inherited form of retinal dystrophy that affects 1,000 to 2,000 Americans and can result in blindness. FDA Commissioner Scott Gottlieb hailed the breakthrough, saying that “we’re at a turning point when it comes to this novel form of therapy.”
The treatment’s cost is $425,000 per eye. "It's wildly expensive,” said Dr. Steve Miller, chief medical officer of ExpressScripts, the nation’s largest pharmacy benefit manager (PBM). But, Miller added, “To be very frank, I think they've priced it what I'll call responsibly."
Why responsibly ? First, analysts were expecting a price of over $1 million, given the drug’s effectiveness. “Patients who participated in the [clinical] trial…described, in interviews and in testimony to a panel of FDA advisers, seeing snowflakes for the first time or being able to read again,” said a report on the CNBC website. Second, it’s a one-time treatment; the costs don’t recur. Third, Spark is negotiating to allow government insurance (such as Medicaid) to pay for the drug over time, on an installment plan. And fourth, Spark is offering a refund if the treatment does not work as advertised. As Bloomberg reports:
In an agreement with the Boston-area insurer Harvard Pilgrim Health Care, Spark will get the full price of treatment up front. If patients don’t get an immediate benefit -- measured at 30 days, or a long term one -- measured at 30 months, Spark will have to give some of the money back in a rebate.
The details of the rebate program have not been announced, but the strategy is in keeping with an innovation called “value-based pricing” – which should more properly be called “value-based reimbursement” since drug manufacturers are reimbursed by private and government insurers. The list price is far from what manufacturers receive under normal circumstances after insurers, hospitals, and PBMs take their debates, discounts, and fees.
A plan like Spark’s represents a positive innovation in the realm of health-care costs because it emphasizes the benefit side, not just the cost side: If the benefit (or value) is reduced, then the cost is reduced as well.
Value-based reimbursement puts the right framework on analyzing costs. It gets us thinking, for example, about the impact of medicines on the use of other health care services. Keeping patients out of the hospital and doctors’ offices, drugs reduce overall health-care costs for the nation. And a true calculation of value-based reimbursement would look not only at the present but the far-off future. A statin that reduces cholesterol eliminates heart attacks which, without the drug, might occur 20 or 30 years out.
Michael Porter’s Value-Based Prescription
Michael Porter, the Harvard economist, offered a prescription for value-based health-care system eight and a half years ago in the New England Journal of Medicine . He wrote:
The central focus must be on increasing value for patients — the health outcomes achieved per dollar spent. Good outcomes that are achieved efficiently are the goal, not the false “savings” from cost shifting and restricted services. Indeed, the only way to truly contain costs in health care is to improve outcomes: in a value-based system, achieving and maintaining good health is inherently less costly than dealing with poor health.
Right now, Porter writes, “The focus is on minimizing the cost of each intervention and limiting services rather than on maximizing value over the entire care cycle.” But if we put the patient in the center of the system and focus on how we can improve his or her health, we are likely to find that medicines are the key to reducing health-care costs throughout the entire system. Drugs provide not only innovation but also a model for holding down expenses through competition.
Online newsletter dedicated to helping you understand the costs and benefits that sometimes lie obscured in our complicated health care system