No simple formula determines the price of a drug, nor is there a single price for a drug in the U.S. multipayer system, but there is a consensus that the value of a medicine – its effectiveness for patients – should be the prime factor. Unfortunately, the leading organization that promotes value pricing has serious shortcomings, both in its overall approach and methodology.
‘Examined for Value by a Credible Body’
Currently, in a nation where 91% of Americans have health insurance, most prices are settled through negotiations between pharmacy benefit managers (PBMs), working for insurers and health plans, and pharmaceutical manufacturers, with such factors as competition, effectiveness and other market factors at play.
But isn’t there a way to gauge the effectiveness of drugs so that prices, reflecting true value, become easier to determine, almost formulaic?
In a July 16, 2018, comment letter responding to the Trump Administration’s “Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs,” the Pharmaceutical Care Management Association, a trade group for PBMs, stated:
To achieve a reasonable level of pricing, the drug could be examined for value by a credible body that would estimate a reasonable range of price for a given drug, based on the value it is expected to bring to patients. One such entity is the Institute for Clinical and Economic Review (ICER).
ICER, founded in 2006, describes itself as “an independent and non-partisan research organization that objectively evaluates the clinical and economic value of prescription drugs.” By analyzing “all clinical data” and convening “key stakeholders – including patients, doctors, life science companies, private insurers, and the government – ICER translates “the evidence into policy decisions that lead to a more effective, efficient, and just health care system.”
Sounds perfect, but there have been problems, big ones. Consistent criticism led ICER last year to ask for public comment on its “value assessment framework” for 2020 to 2023. ICER has asked patient representatives to review its draft drug reports, and in April the organization appointed its first-ever “Vice President for Patient Engagement.”
Despite these steps, the “800-pound gorilla of cost-effectiveness analyses,” as Shea McCarthy called ICER in STAT News, has provided no transparency into how stakeholders are affecting the “economically justified price” that ICER calculates for the drugs it examines.
First Issue: Suspicion of Bias
The organization has been under fire almost from its inception.
The first issue was suspicion of bias. The organization’s eight-person governance board is heavy with former and current insurance industry executives, including officials of Kaiser Permanente and UnitedHealth Group and the past executive vice president of America’s Health Insurance Plans trade association. Another member of the board is Ron Pollack, who headed the advocacy group Families USA for 33 years. Pollack is no friend of the companies that make the medicines that ICER judges. A typical quote: "Price gouging is becoming America's other drug crisis. The drug companies are using the top 20 drugs to squeeze consumers dry."
ICER’s primary funder is the Laura and John Arnold Foundation, which has donated $27.6 million to the organization since 2017, plus at least $20 million more to Memorial Sloan-Kettering, Johns Hopkins, and other institutions for work on pharmaceutical “affordability.” John Arnold was an Enron executive who, according to Wired magazine, “managed to walk away from Enron’s 2001 collapse with a seven-figure bonus and no accusations of wrongdoing attached to his name.” He then started a hedge fund, became a billionaire, and retired at 38 to concentrate on philanthropy. The Laura and John Arnold Foundation has taken an aggressive stance on drug pricing that, from the start, threw into question the objectivity of ICER’s research because of the views of its major funder.
Quantifying Quality of Life
Still, even if ICER were wholly objective, the task it set for itself – trying to quantify a drug’s effectiveness – was certain to invite criticism. The focus of ICER’s work is the acronym QALY, which stands for “quality-adjusted life year.” Introduced 44 years ago in an academic paper Richard Zeckhauser and Donald Shepard, the concept was to create a way to evaluate both the duration of life and the quality of that life in one single measure.
Here’s how it works: If a person lives for one year in perfect (100%) health, the person is assigned a QALY of 1, which is derived by multiplying one year of life by a “utility” value of 1. The utility number represents the relative quality of the life. A utility of 1 represents perfect health, a utility of 0 represents death, and everything between reflects different relative states of quality.
So if a person lives three years with only half the utility of perfect health, then the QALY would be 1.5, because the 3 years of life is multiplied by the 0.5 utility value. Similarly, if the person lives for six months at half utility, then the QALY is 0.25 (0.5 year x 0.5 utility value).
ICER compares a current treatment with a treatment using a new drug and calculates the new drug’s ability to increase QALY; that’s the drug’s effectiveness. Then, ICER suggests an amount of money that an additional QALY is worth – for example, $100,000. Multiply the QALY increase by the dollar amount and (voila!) you have what ICER calls the “value-based price benchmark.”
Obviously, the QALY itself is a blunt instrument, often obscuring the true experience of real people. In Newsletter No. 34, we used this example:
Imagine that Patient A has been living for six years in a state severe debilitation, at a utility of 0.3. Now imagine Person B has lived in a state of near perfect heath for two years, at a utility of 0.9. The net experiences of both patients would each total 1.8 QALYs for the time periods considered. But can the experience of being severely disabled over a longer period of time be deemed similar to living in perfect health over a shorter period?
It clearly depends on the person, and the example shows how difficult it is to quantify personal experience. And there’s another question: How do researchers know whether a person’s “health-related quality of life” is at a 0.4, 0.7, or 0.9? Researchers use surveys that take into account such matters as mobility, ability to wash and dress oneself, pain, anxiety, and ability to perform usual activities at work and leisure. The survey data are translated unto utility values.
‘Our Concern Reflects Deep Flaws’
Many patient groups are appalled at this process.
In 2018, CVS Health, parent company of CVS Caremark, a large PBM, issued a white paper describing “a program that allows clients to exclude any drug launched at a price of greater than $100,000 per QALY” from their plan. More than 90 patient organizations, ranging from the American Association of People With Disabilities to the Bladder Cancer Advocacy Network, wrote a letter to the CEO of CVS Health, that said in part:
Our concern reflects deep flaws in ICER’s cost-effectiveness analysis. In particular, policy decisions based on cost-effectiveness ignore important differences among patients and instead rely on a single, one-size-fits-all assessment. Further, cost-effectiveness analysis discriminates against the chronically ill, the elderly and people with disabilities, using algorithms that calculate their lives as “worth less” than people who are younger or non-disabled.
From a clinical care perspective, QALY calculations ignore important differences in individual patient’s needs and preferences. From an ethical perspective, valuing individuals in “perfect health” more highly than those in “less than perfect” states of health is deeply troubling.
(The CVS-ICER plan is “off to a slow start,” Reuters reported in October.)
In an op-ed piece in the San Francisco Examiner last year, Randall Rutta, the chairman of the Partnership to Fight Chronic Disease, objected to the fact that ICER does not give an extra year of life for a person with a chronic condition the same value as an extra year for a healthy person. In effect, then, a drug that lengthens the life of a sick person is not as valuable – on a QALY basis – as a drug that lengthens the life of someone who is not sick.
“The discounted QALY,” writes Rutta, “is in effect a determination of discounted value assigned to a person, a value judgment that may be at odds with their personal opinion about their own life in its totality, in the context of family, workplace, and community.”
Limitations and Dangers of QALY
Last year, the National Council on Disability, a federal agency, issued a report highly critical of QALY analysis. In a letter of transmittal to President Trump, the council’s chairman, Neil Romano, a former Assistant Secretary of Labor for Disability Employment Policy under President George W. Bush, wrote:
[I]n an effort to lower their healthcare costs, public and private health insurance providers have utilized the Quality Adjusted Life Year (QALY) to determine the cost-effectiveness of medications and treatment. QALYs place a lower value on treatments which extend the lives of people with chronic illnesses and disabilities. In this report, NCD found sufficient evidence of the discriminatory effects of QALYs to warrant concern, including concerns raised by bioethicists, patient rights groups, and disability rights advocates about the limited access to lifesaving medications for chronic illnesses in countries where QALYs are frequently used. In addition, QALY-based programs have been found to violate the Americans with Disabilities Act.
And the Governor of Oklahoma recently signed into law a bill, HB 2587, that would bar the state from using QALY methodology. It says that state agencies…
shall be prohibited from developing or employing a dollars-per-quality adjusted life year, or similar measure that discounts the value of a life because of an individual’s disability, including age or chronic illness, as a threshold to establish what type of health care is cost effective or recommended.
In a review of the academic literature on QALY, published in 2016 in the Journal of Stem Cell Research and Therapy by D.A. Pettit of Oxford University and colleagues wrote:
The QALY has limitations in producing reliable and valid measurements across disease categories and does not consider a variety of contextual factors including program-specificity, palliative care, mental health and indeed the future of the medical landscape. As it is currently defined, QALYs do not cover the nuances needed within and across disease categories and patients.
The researchers concluded: “Three common themes emerged concerning the limitations of QALYs. These were ethical considerations, methodological issues and theoretical assumptions and context or disease specific considerations.”
Perhaps the biggest problem is the rigidity with which ICER employs the QALY – despite the methodology’s well-known limitations, only some of which we have noted here. HTAs (or health technology assessment bodies) in Europe and the U.K. have adopted a more flexible approach.
Some critics accept the notion that ICER’s calculations of QALY despite some misgivings, but they question why ICER includes price recommendations in its efficacy analyses. Those recommendations have lately strayed from the range of $100,000 to $150,000 ICER set in its own “Value Assessment Framework” for 2020 to 2023.
The organization would seem to be better off avoiding pricing recommendations entirely and sticking to calculations that reflect how much a drug extends and improves the life of patients – a tough enough job in itself.
There is no doubt that finding a quantifiable way to provide reasonable range of assumptions on the value makes eminent sense, but so far, ICER has not achieved what it set out to do. It still lacks the confidence of key stakeholders. Perhaps, in the end, an organization with ICER’s apparent ideological baggage is simply not equipped for a task that has proven extremely difficult.
When it comes to pharmaceuticals, the focus of policy makers, the media, academics, and advocacy groups tends to be on who’s paying how much. They often neglect what Americans are paying it for -- that is, the drugs themselves.
As a result, too many people risk missing the big picture, which is that Americans are gaining access to more and more innovative medicines that are granting them longer and better lives.
In 2019, U.S. Food & Drug Administration (FDA) approved 48 new medicines, bringing the total for the past three years to 153. That is 25% more than for any such period since 1938, when President Roosevelt signed the Food, Drug and Cosmetic Act, and the modern era of pharmaceutical regulation began. The record for approvals was set in 2018; last year’s total was the second-highest ever.
In regulatory jargon, these approved drugs are called “new molecular entities,” or NMEs. As the FDA says on its website: “Many of these products contain active moieties that have not been approved by FDA previously, either as a single ingredient drug or as part of a combination product; these products frequently provide important new therapies for patients.”
(A “moiety,” by the way, is part of a molecule that often gets its own name and is found within other molecules, too.”)
What the NME total does not include is also significant. The list of 48 “does not contain vaccines, allergenic products, blood and blood products, plasma derivatives and gene therapy products” or other biological products, which are often the most advanced medicines. (Last year’s 48, for example, does not include the approval in May of a revolutionary genetic treatment for a terrible disease afflicting young children – more on that below.)
The list also does not include approvals for new indications – or other applications for an already-approved drug. For example, the drug Keytruda, originally approved in 2014 for advanced melanoma (skin cancer), has since been granted FDA approval for more than 20 indications. Seven of those approvals came in 2019 (and one so far in 2020), including for certain kinds of cancers of the lungs and esophagus.
Nor does the total include generic drugs, or copies of patented medicines. For fiscal year 2019, the FDA approved an incredible 1,171 generics, breaking the previous year’s record by 21%. In all, more than 3,000 generics have been approved since Oct. 1, 2016. The flood of generics is, in large part, the result of a streamlining of the approval process under FDA Commissioner Scott Gottlieb, and it’s a key reason that the price of the average prescription has leveled off and even declined under the Trump Administration.
While the volume of FDA approvals has been encouraging, drug R&D has to earn enough of a return on investment to keep the innovations coming. Remember that Investments that began decades ago produced the drugs approved in 2019.
Today, there are threats from such proposals as pricing U.S. drugs – the source of most global innovation – according to an index of prices set by governments in foreign countries. We’ll explain some of the dangers of this International Pricing Index at the end of this newsletter.
Wide Variety of Approved NMEs
The variety of NMEs approved last year is striking. Let’s begin with cancer. In our last newsletter, we quoted Janet Woodcock, the director of the FDA’s Center for Drug Evaluation and Research, writing that “2019 was another strong year for making new cancer and blood therapies available to patients in need.”
The FDA approved two new drugs for breast cancer, two for bladder cancer, and others for multiple myeloma (a type of blood cancer), prostate cancer, and large B-cell lymphoma, the most common type of non-Hodgkin lymphoma. Other approved drugs treat mantle cell lymphoma, which causes strokes and heart attacks, and a type of leukemia that afflicts adults.
Also approved was Rozlytrek, the third oncology drug that, said the FDA in an August press release, “targets a key genetic driver of cancer, rather than a specific type of tumor.” The release stated that the treatment is…
based on a common biomarker across different types of tumors rather than the location in the body where the tumor originated. The approval marks a new paradigm in the development of cancer drugs that are “tissue agnostic.”
Here, drawing from the FDA’s excellent annual report on new therapy approvals, issued last month, are just some of the other drugs approved last year:
‘First in Class’ and ‘Breakthrough’ Drugs
Of the 48 drugs, 20 were considered “first in class,” that is, they have, in the FDA’s words, “potential for strong positive impact on the health of the American people. These drugs often have mechanisms of action different from those of existing therapies.” Among them were the depression drug Zulresso and Balversa for advanced bladder cancer.
Thirteen of the approved drugs were awarded “breakthrough” status, meaning that they treat “serious or life-threatening diseases for which there is unmet medical need and for which there is preliminary clinical evidence demonstrating that the drug may result in substantial improvement on a clinically significant endpoint (usually an endpoint that reflects how the patient feels, functions or survives) over other available therapies.” Among them: Adakveo for sickle cell and Rozlytrek for metastatic solid cancer tumors.
22 New Biological Products, Including 3 Vaccines
Biological products, or biologics, are highly complex compounds. They can also be living cells or tissues, “made from a variety of natural resources—human, animal, and microorganism—and may be produced by biotechnology methods,” according to the FDA, which last year approved 22 of them.
Several of the biologics were vaccines, including Ervebo, approved in December to prevent the disease caused Zaire Ebola virus, which kills about half the people it affects. The last Ebola outbreak, from 2014 to 2016, led to 11,324 deaths in Africa and one in the United States.
Other approved biologic vaccines were Exembify, which prevents Primary Humoral Immunodeficiency (PI), a term encompassing multiple disorders of the immune system that can sometimes lead to death if untreated, and Dengvaxia for dengue disease, a painful mosquito-borne illness that each year sickens 100 million people around the world and kills 22,000, according to the Centers for Disease Control and Prevention.
The FDA also approved a separate treatment for PI for adolescents, a biologic to control bleeding in hemophilia patients, and, as we mentioned above, a genetic treatment called Zolgensma for spinal muscular atrophy (SMA), the number-one genetic cause of death in infants.
Biosimilars Lag; What Can Be Done?
Unfortunately, only 26 biosimilars – whose relationship to biologics is roughly the same as that of generics to branded small-molecule pharmaceuticals – have been approved since the FDA began the process is 2015. Ten of those were approved in 2019, compared with seven in 2018 and five in 2017. The trend is up, but the pace is frustratingly slow.
Biosimilars are far more expensive to develop and produce than generics: a cost per drug of between $100 million and $250 million, compared with just $1 million to $4 million, according to Erwin Blackstone and P. Fuhr Joseph Jr., writing in the journal American Heath & Drug Benefits.
Pharmaceutical manufacturers worry that the investment may not be worth the cost if they can gain approval but are still not be able to bring their biosimilars to market. The concern is not clinical; it’s obstacles to acceptance by physicians and pharmacy benefit managers not to mention a barrage of patent lawsuits that lead to long delays. We examined the biosimilars issue in Newsletter No. 54, and we will revisit it soon as advocates push for reforms that will ease uptake.
A great deal is at stake. Biologics are the fastest-growing pharmaceutical expense. Since 2014, writes Avik Roy in Forbes, they are responsible for essentially all of the increase in drug spending. They represent just 2% of prescriptions but 37% of spending, so biosimilars offer significant cost savings opportunity.
Of the nine biosimilars approved last year, three have Herceptin as their reference branded drug and two have Humira.
Herceptin treats early-stage breast cancer that is Human Epidermal growth factor Receptor 2-positive (or HER2+). Two previously approved biosimilars also have Herceptin as their reference drug, and competitors to the branded drug, which was approved by the FDA back in 1998, went on the market last year. According to FiercePharma, Herceptin ranks number-17 among top-selling drugs, with $2.9 billion in revenues in the U.S. in 2018.
The number-one seller is Humira at $13.7 billion. Initially approved by the FDA in 2002, Humira treats several auto-immune diseases, including rheumatoid arthritis and Crohn’s. As with Herceptin, the FDA has approved a total of five biosimilars with Humira as the reference product. But, because of legal settlements, Humira will keep competition in the U.S. at bay until 2023.
By contrast, in Europe, where far more biosimilars have been approved and come to market, competitors to Humira began being sold last year. The effect of biosimilars was immediate, with revenues for branded Humira falling 34% in the first three quarters of the year outside the U.S. (compared with an increase of 10% domestically).
Other biosimilars approved by the FDA in 2019 had as their reference products: Avastin, the 18th top-selling drug in the U.S., for multiple cancers (now with a total of a total of two biosimilar competitors); Neulasta, ninth top-seller, for low white blood cell counts (with three biosimilars); Remicade, ranking 11th, for stroke (four biosimilars); Enbrel, third, for auto-immune diseases (two biosimilars); and Rituxan, fourth, for several diseases, from rheumatoid arthritis to leukemia (also two biosimilars).
There’s little doubt that if these biosimilars gain wide acceptance in the market – as many have done in Europe –the competition will lead to significant and sustainable savings in drug costs.
The Great American Drug-Developing Machine
The U.S. continues to lead the world in developing new drugs (about twice as many as all of Europe combined from 2014 to 2018), and the people who live here are the main beneficiaries. Of the 48 novel drugs, 33 were approved first in the United States. Americans not only develop most of the world’s drugs; we also have far greater access to them.
As we noted in our last newsletter, a PhRMA analysis last year, using data from the research firm IQVIA, as well as the FDA, the European Medicines Agency, and Japan’s Pharmaceuticals and Medical Devices Agency, compared how broadly and quickly new cancer medicines became available in 15 rich countries, many of which set prices artificially low.
The U.S. was, far and away, and the leader. Some 96% of the new drugs were available in the U.S.; Germany and the U.K. tied for second with 71%, with Canada at 57% and Japan at 50%; the median was just 62%. The average delay in the public’s access to the new cancer medicines was a mere three months in the U.S., again by far the best. French patients could not gain access to the average new drug for 19 months; Italy, 20 months; the U.K., 11 months. The median among the nations was 16 months.
The reason is no secret. While highly regulated, the U.S. health care system remains far more responsive to the market and the immediate wants and needs of the public and physicians, compared with government-controlled systems in other countries. U.S. policy has been developed with an eye toward encouraging scientific innovation.
In an important piece in the New England Journal of Medicine on Jan. 30, Dhruv Khullar and colleagues presented a model of “the structure of the pharmaceutical reward system and the way in which existing and proposed policies affect it.” They are worth quoting at length:
The evolution of a successful drug occurs in three sequential periods. During the innovation period, a drug is developed and tested but cannot be sold. Only a small minority of drug products are ultimately approved by the FDA, and for those that are, this approval constitutes the start of the monopoly period, during which no other corporation can manufacture and sell the drug. After the various patents and exclusivity periods of a drug expire, the competitive period commences. Other corporations can now produce and market identical copies (i.e., generic or biosimilar drugs) of the innovator product (i.e., the brand-name drug).
Each pharmaceutical policy can be understood in terms of how it affects the financial condition in one (or more) of these three periods. Financial losses generally occur during the innovation period. Positive and potentially sizable profits occur during the monopoly period and then decline during the competitive period.
The decision to develop a new drug is driven largely by a corporation’s expectation of the relative sizes of these three periods — that is, what it anticipates the investments and rewards to be before and while embarking on drug development. For a given corporation, realized net profits may ultimately prove to be larger or smaller than anticipated, but public policy creates an environment that defines what can be expected on average.
Policymakers can use four types of levers to alter the expected financial results in the reward box: market entry levers, monopoly protection levers, payer requirement levers, and tax policy and direct financial incentives.
Threats to a Delicate, Productive System
The system the authors describe is delicate. It currently produces remarkable results – far more medicines each year than any other country produces with far greater access for patients. In the debate over drug pricing, these results – incredibly enough – are often ignored when changes are advanced. For example, Vital Transformation, a consulting firm, looked at the consequences of the International Pricing Index (IPI) that is part of H.R. 3 legislation, which passed the House in December.
According to the analysis, 64 drugs came to market over the past 10 years under biotech partnerships that have been so productive lately. With the IPI in effect, there would have been “56 fewer approvals of medicines originating from these small biotech companies, a reduction of nearly 90 percent.”
The largest overall impact would be seen in the treatment of cancers, with the loss of 16 treatments ranging from chronic myeloid leukemia (CML), lymphoblastic leukemia, ovarian cancer, breast cancer, prostate cancer, and lymphoma. In addition, two treatments for non-insulin-dependent diabetes would not have reached the market, as well as 10 orphan drugs for rare conditions such as pulmonary fibrosis, glioblastoma (cancers of the brain), and pulmonary arterial hypertension. Also included in the 56 drugs at risk are treatments for migraine, narcolepsy, wound care, and hepatitis B.
Changing policy while overlooking the powerfully positive effects of the current system could be disastrous.
Issue No. 59: Cancer Death Rate Registers a Record Decline; Reminder That Drugs Have Massive Benefits as Well as Costs
With all the debate over drug costs, it’s important to remember that pharmaceuticals also have massive benefits. Lives are extended or saved, pain and disability are reduced, suffering patients become more happy and productive, and burdens are lifted from their families.
Consider cancer, which, after heart disease, is the number-two cause of mortality in the United States. Two in every five Americans will get cancer in their lifetimes, with 1.8 million new cases expected in 2020. One in nine men will get prostate cancer; one in eight women will get breast cancer; one in 16 Americans will get lung cancer. Overall, cancer kills about 600,000 Americans a year; it’s the cause of 21% of all deaths.
But over the past quarter-century, the cancer death rate (that is, mortality per 100,000 Americans) has fallen an incredible 29%. Among black males, the demographic group with the highest death rate, the decline has been close to 50%. The American Cancer Society (ACS) estimates that 2.9 million fewer deaths have occurred than if the peak rates of the late 1980s and early 1990s had persisted.
Most dramatically, the death rate from cancer registered the largest one-year drop ever recorded, 2.2%, between 2016 and 2017, according to an ACS report released on Jan. 8.
There are several reasons for the decline: the reduction in tobacco use, earlier detection through better imaging techniques, improved surgical procedures, and new medicines and vaccines. A study by Seth Seabury and colleagues, published in the Forum for Health Economics and Policy in 2016, estimated that 73% of the success in fighting cancer is attributable to drugs.
The Promise of Immunotherapy
One of the most dramatic advances recently has been the use of drug-based immunotherapy, which enlists patients’ own immune system to kill tumors. As of December, the Food & Drug Administration had approved immunotherapy to treat about 20 different kinds of cancer, including bladder, kidney, lung cancer, leukemia, and non-Hodgkin’s lymphoma.
Immunotherapy is not a panacea. Currently, only a minority of patients respond positively to individual immunotherapy drugs, and immunotherapy has not proven significantly effective for three of the most common types of cancer: breast, prostate, and colon. More research and innovation are needed.
Still, recent declines in mortality because of immunotherapy are particularly striking for metastatic melanoma, or skin cancer that had spread to other organs, according to a new ACS paper. Death rates fell from an average reduction of 1% a year between 2006 and 2010 for men and women aged 50 to 64 years to 7% between 2013 and 2017. In other words, mortality rates in metastatic melanoma fell by a total of one-fourth in just four years.
A breakthrough occurred when James Allison, who, since the late 1970s, had been exploring the theory that the immune system can be manipulated to recognize cancer and mobilize cells to fight it, developed the drug ipilimumab, patented in 2011 by Bristol-Myers Squibb under the brand name Yervoy. (In 2018, Allison, affiliated with the MD Anderson Cancer Center, won the Nobel Prize.)
Former President Jimmy Carter, at age 90, was diagnosed in August 2015 with Stage IV melanoma that had spread to his brain. He said he had only a “few weeks left,” but he was successfully treated with radiation and a new immunotherapy drug developed by Merck called pembrolizumab, or Keytruda, which had been approved by the FDA less than a year earlier. Carter, four and a half years later, is still alive, and Keytruda has been approved for many other cancers as well, including lung, renal cell, esophageal, and cervical.
William G. Cance, chief medical officer for ACS, cited the “accelerated drops” in melanoma mortality thanks to immunotherapy as “a profound reminder of how rapidly this area of research is expanding, and now leading to real hope for cancer patients.”
The Case of TKIs for CML
Immunotherapy is not alone as an effective drug treatment for cancer. In May 2001, the FDA approved imatinib, a tyrosine kinase inhibitor (TKI), marketed by Novartis as Gleevec. The drug fights chronic myelogenous leukemia (CML), a cancer in which too many white blood cells are being produced in bone marrow. Tyrosine kinases are enzymes that promote cell growth, and a TKI like imatinib can inhibit their activity. Several generic manufacturers started producing imatinib after Gleevec went off-patent in 2016, and Novartis has since developed another TKI called nilotinib.
In addition to generics, there are five different branded TKIs, including Pfizer’s Bosulif and Takeda’s Iclusig, to fight CML. While it is not yet proven that any of these drugs can cure the disease, CML is being tamed; some 80% of patients are surviving at least 10 years, compared with 20% before imatinib reached the market.
Medicines to battle CML are not inexpensive, but their benefits far outweigh their costs. According to a 2012 study by Wesley Yin and colleagues in the American Journal of Managed Care, “Cost analyses indicate that the TKI drug class in CML therapy has created more than $143 billion in social value. Approximately 90% of this value is retained by patients and society, while approximately 10% is recouped by drug companies.”
The Yin study appeared four years before the imatinib generics and the same year that the FDA approved Bosulif and Iclusig. Today, the value retained by patients and society is undoubtedly far higher.
Economic Value of Progress in Fighting Cancer
In an earlier study, Frank Lichtenberg of Columbia University took a broader view. Lichtenberg wrote:
Based on the average cancer drug expenditure per cancer patient from diagnosis until death over the past decade, my analysis shows that the cost of [an] added year of life—plus any further benefits to people’s quality of living—was about $6,500. Given that surveys have estimated that most Americans would be willing to pay between $100,000 to $300,000 to extend their lives by one year —$6,500 represents a true bargain….
It’s worth remembering that…expensive drugs remain outliers in the grand scheme of cancer therapies. What’s more, drug prices usually decline steeply after patents expire and the drugs become available as generics, yet the ability of companies to charge high prices for a brief window provides incentive for the pharmaceutical industry to keep the wheels of innovation turning. This system may do a pretty good job of balancing society’s need for innovation as well as access.
In a separate 2004 National Bureau of Economic Research paper, Lichtenberg wrote that “since the lifetime risk of being diagnosed with cancer is about 40%, the estimates imply that new cancer drugs accounted for 10.7% of the overall increase in U.S. life expectancy at birth.”
In 2010, Darius Lakdawalla of the University of Southern California, along with five colleagues, including Tomas Philipson, who was then an economics professor at the University of Chicago and now heads the President’s Council of Economic Advisers, wrote a detailed study in the Journal of Health Economics of the economic effects of the war on cancer, declared in 1971 by President Nixon.
Lakdawalla and his colleagues determined that by 2000, the increased life expectancy was much greater, and like Lichtenberg and Yin, the vast majority of increased value flowed to patients and society:
Between 1988 and 2000, life expectancy for cancer patients increased by roughly four years, and the average willingness-to-pay for these survival gains was roughly $322,000. Improvements in cancer survival during this period created 23 million additional life-years and roughly $1.9 trillion of additional social value, implying that the average life-year was worth approximately $82,000 to its recipient.
Health care providers and pharmaceutical companies appropriated 5–19% of this total, with the rest accruing to patients. The share of value flowing to patients has been rising over time. In terms of economic rates of return, R&D investments against cancer have been a success, particularly from the patient’s point of view.
The researchers calculated that “drug companies, hospitals, doctors, and health professionals” earned at most $393 billion in profits over this time period,” compared with the net surplus to patients of nearly $2 trillion. This study is not new, but it is thorough and widely cited, and its conclusion holds up today.
In Three Years, 36 New Cancer Drugs
In the next edition of this newsletter, we will provide a complete rundown on new drugs approved in 2019, but for now, let’s continue to focus on cancer. It is worth quoting at length the section on cancer drugs in the annual report of the FDA’s Center for Drug Evaluation and Research (CDER), issued earlier this month:
2019 was another strong year for making new cancer and blood therapies available to patients in need. We approved new advances for certain patients with prostate cancer, bladder cancer, breast cancer, and lung cancer. We also approved two new bone marrow cancer therapies.
Additionally, CDER approved another new cancer therapy that can be used to treat any kind of tumor that has a specific genetic marker, as opposed to where in the body the tumor originated --- only the third cancer therapy approved by the FDA to target treatment based on a specific characteristic of a tumor instead of its site of origin.
Also to help advance cancer therapies, CDER approved a new drug to treat certain adult patients with diffuse large B-cell lymphoma, the most common type of non-Hodgkin lymphoma, a type of blood cancer. CDER also approved a new therapy for patients with mantle cell lymphoma, also a form of blood cancer that causes blood clots that can cut off oxygen and blood supply to the major organs and cause strokes and heart attacks that may lead to brain damage and death…. We also approved a new therapy for adult patients with chronic lymphocytic leukemia or small lymphocytic lymphoma, similar blood cancers that occur in different parts of the body.
In all, the FDA has approved 36 novel cancer drugs in the last three years. In addition, drugs that were first approved for one particular indication, like the immunotherapy Keytruda, have been approved for many more.
Developing these drugs is expensive and time-consuming. A study published in 2015 in the journal Cell concluded that ipilimumab, the treatment for metastatic melanoma “resulted from research conducted by 7,000 scientists at 5,700 institutions” over a period of a century. Remember that the average cost of bringing a single drug, of any sort, to market is about $3 billion, as this Scientific American article explains.
In addition to medicines that directly treat cancer, vaccines can prevent it from ever developing. For example, the human papillomavirus (HPV) has been linked, according to ACS, “to cervical, anal, throat, vulvar, and penile cancers. In fact, most cervical cancers are caused by infection with HPV.” A vaccine can stop the virus from developing. Similarly, a vaccine combats the hepatitis B virus, which puts people at higher risk of liver cancer. And eight new, competitive drug treatments developed in the past six years can completely eliminate the hepatitis C virus, which also can lead to liver cancer.
‘Where You Want to Get Cancer’
Since 1975, the proportion of people diagnosed with specific cancers who have survived at least five years has risen by 54% for lung cancer, 36% for colon, 50% for prostate, and 21% for breast.
For breast cancer, five-year survival rates vary widely, based on the stage at which detection occurs. The rate is 99% for localized disease, 85% for regional disease, and 27% for distant-stage disease, according to a 2017 ACS report. Overall for breast cancer, the rate is 90%; for prostate cancer, 98%; for melanoma, 92%.
The National Cancer Institute now lists 71 drugs to treat breast cancer, and new treatments are being developed all the time. For example, last month, the FDA granted “Breakthrough Therapy Designation” to the “addition of tucatinib to trastuzumab (Herceptin) and capecitabine for the treatment of patients with locally advanced unresectable or metastatic HER2-positive breast cancer,” including cancer that has spread to the brain.
Progress against all cancers will depend on advances in detection and on new medicines, and the source of most of those medicines will undoubtedly be the United States. According to PhRMA, the trade association, some “1,100 medicines and vaccines for cancer…are in clinical trials or awaiting review by the U.S. Food and Drug Administration.”
As a Wall Street Journal editorial headline put it earlier this month, the U.S. is “where you want to get cancer.” The piece cited a study in The Lancet last year that found that someone diagnosed with pancreatic cancer between 2010 and 2014 had nearly twice the likelihood of surviving five years in the U.S. than in the U.K. The five-year survival rate for brain cancer was 36.5% in the U.S., 27.2% in France, and 26.3% in the U.K. For stomach cancer: 33.1% in the U.S., 26.7% in France, and 20.7% in the U.K.
An earlier study that looked at survival results for five common cancers in seven rich countries, as related by the U.S. Centers for Disease Control, found the U.S. performing best by far. That study looked at proportion of patients with different kinds of cancers surviving at least five years. The United States was number-one out of the seven countries for three of the five cancers (breast, colon, and prostate), second in lung cancer, and sixth in childhood leukemia. No other country came close to that record.
A PhRMA analysis last year, using data from the research firm IQVIA, as well as the FDA, the European Medicines Agency, and Japan’s Pharmaceuticals and Medical Devices Agency, compared how broadly and quickly new cancer medicines became available in 15 rich countries, many of which set prices artificially low.
The U.S. was, far and away, and the leader. Some 96% of the new drugs were available in the U.S.; Germany and the U.K. tied for second with 71%, with Canada at 57% and Japan at 50%; the median was just 62%. The average delay in the public’s access to the new cancer medicines was a mere three months in the U.S., again by far the best. French patients could not gain access to the average new drug for 19 months; Italy, 20 months; the U.K., 11 months. The median among the nations was 16 months.
A survey in 2018 identified 65 new cancer drugs launched between 2011 and 2017 and found that “nearly all were available in the United States (62 medicines or 95 percent) compared to 75 percent in the United Kingdom and 51 percent in Japan.”
The country that develops drugs first gives the fastest and the most comprehensive access to those drugs. And it is an advantage that is becoming glaringly obvious as the development of cancer drugs accelerates. That system, as it pertains to pharmaceuticals, is currently under severe attack, and opponents might want to remind themselves that research has shown clearly that the benefits of cancer drugs far outweigh their costs.
Issue No. 58: Rebate Reform, Suddenly Dropped by the White House, May Be Convincing Enough for a Comeback
On May 11, 2018, President Trump declared that rebate reform would be a significant part of the Administration’s strategy for constraining drug prices. In a Rose Garden speech, he said, “Our plan will end the dishonest double-dealing that allows the middleman to pocket rebates and discounts that should be passed on to consumers and patients.”
Then, last summer, five months after the Department of Health and Human Services placed a proposed rebate-reform rule in the Federal Register, the Administration backtracked. What happened? And is rebate reform truly dead, or is there a convincing case for a comeback?
Why the White House Originally Wanted
to Reform the Rebate System
The prescription drug supply chain “middlemen” mentioned above include wholesalers, distributors and most notably, pharmacy benefit managers, or PBMs. PBMs determine the composition of formularies, the medicine chest that patients can access under their insurance plans. They extract rebates from drug manufacturers and then pocket the money themselves or pass a percentage of it on to insurers (some of which, like Cigna and UnitedHealth, own PBMs), to federal and state governments, or to private health plans.
Rebates are payments from sellers to buyers, and, in the health-care sector, they would be illegal under the 1972 federal Anti-Kickback Statute if it were not for a special safe-harbor exemption applying to PBMs That exemption would be eliminated under HHS’s proposed rule, which Secretary Alex Azar said would end the “hidden system of kickbacks to middlemen.” He added, “Every day, Americans, particularly our seniors, pay more than they need to for their prescription drugs.” By ending “this era of backdoor deals,” he continued, President Trump will “deliver savings directly to patients when they walk into the pharmacy.”
The Administration’s objective with the proposed rule was to replace rebates with discounts to patients at the point of purchase, perhaps as soon as 2020. The rule applied only to drugs under Part D of Medicare and to managed care organizations (MCOs) that participate in Medicaid. Congress would have to pass laws to reform the rebates for the commercial plans that cover most Americans, but, frequently, changes to Medicare and Medicaid flow to the rest of the reimbursement system.
‘Finally Ease the Burden of Sticker Shock’
Azar was not exaggerating when he said that rebate reform “has the potential to be the most significant change in how Americans’ drugs are priced at the pharmacy counter, ever, and finally ease the burden of sticker shock.”
According to a report last year by the consulting firm Milliman, “Rebates are mostly used for high-cost brand-name prescription drugs in competitive therapeutic classes where there are interchangeable products (rarely for generics).” The aim of the PBMs is to get pharmaceutical manufacturers to pay to have their drugs admitted to formularies and to secure preferred “tier” placements.
Says an April 2018 report by the Altarum Institute:
The concern is that PBMs, in their role as intermediaries, have diverted much of the potential savings to their own bottom lines, a concern intensified by the lack of transparency around the proprietary rebate amounts.
Examples include PBMs retaining more than their agreed upon share of rebates through re-labeling rebates as fees and PBMs pressuring manufacturers to increase their list prices with a commensurate increase in rebates. This benefits PBMs doubly since they are often paid fees based on a percentage of list price and also retain a share of rebates.
The role of rebates has increased in recent years, and they now average 26% to 30% of the list price of a drug-- and much higher (over 60%) in some cases. According to Altarum (see Exhibit 4 in the report), rebates for branded drugs under Medicare in 2016 averaged 31%; for Medicaid, 61%. Rebates’ proportion of total Part D doubled from 2006, according to a report by the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.
“There is general agreement,” said a white paper last March by Amanda Cole and colleagues for the Institute for Clinical and Economic Review (ICER), “that the gap between list price and net price is widening as a cumulative sum: over the five years between 2012 and 2016 the total value of pharmaceutical manufacturers’ off-invoice rebates and other price concessions more than doubled from $59 billion to $127 billion.”
In 2017, Adam Fein reported in the blog Drug Channels, new data from the research firm IQVIA revealed that “manufacturers of brand-name drugs in 2017 reduced list price revenues by an astonishing $153 billion. Those reductions came primarily from rebates, discounts, and other payments to the drug channel. That figure has grown by 10% from the 2016 figure, even though net prices for brand-name drugs grew by only 1.9%.”
The Rebate Dynamic
Critics argue that to satisfy the demands of powerful PBMs, pharmaceutical manufacturers raise their list prices so that PBMs can capture more money from the proportion of that price they charge. The higher list price also means that patients face higher out-of-pocket costs for their medicines. Thus, as Fein noted, the gap between list and net price grows – and consumers are harmed.
The ICER white paper explained a key part of the dynamic:
All would agree that higher list prices hurt many patients who need ongoing drug treatment, since the increase in the use of co-insurance and of high-deductible plans has meant that rising numbers of patients are required to pay their out-of-pocket share for drug coverage in relation to the list price, not the negotiated rebate price.
A fact sheet from HHS points out that if patients are “spending out-of-pocket up to their deductible, they typically pay a drug’s list price” – that is, the price before the rebate. And if patients are paying “co-insurance, as is common for expensive specialty drugs, they typically pay it as a percentage of a drug’s list price, even if the plan received a rebate.”
The fact sheet uses this example. Assume that a drug’s list price is $300 for a monthly prescription. A 30% rebate to a health plan would reduce the cost to that plan to $210. Assume also that a patient’s health plan requires co-insurance of 20%, paid out of the patient’s own pocket. But that 20% applies to the list price of $300 (thus, $60), not to $210 (where it would be $42). So, the net cost to the insurer is now $150 ($210 minus $60). HHS wants to end this practice, noting, “In some cases, a patient’s co-pay can actually be higher than the net price paid by the health plan after rebates.”
Under Part D, Medicare beneficiaries are currently responsible paying out of pocket 5% of the cost of their drugs once they reach the catastrophic part of their coverage (after about $8,100 of total spending in 2019: see Figure 4 here). That 5% is applied, again, to the list price of the drug, not to its price after rebates. Part of the rebate goes to the insurer and part to the federal government.
The 2018 report by Milliman pointed out the perverse incentives that rebates can cause with Part D, adding expenses for both patients and the government. Says the report, “A very high rebate can mean that the Medicare Part D plan’s retained portion of the rebate exceeds its liability. In this case, the Medicare Part D plan would have a financial incentive to prefer a high-cost prescription drug over a lower-priced alternative, which would increase costs to patients and the federal government.”
The Problem of Rebate Secrecy
A further problem with the rebate system is that it is so opaque. As the Milliman report explained:
Rebate contract terms are trade secrets and vary widely among brands, pharmaceutical manufacturers, and health insurers, but tend to be highest for brands in therapeutic classes with competing products. This secrecy makes cost comparisons of competing brands on the basis of price alone very difficult (if not impossible) to estimate.
Rebates therefore create a “black box” in the prescription drug distribution chain—the patient (and often the commercial health insurer) does not know how much the pharmaceutical manufacturers are paying in rebates, and how much of the rebates PBMs are keeping before passing the remainder to the health insurer.
It is no wonder, then, that in its comprehensive blueprint of May 2018, “American Patients First,” HHS listed among its potential action items: “Measures to restrict the use of rebates, including revisiting the safe harbor under the AntiKickback statute for drug rebates.” The document criticized “a business model built on opaque rebates and discounts that favor high list prices.”
The Administration thus made a strong case for reforming rebates and used tough language to criticize a secretive system that was raising out-of-pocket costs for seniors and increasing government expenses.
July 10 Meeting Leads to a Reversal
In a speech on June 13 in Washington, Azar argued that the “prescription drug market is so characterized by opacity, backdoor dealing and market concentration that it’s really not a market at all—and we need active steps to restore competition.” He added:
For instance, the current shadowy system of drug rebates pushes prices perpetually higher, allowing all actors in the system to make more money every year, while patients keep paying more out-of-pocket. Does that sound like any market you’ve heard of?
That’s why we’ve proposed replacing this rebate system with upfront discounts for seniors at the pharmacy counter.
But then, just 28 days later, the White House announced a sudden change of mind: “Based on careful analysis and thorough consideration, the president has decided to withdraw the rebate rule.”
But why? The decision came July 10 at a meeting that included Trump; Azar; Larry Kudlow, the director of the National Economic Council in the White House; Tomas Philipson, a University of Chicago health economist who a few days later would be named Acting Chairman of the Council of Economic Advisers; Kellyanne Conway, Counsellor to the President; and Seema Verma, Administrator of the Centers for Medicare and Medicaid Services.
According to a Bloomberg Law report, “Trump decided to kill the rule because of the high cost to the government and because of a concern that the rule could benefit drug companies, according to two sources briefed on the meeting.”
The Bloomberg article pointed to the Administration’s “recent loss in a lawsuit that challenged a rule requiring drugmakers to put their list prices in direct-to-consumer advertising.” It is hard to see how the disclosure lawsuit was germane to rebate policy, but it may have stirred animosity in some quarters. In addition, the insurers and PBMs, with considerable political clout, mounted strong opposition.
Two months before the White House decision, the Congressional Budget Office (CBO) issued a report on the possible effect of the rule on the federal budget. CBO estimated that spending for Medicare and Medicaid would rise by a total of $177 billion between 2020 and 2029. "Why be for something that CBO says has a tremendous cost and there aren’t ways to pay for it?" Axios quoted a Senate aide as saying. Certainly, $177 billion looks like a large number, but it is actually only 1% of projected Medicare and Medicaid spending over the 10-year period.
The CBO report was based on assumptions that were highly speculative. Change assumptions about behavior, and you get much different results. A PhRMA blog makes the point that the CBO report “fails to account for the stronger incentives that the proposed rule could create to negotiate the best value for patients.”
Study Finds Government Costs Fall in Four of Six Scenarios
A Milliman study in January 2019 for the Assistant Secretary of HHS for Planning and Evaluation looked at six scenarios, such as decreases in branded drug prices by drug manufacturers and increased formulary controls by PBMs. For four of the scenarios, net government spending actually fell – in one case by $100 billion over 10 years and in another by $79 billion. All six cases projected that, for beneficiaries, premiums would rise and cost sharing would fall. On net, in five of the six scenarios, spending by beneficiaries would decline.
Two months before the White House meeting, an article in Health Affairs by Joe Antos and James Capretta of the American Enterprise Institute argued:
It is tempting to blame high prices on unnecessary middlemen, but those middlemen have been hired by employers and health plans with the expectation that they will be effective at holding down overall costs. Undercutting the ability of PBMs to secure rebates would shift power and leverage to drug manufacturers. It is hard to see how taking that step would lead to lower overall costs for consumers.
But the truth is that rebate contracting is only one tactic to constrain prices. There are many other means at the disposal of PBMs without the negative consequences of the rebate system. For example, some insurers use a net-price contracting and pass all the savings on to the members.
By contrast, a study published in the Journal of the American Medical Association last month, funded by the Laura and John Arnold Foundation, looked at the placement of branded drugs in Medicare Prescription Drug Plan formularies when a generic equivalent was available. Researchers found that “72% of Part D formularies had a lower cost-sharing tier and 30% of Part D formularies had fewer utilization controls on branded drugs for at least one multisource drug.” In other words, PBMs and Insurers preferred costlier alternatives due to higher rebates than lower-priced generic medicines; leaving patients and the healthcare system to absorb the cost.
In addition, the argument that, as Bloomberg put it, the Administration balked because the proposed rule benefit pharmaceutical manufacturers would appear to be irrelevant. Does it make sense to render policy decisions on the basis of whether they harm one industry group or another? Or on the basis of whether the decisions achieve the kind of goals laid out in the 2018 HHS blueprint: better health and lower costs for consumers?
Yes, both better health and lower costs. This paragraph from the CBO report is instructive:
Lower prices on prescription drugs reduce beneficiaries’ out-of-pocket costs. Beneficiaries who do not fill some of their prescriptions because their current out-of-pocket expenses are high would be more likely to fill them and to better adhere to their prescribed drug regimens if their costs were lower, as they would be under the proposed rule.
In CBO’s estimate, the additional Part D utilization stemming from implementing the proposed rule would increase federal spending for beneficiaries who are not enrolled in the low-income subsidy program over the 2020–2029 period by a total of about 2 percent, or $10 billion.
However, the increase in the number of beneficiaries following their drug regimens would also reduce spending for services covered under Parts A and B of Medicare, such as hospital and physician care, by an estimated $20 billion over that period. On net, those effects are projected to reduce Medicare spending by $10 billion over the 2020–2029 period.
Political Fears Over a Minuscule Premium Increase
One simple explanation for the rejection of rebate reform at the July 10 White House meeting was the prospect that health plans would compensate for lost rebate revenues by boosting Medicare Part D premiums. And who wants to be responsible for a hike on seniors with an election approaching?
“At the end of the day, while we support the concept of getting rid of rebates and I am passionate about the problems and the distortions in system caused by this opaque rebate system, we are not going to put seniors at risk of their premiums going up,” Azar was quoted by The New York Times as saying after the July 10 decision.
But objections to premium increases may have been disingenuous while the real reasons were more political – a response to intense advocacy by the insurers, unhappiness with the successful legal opposition to disclosure regulations and fear of being seen as helping pharmaceutical companies in any way.
After all, premium increases would almost certainly be tiny. A study by the California Department of Managed Healthcare estimates the figure at 0.4%.
A separate study found that the majority of Medicare Part D members would see no increase at all. In that research, Erin Trish and Dana Goldman of the Schaeffer Center for Health Policy and Economics at the University of Southern California, began by estimating that “eliminating rebates would increase beneficiary-paid monthly premiums by an average of $4.31.” They wrote, “Our estimate is in line with those reported by HHS.”
The minuscule premium increases, as the Milliman report found, would easily be overwhelmed by out-of-pocket savings on co-pays and co-insurance. The biggest beneficiaries of this change, by far, will be sickest seniors, whose out-of-pocket spending will fall and whose health will improve.
Trish and Goldman also found that “only about 13 million of the 43 million Part D beneficiaries would see their premiums increase.” Many of the others either get their coverage through Medicare Advantage plans that use federal dollars to offset premium or qualify for low-income subsidies.
One large PBM, OptumRx, owned by UnitedHealthcare, has experimented, with excellent results, on “consumer point-of-sale prescription drug discount programs,” accompanied by “modest increases” in premiums, in the low single digits.
According to an Optum press release early in 2019:
Just two months into the year, the existing program has already lowered prescription drug costs for consumers by an average of $130 per eligible prescription. UnitedHealthcare data analytics demonstrate that when consumers do not have a deductible or large out-of-pocket cost, medication adherence improves by between 4 and 16 percent depending on plan design, contributing to better health and reducing total health care costs for clients and the health system overall.
An Irresistible Policy Change?
It is also far from clear that a political calculus that eschews rebate reform for fear of tiny increases in premiums is a winning one. Without rebate reform and without point-of-sale advertising disclosures (struck down by a federal court two days before the White House meeting on rebates), President Trump could be “vulnerable to Democrats’ attacks that he isn’t following through on his promises to lower drug prices,” wrote Stephanie Armour in the Wall Street Journal.
As a result, the Administration may soon take another look at rebate reform. The Administration record on constraining drug prices – mainly by easing approvals of generic drugs – is confirmed by Bureau of Labor Statistics data, which show declines for pharmaceuticals in 10 of the last 16 months and by reports from research firms and PBMs like Express Scripts. But the White House has done a surprisingly inadequate job of publicizing the achievement.
Rebate reform would be a solid policy accomplishment, relatively easy to explain. The Administration would almost certainly benefit from a reform that addresses what Americans care about most in health care: reducing the amount of money comes out of their own pockets and gaining access to drugs that address the worst illnesses. After the White House implements the reform, Congress will be under pressure to follow by making similar changes for commercial policies.
As an election nears, rebate reform may be turn out to be irresistible policy.
Hospital spending increased to $1.2 trillion in 2018, according to National Health Expenditures (NHE) data, released earlier this month by the Centers for Medicare and Medicaid Services (CMS). The total now represents 33% of all U.S. health spending. By comparison, spending on retail drugs in 2018 was $335 billion, or 9% of all health spending, according to NHE.
In an analysis in Health Affairs on Dec. 5, Micah Hartman and his colleagues at CMS present a table that shows that from 2015 to 2018, hospital spending rose $157 billion while prescription drug spending rose $18 billion.
So, over the past four years, hospital spending jumped 15.2% while retail prescription drug spending increased a total of just 5.7%, which is less than the overall Consumer Price Index. And that is spending, which is boosted by increased utilization of drugs. As a CMS document put it: “In 2018, faster growth in non-price factors helped to drive the increase in total retail prescription drug spending growth, while retail prescription drug prices declined by 1.0 percent.” Drug prices have continued to fall. According to the Bureau of Labor Statistics, they have dropped in 10 of the past 16 months.
Using a different set of definitions, the Centers for Disease Control reported that hospital spending represented 38.6% of all U.S. health spending in 2017, up from 36.1% in 2007, and that pharmaceutical spending was 11.3%, down from 12.3% ten years earlier. Among the five major categories of health spending, hospitals were the only one where the proportion rose.
With these facts, where do you think policy makers, journalists, and non-profit advocates are focusing nearly all their attention when it comes to America’s health costs? The answer, of course, is prescription drugs.
Why? One explanation is the design of health insurance policies, which require patients to pay a far higher proportion of total costs out of their own pockets for medicines than for hospital care. Another is that hospitals, which are major employers in congressional districts, tend to enjoy the support of elected officials.
But lately, things are changing. The Trump Administration is now insisting that hospitals disclose price information which, as Kaiser Health News put it, “they have long kept obscured,” such as the rates they negotiate with insurers. In another proposal, the White House wants to require that insurers tell patients beforehand how much they owe out of pocket for hospital services.
Meanwhile, Congress is considering a deal on what is often termed “surprise billing.” The phrase, explains Peterson-KFF Health System Tracker…
…describes charges arising when an insured person inadvertently receives care from an out-of-network provider. Surprise medical bills can arise in an emergency when the patient has no ability to select the emergency room, treating physicians, or ambulance providers. Surprise bills can also arise when a patient receives planned care.
For example, a patient could go to an in-network facility (e.g., a hospital or ambulatory surgery center), but later find out that a provider treating her (e.g., an anesthesiologist or radiologist) does not participate in her health plan’s network. In either situation, the patient is not in a position to choose the provider or to determine that provider’s insurance network status.
Median rates for these surprise bills for anesthesiologists are 5.5 times that of patients treated under Medicare and for emergency medicine, 4.7 times, according to a study in August by the USC-Brookings Schaffer Initiative for Health Policy.
New rules would apply, according to Bloomberg, “where patients can’t afford bills from physicians who don’t accept their insurance. In those situations, patients would have to pay only what they would owe to an in-network provider of the same service.”
Disclosing Prices at Hospitals
On Dec. 4, the Federation of American Hospitals, along with three other hospital associations and three hospitals, filed a suit in U.S. District Court to prevent the Trump Administration from requiring them to disclose prices they privately negotiate with insurance companies. As an article on CNN.com explained:
The rule, which stems from an executive order Trump issued this summer, requires hospitals to make public by 2021 the rates they negotiate with insurers and the amounts they are willing to accept in cash for an item or service. In addition, they must provide this information in an online, searchable way for 300 common services, such as X-rays, outpatient visits, Cesarean deliveries and lab tests.
Meanwhile, the Administration has asked for comment on further rules that would require health plans to allow their members to get access to pricing and out-of-pocket (OOP) costs through a standardized Internet tool.
Seema Verma, the CMS Administrator, wrote in an op-ed in the Chicago Tribune:
For too long, insurers and hospitals have dubiously claimed that negotiated prices are a strange variation of proprietary business secrets that they’ll share with you — just after you receive the service. Remarkably, prices are even hidden from people with high deductible plans who must pay for a substantial amount of services out of their own pocket before their insurance kicks in.
The idea is not just to inform consumers but to push down prices. “The price transparency delivered by these rules,” Verma wrote, “will put downward pressure on prices and restore patients to their rightful place at the center of health care.”
Or, as Caitlin Oakley, an HHS spokeswoman, said bluntly, “Hospitals should be ashamed that they aren’t willing to provide American patients the cost of a service before they purchase it.”
Judging from the lawsuit, however, one would have to conclude that hospitals are not. They argue that the Administration has exceeded its authority and that the rules violate the free-speech clause of the First Amendment.
It is also unclear just how much interest patients will take in hospital costs, when they pay such a small proportion of the total bill out of their own pockets. A Kaiser Family Foundation analysis in November found that Medicare beneficiaries – a good proxy for all Americans -- spent an average of 2% of the cost of in-patient hospital services out of their own pockets, compared with an average of 21% of the cost of prescription drugs.
In addition, it is uncertain whether the rule will stand up to legal scrutiny. In July, a federal court struck down a rule issued by the Department of Health and Human Services requiring that drug companies disclose the price of drugs in direct-to-consumer advertising. The court said HHS overstepped its statutory and regulatory authority. The judge didn’t rule on First Amendment claims made by the plaintiffs.
An Inefficient Hospital System
What is important about proposals to rein in surprise billing and to increase transparency may not be so much the substance of the measures but that they are being attempted at all. Hospitals have enjoyed a special relationship with policy makers, as chronicled by Chris Pope, a Manhattan Institute fellow, in the Winter 2019 article in National Affairs.
Pope wrote that our health care system is distinguished “by the protectionist nature of government intervention in the marketplace. And this above all means protectionism on behalf of hospitals.” He continued: “Over decades, the structure of state regulations and federal subsidies has encouraged hospitals to inflate their costs by protecting them from competition. This has yielded enormous overcapacity and inefficiency.
As an example, Pope writes:
Whereas the European Union had an average hospital-bed occupancy rate of 77% in 2015, the rate in America's community hospitals was only 63%. Occupancy rates were less than 30% for American hospitals with between six and 24 beds, and 42% for those with 25 to 49 beds.”
Hospital admissions inn he U.S. dropped from 39 million in 1980 to 35 million in 2015, and the average length of a hospital fell by 40%. But, meanwhile, hospital employment has been rising sharply – from 4.7 million in November 2014 to 5.3 million five years later – an increase of 10.5%, according to the Bureau of Labor Statistics. As The Economist magazine reported: “America spends vastly more on administration [than Europe]: 8% of health spending versus 2.5% in Britain. As of 2013, Duke University hospital had 400 more billing clerks (1,300) than hospital beds (900).”
The U.S. also over-invests in equipment, in part, as Pope argues, because political imperatives keep hospitals open that should be closed and, as a result, our system is far too decentralized.
As we noted in newsletter No. 46, a study by CMS found that over the period 1990-2013, the average annual growth rate of multi-factor productivity for hospitals was only 0.1% to 0.6% (depending on methodology). “Multi-factor productivity” (MFP) is the change in outputs that results from a change in labor and capital inputs. Along with population increases, it is the main factor in GDP growth. For private non-farm businesses in the U.S., the rate was 1.1%.
Hospitals don’t behave like other markets. Consolidation, which in most industries is a way to increase efficiency and bring down costs, has actually increased the prices of hospital services, according to a study by the National Council on Compensation Insurance (NCCI). The July 2018 report concluded:
Reductions in hospital operating costs do not translate into price decreases. Research to date shows that hospital mergers increase the average price of hospital services by 6%-18%. For Medicare, hospital concentration increases costs by increasing the quantity of care rather than the price of care.
A report to Congress in March by Medpac, the Medicare Payment Advisory Commission also took a dim view of the results of hospital consolidation in America. It found that horizontal consolidation (among hospitals) can lead to higher commercial prices and so a greater gap with Medicare, which “could put pressure on Medicare to increase physician prices.” Meanwhile, vertical consolidation (where hospitals buy out medical practices) “can also result in higher costs for Medicare and commercial insurers.”
Higher Prices Abound in Hospitals
A study in Health Affairs in February found between 2007 and 2014, “hospital prices grew 42 percent, while physician prices grew 18 percent. Similarly, for hospital-based outpatient care, hospital prices grew 25%, while physician prices grew 6 percent.” An article in Modern Healthcare that examined the study concluded: “Hospital prices are the main driver of U.S. healthcare spending inflation, and that trend should direct any policy changes going forward.”
The new NHE data show that hospital spending rose 4.5% during 2018, and prices were the main reason. “Faster growth in hospital prices,” said the CMS report, “was partly offset by slower growth in non-price factors, such as the use and intensity of services.”
Between 2005 and 2014, the average cost per hospital stay, adjusted for inflation, rose a total of 12.7%, according to a major study by the Healthcare Cost and Utilization Project (H-CUP). “The cost of a maternal childbirth hospital stay rose 12.8% (again, adjusted for inflation); neonatal stay, 19.2%; surgical, 16.4%; injury, 17.1%,” wrote the study’s authors.
The average cost of a hospital stay for pneumonia is now $10,000; for the fracture of a lower limb, $17,000; for a heart valve disorder, $42,000. A liver transplant averages $813,000; kidney transplant, $415,000. An MRI averages $1,119 in the U.S. and $503 in Switzerland; an appendix removal is $15,930 in the U.S. and $2,003 in Spain; and a C-Section is $16,106 in the U.S. and $7,901 in Australia.
It’s no wonder the New York Times in November ran an article headlined, “With Medical Bills Skyrocketing, More Hospitals Are Suing for Payment.” The reporter, Sarah Kliff, wrote:
When a judge hears civil cases at the courthouse in this southwest Virginia town two days a month, many of the lawsuits have a common plaintiff: the local hospital, Ballad Health, suing patients over unpaid medical bills. On a Thursday in August, 102 of the 160 cases on the docket were brought by Ballad.
Hospitals mark up the price of the medicines they use by an average of 479% of the cost they actually pay, according to a study by The Moran Company, a research firm that prepared the report for the Pharmaceutical Manufacturers of America. Insurers don’t reimburse hospitals for the entire amount that they bill. But, says Moran, “hospitals receive 252 percent of estimated hospital acquisition cost from commercial payers.”
Another way that hospitals offset inefficiencies is through government subsidies like the 340B program. This program was established more than a quarter-century ago to stretch scarce resources for government grantees providing health services and to help large mission driven-public hospitals such as New York Health and Hospitals Corporation. Under 340B, in order to participate in Medicaid, drug manufacturers have to provide outpatient medicines at prices discounted by 23% to 99.9% to certain non-profit hospitals. The hospitals are then allowed to claim full reimbursement at undiscounted rates for private payers. The difference was intended to help support the institutions and centers that provided care to low income patients.
But the program has changed drastically from the original concept, as we showed in Issue No. 30 of this newsletter. It has encouraged hospitals to swallow up other independent health practices, which then get to take advantage of 340B program. Meanwhile, the law allows hospitals to avoid passing on the discount to poor or financially stressed patients, and the number of eligible types of hospitals has been expanded regardless of whether they serve any Medicaid or uninsured patients.
Even ostensible attempts to constrain hospital costs turn into subsidies, as Pope demonstrated in a Manhattan Institute study, “When the Government Sets Hospital Prices: Maryland’s Experience,” released in June:
Rather than reducing health-care costs in any significant way, Maryland’s payment-regulation experiment has…been captured by the hospitals that it was intended to regulate. The regulation is loose and does little to distinguish the state from its peers in a variety of metrics—except for one crucial fact: the system allows the state to claim higher reimbursements from the federal government for Medicare patients.
Decades of regulations have induced unintended consequences, too, which have been patched with further regulations, inducing further unintended consequences. Nevertheless, Maryland’s payment system survives because it entitles the state’s hospitals to a unique $2 billion annual windfall from Medicare.
Despite the attempts to fix problems of surprise billing and lack of transparency, politicians remain more focused on drug costs rather than hospital costs – even though hospital spending is at least triple drug spending and rising at 4%-plus annually, more than twice the rate of drugs.
Besides the obvious issue of political favoritism, with hospitals being the largest employers in 16 states (the University of Pittsburgh Medical Center, for example, has 89,000 employees), there is the problem of insurance design. More and more insurance policies are requiring the sickest patients to pay high co-pays and co-insurance tabs. These patients face large OOP costs, sometimes $10,000 a year or more, and the bills frighten not just those who have to pay them but their friends and neighbors who hear their stories.
While hefty co-pays and co-insurance affect all kinds of health care spending by consumers, the highest OOP expenses often hit people who use the most innovation medicines. So, while hospital spending is more than three times pharmaceutical spending overall, individual Americans pay out of their own pockets $47 billion a year for pharmaceuticals compared with $34 billion for hospital services – or 38% more.
The actuarial value – that is, the percentage of total average costs for benefits that a plan will cover – is 72% for hospitals, 71% for professionals and other, and just 54% for drugs in silver ACA Exchange plans with combined medical and pharmacy deductibles.
Medicare has the same problem. Hospitals represent 40% of total Medicare spending and only 9% of the average recipient’s out-of-pocket costs: a ratio of 4.4. But pharmaceuticals represent 12% of total spending and 19% of out-of-pocket costs: a ratio of 0.6.
A rational health insurance system would reimburse drugs more heavily than hospitals and doctors in order to encourage medicine use – because drugs can lower costs for other services, as we showed in our last newsletter.
No wonder constituents are more scared of drug costs than hospital costs. Insurance redesign would be a huge help, but, in the meantime, policy makers should keep their eyes on cost-containment prize: the American hospital.
A new study confirms that medicines are often lower-cost alternatives to expensive and sometimes dangerous procedures. In addition, other research shows how medicines allow patients to avoid other treatments that involve further doctor visits, hospital stays, and much greater costs.
The new study, a seven-year clinical trial, called ISCHEMIA, drew significant attention globally. It found that people with severe but stable heart disease from clogged arteries cut their risk of having a heart attack over the next few years just as much by using medicines as by having surgery. “Stents and bypass surgery are no more effective than drugs for stable heart disease, highly anticipated trial results show,” said the Washington Post in a Nov. 16 headline.
According to the Associated Press:
The results challenge medical dogma and call into question some of the most common practices in heart care. They are the strongest evidence yet that tens of thousands of costly stent procedures and bypass operations each year are unnecessary for people with stable disease.
Percutaneous coronary angioplasty (PTCA) – which opens up blocked arteries in order to increase circulation to the heart – is the second-most-common operating-room procedure in America during a hospital stay (after knee surgery), with 534,000 operations, according to H-CUP, the federal Healthcare Cost and Utilization Project. Coronary bypass surgery is also common, ranking 14th with 203,000 operations. Heart procedures are expensive. H-CUP data show that in 2015, a PTCA cost an average of $92,000 – almost doubling in ten years.
A fairly simple coronary intervention with drug-eluding stents (propping open arteries and releasing medicine internally) cost an average of $26,000 for the initial hospitalization and a total of $57,000 including costs for outpatient visits and complications, according to the California Technology Assessment Forum. For bypass surgery, the costs are $34,000 and $61,000.
Unfortunately, getting reliable information on hospital costs can be difficult, and these figures are from 2013, but the price trajectory is up while that of heart-disease medicines is down.
Details of the Research
The trial involved 5,200 men and women with moderate to severe ischemia, or insufficient blood flow caused by clogged arteries. The participants in the study kept to their regular medical therapy, which, according to Gina Kolata, writing in the New York Times, included “statins and other cholesterol-lowering drugs, blood pressure medications, aspirin and, for those with heart damage, a drug to slow the heart rate.” Some patients got stents to open arteries, and the ones who did took anti-clotting drugs.
But for those who received only standard medical therapy, the drugs were generally inexpensive. Generic statins and drugs to reduce blood pressure cost only a few dollars a month, according to the GoodRx website.
Most dramatically, the study found that among those who had stents or bypasses, deaths totaled 145; for those who received medication alone, deaths were 144.
The trial also examined whether patients experienced a heart attack, heart failure, hospitalization for unstable chest pain, or resuscitation after cardiac arrest. Researchers found no difference, over a median of 3.3 years, in any of these disease-related events between the two groups. They did, however, find that those who underwent bypass or stent procedures experienced the events at a higher rate during the first six months of their treatment. In an interview, Judith Hochman of the New York University Grossman School of Medicine, the study’s chair, said that those results suggested that the procedures led to complications.
This study was not the first to show that medicine alone is often the best way to treat heart disease. An earlier report, by the American Medical Association and the Joint Commission, said that “roughly 1 in 10 elective angioplasty procedures performed nationwide may be ‘inappropriate,’ and another third questionable. The operation typically costs around $30,000, and in rare circumstances it can cause tears in blood vessel walls, major bleeding and other problems.”
Will this research change the way doctors treat heart disease? Perhaps not, said Vikas Saini, a cardiologist and president of the Lown Institute in Brookline, Mass., quoted by Axios, "Established practices die hard, especially when there is a substantial culture, mindset and financial structure reinforcing that behavior.”
The Axios article continued:
The prices of individual stents range anywhere from several hundred to several thousand dollars, and the surgeries tack on tens of thousands more for hospitals, which have been pretty dedicated to keeping their beds full whenever possible.
Statins and hypertension drugs have been a major factor in reducing age-adjusted deaths from heart disease from 412 per 100,000 Americans in 1980 to 165 in 2017. An H-CUP study, titled, “Trends in Hospital Inpatient Stays in the United States, 2005-2014,” found that over the nine years “the number of stays for coronary atherosclerosis and other heart disease decreased by 63 percent (from 1,076,100 to 397,000)… Stays for congestive heart failure decreased by 14.4 percent (from 1,053,100 to 901,400).”
Hepatitis C: Medicines vs. Transplants
Hepatitis C (HCV), which kills more Americans each year than any other infectious disease, provides another example of how medicines can reduce costs in the health system overall. In 2014, the FDA approved a remarkable drug called Sovaldi that cured HCV within 12 weeks for 91% of patients. Much of the commentary around Sovaldi focused on its list price: $84,000 for a course of treatment. Since then, the original manufacturer, Gilead, as well as competitors have brought out improved HCV drugs and prices have fallen by three-quarters.
But even at $84,000 or far more, HCV drugs are a comparative bargain – and comparisons, measuring one alternative against another, are what public policy is all about. HCV infection, which afflicts more than 3 million Americans, is responsible for 40% of all chronic liver disease in the United States, and one consequence is a liver transplant. The average estimated cost of such a procedure in 2017, according to a study by the research firm Milliman, was $813,000, or nearly ten times the original cost of Sovaldi.
Adherence and Reduced Medical Costs
If policy makers are serious about reducing health care costs, the best place to look is improving adherence. Many Americans end up in the hospital, where the cost of an average stay is more than $10,000, because they don’t take medicines they should.
In 2017, Jane Brody of the New York Times called non-adherence to doctors’ prescriptions an “out-of-control epidemic.” A review in the Annals of Internal Medicine noted that non-adherence leads to 125,000 deaths and 10% of all hospital admissions each year. The authors wrote:
Studies have consistently shown that 20 percent to 30 percent of medication prescriptions are never filled, and that approximately 50 percent of medications for chronic disease are not taken as prescribed.
And an article by Lisa Rosenbaum and William Shrank in the New England Journal of Medicine concluded that patients not adhering to medication regimens costs the U.S. $100 billion to $290 billion a year. That article was published in 2013, so we can assume the figure is much higher today.
This phenomenon of non-adherence has been extensively studied. For example, in an article in the journal Medical Care last year, M. Christopher Roebuck and colleagues found that full adherence to prescriptions by Medicaid beneficiaries would have reduced hospitalization due to congestive heart failure by 26%, to hypertension by 25%, and to diabetes by 12%.
Uncontrolled diabetes is an especially difficult problem. Research in 2016 found that more was spent on diabetes, at $101 billion in 2013, than on any other disease in the United States (ischemic heart disease was second). But much of the spending could avoided if diabetes were controlled by more Americans through medications.
Diabetes can lead to kidney failure, amputation, blindness and stroke – and high hospital bills. According to American Diabetes Association data, only 8 million of the 30 million Americans with diabetes actually control their disease. Better adherence would avoid 2.9 million hospital days and save $5,170 per diabetes patient per year, according to research published this year by J.T. Lloyd of the Center for Medicare and Medicaid Innovation.
Often, critics point to drug prices as the reason for non-adherence, but the issue is far more complicated. Non-adherence, for example, is high even for inexpensive medications like statin drugs, as research published last year showed clearly. Behavior counts.
In cases where costs do deter adherence, the obstacle is not the list price of a prescription but what patients, only 8.5% of whom did not have insurance at any point during the year, have to take out of their pockets to pay for it. That amount is determined by the design of insurance policies, which, more and more, require high rates of cost-sharing, especially for innovative drugs.
Research on Offsetting Costs
More generally, a study by the Congressional Budget Office (CBO) in 2012 reviewed the extensive literature on the offsetting effect of pharmaceutical use on other medical costs. The conclusion: “A 1 percent increase in the number of prescriptions filled by beneficiaries would cause Medicare’s spending on medical services to fall by roughly one-fifth of 1 percent.”
That is impressive in itself, but Roebuck, writing in the Journal of Managed Care & Specialty Pharmacy, points out that for some costly diseases, the savings are even greater. For hypertension, a 1% increase in prescription drug use led to a 1.17% decrease in other medical costs; for diabetes, it led to a 0.83% decrease; for congestive heart failure, 0.77%; for dyslipidemia (high cholesterol), 0.63%. Roebuck notes that these four conditions represent 40% of Medicare Part D (drug benefit) utilization. He writes that more than half of Medicare beneficiaries have both hypertension and high cholesterol, with average annual medical costs of $13,825 – despite the low costs of drugs to treat the diseases.
He writes, “The current findings suggest that a 5% increase in the use of antihypertensive medication by patients with these 2 conditions may prompt reductions in medical costs of more than $800 annually per beneficiary.”
In addition, the CBO recently analyzed a proposed rule to reform the system of rebates in way that would reduce the out-of-pocket (OOP) costs paid by beneficiaries as an alternative to pharmaceutical benefit managers requiring payments from drug manufacturers. “Beneficiaries who do not fill some of their prescriptions because their current out-of-pocket expenses are high would be more likely to fill them and to better adhere to their prescribed drug regimens if their costs were lower, as they would be under the proposed rule,” said the CBO analysis.
In its research, CBO estimated the proposed rule “would increase federal spending” on behalf of beneficiaries of the Medicare Part D drug insurance program “over the 2020–2029 period by a total of about 2 percent, or $10 billion.” But there would also be a huge offset in increased adherence as OOP outlays dropped. “The increase in the number of beneficiaries following their drug regimens,” said CBO, “would also reduce spending for services covered under Parts A and B of Medicare, such as hospital and physician care, by an estimated $20 billion over that period.”
The net result, then: “Those effects are projected to reduce Medicare spending by $10 billion over the 2020–2029 period.”
Dangers of Viewing Costs in a Vacuum
As this last example shows, policy makers, the media, and the public should never examine health care costs in a vacuum. The medical system is intricately interrelated. It is meaningless to say that a drug – or a surgical procedure – is costly. We need, first of all, to examine “compared to what” and then to understand how a small increase in spending in one area can lead to large decreases in others.
In recent months, an idea called “march-in rights” has gathered momentum among prominent politicians and some journalists as a panacea to what they see as high pharmaceutical prices. As an article in The Hill described it last month, “Democratic presidential candidates are threatening to take a drastic step that even the Obama Administration rejected to lower drug prices without congressional approval.”
The Hill piece cited support for march-in rights from Sens. Elizabeth Warren (D-Mass), Bernie Sanders (I-Vt), and Kamala Harris (D-Calif), and from South Bend, Ind., Mayor Pete Buttigieg. Rep. Lloyd Doggett (D-Texas), the chairman of the Ways and Means subcommittee on health, has long been a fan, and in 2017, he led 50 House members in writing a letter to President Trump, urging him to make march-in rights easier to implement. And Washington Post business reporter Christopher Rowland began his article on the resurgent interest in march-in rights this way: “As drug prices have soared, lawmakers and patient advocates have pushed the federal government to deploy for the first time a powerful deterrent.”
Drug prices actually haven’t soared, but we’ll get to that later. For now, understand that the interest in march-in rights isn’t new. It began in 2002 but soon fizzled. Now, it’s being resurrected – though the idea faces the same obstacles. First, the right to march-in because of the price of a drug does not appear to exist in the law, and, second, if the law were changed, marching-in because of price would, according to a report in March by the Information Technology & Innovation Foundation (ITIF), “negatively impact U.S. life-sciences innovation and result in fewer new drugs.”
What Are March-in Rights?
Some 39 years ago, President Carter signed The Patent and Trademark Law Amendments Act, called colloquially “Bayh-Dole” for its two most prominent sponsors, Sen. Bob Dole (R-Kan) and the late Sen. Birch Bayh (D-Ind). The law addressed what both Democrats and Republicans saw as a major problem: The federal government was spending billions of dollars on research, but the fruits of that investment were not reaching the public because the researchers that did the work were obligated to assign rights to the government. Very few federally funded research projects were being commercialized.
Bayh-Dole clarified that, even if the government provided funding, universities and other institutions could own their inventions and assign them to others, including pharmaceutical manufacturers, which would then invest the hundreds of millions or billions of dollars necessary to develop an actual drug and bring it to market.
A report in April by the National Institute of Standards and Technology (NIST), a U.S. Commerce Department agency, explained that the “foundation” of Bayh-Dole is…
…the principle that inventions resulting from federally funded research should benefit the American people by the development of the inventions into commercially available products and services by achieving practical application of the invention that benefits the public.
Bayh-Dole recognized that federally funded research could create a virtuous cycle of innovation, which was described last year in an article in the Proceedings of the National Academy of Sciences by Ekaterina Galkina Cleary and colleagues:
Basic research provides a scientific foundation for drug discovery by elucidating mechanisms of disease and strategies for therapy, validating drug targets, and, sometimes, identifying prototype compounds. This research is funded largely by the public sector, primarily by government and is performed principally in academic institutions or government laboratories. The insights and intellectual property arising from this basic research are then transferred to the private sector for development.
Biopharmaceutical companies are responsible for conducting applied preclinical research and clinical research, obtaining regulatory approval, and establishing the manufacturing, control, distribution, and marketing required to commercialize a new molecular entity (NME). This development is funded primarily from the profits generated by earlier products as well as by capital investments.
The problem, before Bayh-Dole, was that there was a disruption in the cycle between government-funded basic research and the application of that research into commercialize products. The legislation was meant to patch the cycle.
The authors of Bayh-Dole wanted to be sure that they achieved their commercialization aims, so the law gave the federal government, as the NIST report states, “the right to ensure that a contractor, an assignee, or exclusive licensee of intellectual property developed with Federal funding is taking effective steps to further develop the invention so that it is available to the public.” The government, in limited circumstances, was allowed to “march in” and require contractors and assignees to, in the words of the law, “grant a nonexclusive, partially, or exclusive license in any field of use to a responsible applicant or applicant.” Or the government could grant such a license itself.
The justification for marching in was that steps were not taken by the licensee to achieve a “practical application” (that is, commercialize) of the invention.
As Bayh himself explained in 2004, he wanted to assuage the fear of some members of Congress that “companies might want to license university technologies to suppress them because they could threaten existing products…. The clear intent of these provisions is to insure that every effort is made to bring a product to market.”
The provisions were meant for extreme occasions, and none, apparently, has arisen. Since the law was signed in 1980, there has been no case of march-in rights being exercised.
The Specter of ‘Reasonable’ Prices
In 2001, Peter Arno, then a health economist at the Albert Einstein School of Medicine, and Michael Davis, a law professor at Cleveland State University, wrote an article in the Tulane Law Review claiming to have found a way to “enforce existing price controls.” They wrote, “The solution to high drug prices does not involve new legislation but already exists in the unused, unenforced march-in provision of the Bayh-Dole Act,” which was then 21 years old.
In an op-ed for the Washington Post the next year, Arno and Davis wrote that Bayh-Dole…
…states that practically any new drug invented wholly or in part with federal funds will be made available to the public at a reasonable price. If it is not, then the government can insist that the drug be licensed to more reasonable manufacturers, and, if refused, license it to third parties that will make the drug available at a reasonable cost.
In fact, Bayh-Dole makes no explicit reference at all to any “reasonable price.” The word “price” – reasonable or not -- never appears in the law, and the word “cost” is only used in reference to patent fees. Undaunted, Arno, Davis and other advocates of march-in rights point to the term “practical application,” which is defined in the law this way:
The term ‘practical application’ means to manufacture…under such conditions to establish that the invention is being utilized and that its benefits are to the extent permitted by law or Government regulations available to the public on reasonable terms.
The phrase, “reasonable terms,” has been interpreted by advocates of march-in rights to be a reference to consumer prices. The government, however, has interpreted the phrase to mean “reasonable licensing terms,” says the NIST report.
In a piece for IP Watchdog, Joseph Allen, who worked for Bayh as a professional staffer on the Senate Judiciary Committee during the debate over Bayh-Dole, explained that the clause with the phrase “reasonable terms”…
…is limited to the patent owner, which will normally be an academic institution. As academic institutions are not commercializing their discoveries, the language applies to the terms of the patent license, not to how a product is priced in the market. That distinction is ignored by the critics.
For further elucidation, we can turn to the authors of the law itself. A few weeks after the Arno-Davis piece, Bayh (who had left office the year before) and Dole (the Senate Republican Leader) wrote in a letter to the Washington Post that their law…
…did not intend that government set prices on resulting products. The law makes no reference to a reasonable price that should be dictated by the government….
The ability of the government to revoke a license granted under the Act is not contingent on the pricing of the resulting product or tied to the profitability of a company that has commercialized a product that results in part from [federally] funded research. The law instructs the government to revoke such licenses only when the private industry collaborator has not successfully commercialized the invention as a product.
The NIST report points out that since 1980, the National Institutes of Health has received 12 requests to initiate march-in proceedings, and, “in each case, NIH determined that the criteria to exercise march-in rights were not met.” Ten of the 12 cases involved what the petitioners believed were high drug prices. “Ultimately, for each of these requests,” said the NIST report, “NIH determined that the use of march-in to control drug prices was not within the scope and intent of its authority.”
The NIST report acknowledged that there was “market uncertainty” created by the controversy over march-in rights, but the way to resolve any confusion about the “exceptional circumstances” under which such rights apply was sticking to the statute rather than creating a “regulatory mechanism for the Federal Government to control the market price of goods and services.” In other words, NIST, as the government’s top innovation agency, is not buying the argument of the marchers-in.
The Federal Government’s Share
In 2004, Bayh was asked to address NIH on the subject. He began with a reminder of why his legislation of a quarter-century earlier has been necessary:
By the late '70s, America had lost its technological advantage…. The number of patents issued each year had declined steadily since 1971. Investment in research and development over the previous 10 years was static. American productivity was growing at a much slower rate than that of our free world competitors. The number of patentable inventions made under federally supported research had been in a steady decline.
What had happened to American innovation, which had sparked generation after generation of international economic success? Our investigation at the Patent and Trademark Office [PTO] disclosed that the U.S. government owned 28,000 patents, only 4 percent of which had been developed as a product for use by the consumer.
Bayh admitted that there were critics of his bill, who argued, “If the taxpayer funds the research, the taxpayer should own the ideas produced.” But the vast majority of “patents procured as a result of government research grants, particularly those developed in university laboratories, resulted from basic research,” said Bayh to NIH. He added:
The ideas patented were in the embryonic stages of development. Often millions of dollars were required to produce the sophisticated products necessary for marketability. Since the government refused to permit ownership of the patents, private industry and business refused to invest the resources necessary to bring the products to consumers.
Bayh then quoted Thomas Edison as saying that “invention is 1% inspiration and 99% perspiration." And, said Bayh, “With regard to publicly funded research, government typically funds the inspiration and industry the perspiration.” The result of a policy of government ownership was that “billions of taxpayer dollars spent on thousands of ideas and patents which were collecting dust at the PTO. The taxpayers were getting no benefit whatsoever.”
The general argument that the government should reap the dollar benefits of its research is often repeated – lately by Rep. Alexandra Ocasio-Cortez (D-NY). But nearly all NIH funds go to basic research, which, because of the nature of markets, carries positive economic externalities that make it, throughout the world, an essential government-supported, rather than private-sector, function.
The study by Cleary, et al., in the Proceedings of the National Academy of Sciences found that federally funded studies contributed to the science underlying every one of the 210 new drugs approved between 2010 and 2016. But, as an article in STAT pointed out, “More than 90 percent of the [research] publications [deriving from the government-funded research] were related to the biological targets of the drugs, not the drugs themselves.” The authors of the research “say that the NIH funding for basic science complements industry research and drug development, which is mainly focused on applied science.”
The entire NIH budget for all activities – not just drug research -- in fiscal 2017 was $33 billion while R&D spending by U.S. drug companies was $71 billion. “Measured by R&D expenditure per employee, the U.S. biopharmaceutical sector leads all other U.S. manufacturing sectors, investing more than 10 times the amount of R&D per employee than the average U.S. manufacturing sector,” said the ITIF study.
Eyes on the Prize
It’s important to remember why Bayh-Dole was enacted in the first place. The goal of what is now called “the lab-to-market cross-agency priority,” the NIST report points out, is to “improve the transfer of technology from federally funded R&D to the private sector to promote U.S. economic growth and national security.” The idea is to “enable the United States to adapt to a rapidly changing global innovation landscape.” It’s not to try to extract extra rents from drug companies and other manufacturers.
Bayh-Dole has been a huge success. The Economist magazine called it “possibly the most inspired piece of legislation to be enacted in America over the past half-century.” It is no accident, as the ITIF report points out, that the U.S. now leads the world in the introduction of new drugs, with a 60% market share, compared with 10% in the 1980s – an acceleration that coincides with the enactment of the law.
“Over the last decade, biopharmaceutical companies have invested over half a trillion dollars in R&D,” says the report, “while more than 350 new medicines, many firsts of their kind, have been approved by the U.S. Food and Drug Administration.”
But like most legislation, Bayh-Dole is a delicate instrument. Changing the interpretation of march-in rights from what the authors of the law intended, says the ITIF report, would…
… jeopardize America’s successful life-sciences innovation system, as companies would be highly reticent to license IP [intellectual property] that could be connected to federal research and subsequently invest the additional billions required to develop a drug if they knew the government could come in as long as two decades later and seize or compulsorily license companies’ IP whenever it deemed a drug’s price too high.
How to Constrain Drug Prices
When he was asked about march-in rights at a hearing in August, NIH Director Francis S. Collins responded, “I’m not sure you want to mess with that. I don’t think, for the most part, the solution to drug prices is going to fall upon changes of a dramatic sort and how patenting is done for our funded efforts.”
Fifteen years ago, Bayh told NIH, “One is entitled to second-guess us and say that we should have allowed the government to have a say in the prices of products arising from federal R&D. However, if changes are believed warranted, we have a process to do so. That is to amend the law. You simply cannot invent new interpretations a quarter of a century later.”
Amending the law, however, would put at risk a system that is improving America’s economy and America’s health. As the NIST study put it:
U.S. economic competitiveness is strengthened by the ability of private sector companies to advance the new technologies resulting from basic R&D, and to deliver the products and services that drive the Nation’s economy forward. This ecosystem has allowed the U.S. to enjoy the economic benefits of advancing science and technology and has kept the Nation prosperous and strong. The partnership between Federal R&D and the private sector has proven to be an effective model.
The Trump Administration is already holding down drug prices through market mechanisms – mainly easing the path for generic medicines to compete when brand patents expire. In 2018, pharmaceuticals were one of only eight categories that saw an annual price declined among the 31 categories tracked by the Bureau of Labor Statistics.
While consumer drug prices dropped 0.6%, medical care prices rose 2% and hospital services rose 3.7% – the number-two categories for increases. The decline in drug prices has continued through 2019, falling in the last four consecutive months and in nine of the last twelve.
Currently, specialty drugs, many of them biological products (biologics) are the main driver of higher drug prices, accounting for 93% of spending growth since 2014. That’s no surprise. Biologics are exceedingly complicated to develop and produce. But their prices, too, can be constrained through competition, as we discussed in our last newsletter. A far better way to tackle the pricing issue is to focus on safe ways to speed biosimilars, which have no clinically meaningful differences from reference biologics, to market after patents expire.
This would seem to be a far more productive strategy than messing – as Collins put it – with the enormously effective technology-transfer law called Bayh-Dole.
Complex, powerful drugs called biological products, or biologics, now account for about two-fifths of all pharmaceutical spending and 93% of spending growth since 2014. The rise of biologics, which are harvested from biology rather than being synthesized chemically, has been a boon to patients suffering from cancer and other diseases, but the costs of these medicines are an increasing concern to policy makers. Biosimilars, which have no meaningful clinical differences from biologics, are supposed to tame biologic prices when patents expire, but so far they have had minimal effect, saving a mere $240 million a year, according to a new study by the Pacific Research Institute.
The situation is so frustrating that a group of researchers published a two-part article this spring in Health Affairs that argued for abandoning the biosimilars regime altogether, declaring biologics a “natural monopoly,” and having the government set prices according to a formula. (More details on that proposal – and the response – below.) Another article, by an intellectual-property scholar, termed biosimilars “a distraction.” Perhaps we’re asking biosimilars to do too much, too soon. On the other hand, biosimilars are already having a significant impact in Europe. Why haven’t they lived up to their promise here?
Can the Virtuous Cycle Apply to Biologics?
In recent years, the average price of a prescription in the U.S. has leveled off and even fallen. September was the fourth month in a row that the Bureau of Labor Statistics reported a decline in its pharmaceutical price index. A major reason is that regulatory changes have made it easier to bring generic drugs to market to compete with branded drugs whose patents have expired. Generics now account for 90% of all prescriptions, up from 75% in 2009, according to a May study by IQVIA. From 2014 to the end of 2017, generic drug prices fell by one-third. And when additional generics hit the market, the prices of their branded competitors fall as well.
This virtuous cycle, however, does not apply to the vast majority of biologics, which are becoming more and more important, especially in treating cancers and autoimmune diseases such as rheumatoid arthritis and ulcerative colitis. Because biologics are made from living organisms, they are large and complex molecules. For example, a Congressional Research Service (CRS) report in June pointed out that aspirin “contains nine carbon atoms, eight hydrogen atoms, and four oxygen atoms while the large biologic drug Remicade contains over 6,000 carbon atoms, almost 10,000 hydrogen atoms, and about 2,000 oxygen atoms.”
Biologics are expensive to develop, and, frequently administered in doctors’ offices and hospitals, they are also priced higher than other drugs. Last year, 11 of the 15 top-selling drugs in the U.S. were biologics, with total sales of about $85 billion.
An analogue – but not a precise one – to the relationship between a brand-name chemical drug and a generic is the relationship between a biologic and a biosimilar. While generics are exact copies of branded chemical drugs, biosimilars are almost. CRS provides this definition:
A biological product may be demonstrated to be “biosimilar” to the reference product if data show that the product is “highly similar” to the reference product, notwithstanding minor differences in clinically inactive components, and there are no clinically meaningful differences between the biological product and the reference product in terms of safety, purity, and potency.
Even developing a product that is “highly similar” to a biologic is daunting. “The investment needed to develop and market a biosimilar is considerably higher than the $1 million to $4 million that is required in the generic market,” wrote Erwin Blackstone and P. Fuhr Joseph Jr. in 2013 in a paper for the journal American Heath & Drug Benefits. “It takes 7 to 8 years to develop a biosimilar, at a cost of between $100 million and $250 million.”
Until recently, biosimilars faced daunting regulatory hurdles as well. Then, in 2010, Congress passed the Biologics Price Competition and Innovation Act (BPCIA) as part of the Affordable Care Act. The BPCIA created an abbreviated pathway for biosimilar approval by the Food & Drug Administration. Still, the number of biologics actually approved has been meager and the number actually reaching the market is minuscule.
Savings of $50 Billion to $250 Billion Over 10 Years
The potential for savings, however, is immense. In an earlier study, CBO estimated that biosimilars would reduce prices by 40%. Research published in July by the Pacific Research Institute found that if currently approved biosimilars became reasonably competitive -- gaining a 50% market share against branded biologics – savings would increase to $4.8 billion a year (or about 20 times current levels). With more approvals in more therapeutic classes, biosimilar savings could become much greater. A separate study by the Rand Corporation two years ago estimated total savings of $54 billion from 2017 to 2026, and a study by the pharmacy benefit manager (PBM) Express Scripts in 2013 forecast savings of $250 billion over the next 10 years.
So far, however, the FDA has approved 23 biosimilars, with only nine of those currently being marketed in the United States. Approvals are accelerating, with six in 2018 and seven so far in 2019, including two anti-cancer drugs. By contrast, Europe developed a regulatory framework five years earlier than the United States and has approved about two and a half times as many biosimilars, including 16 in 2018 alone.
Unlike in the U.S., in Europe, approved biosimilars are reaching patients and saving money. For example, the CRS study points out that the three FDA-approved biosimilar competitors to the top-selling drug in the U.S., Humira, will not reach the market until 2023. In Europe, however, four Humira biosimilars were launched at the start of 2019 with two more to come. Sanford C. Bernstein & Co. analyst Ronny Gal predicts that, by year-end, biosimilars will account for half the market in countries where they are being sold.
“The Impact of Biosimilar Competition in Europe,” an IQVIA study last year, looked in depth at the effect on prices and concluded:
The seven established therapy areas with biosimilar competition show a consistent picture of reduced average list prices in European countries. The increased competition resulting from biosimilars entering the market affects not just the price of the respective biosimilars referenced product, but also the price of the whole product class. It can have almost as large an impact on the total market price as it has on the biosimilar/referenced product price. In the case of EPO’s in Portugal, the price decease of the total market was -66%.
EPO stands for Epoetin, a drug that stimulates the production of red blood cells and fights anemia. Overall in Europe, biosimilars to Epoetin have driven prices down 27%, according to IQVIA. A separate FDA study found that the entry of a single biosimilar in a non-U.S. OECD market lowered prices by 30% compared with the previous price of the biologic. With three or four biosimilars in a therapeutic class, prices dropped 35% to 43%.
The IQVIA study also found that lower prices led to more demand and, thus, improved patient access. In other words, for the United States, more competitive biosimilars mean, not just lower spending, but a healthier nation.
Obstacles Biosimilars Face
The United States is usually in the vanguard of both medical innovation and the policy that encourages it. Why does Europe seem to be so far ahead? Besides development costs, biosimilars face a host of obstacles to getting to market here. One problem that seems fairly simple to address is lack of good information. Among the remedies discussed in the Biosimilars Action Plan, released by he FDA in July 2018, is better communication. Many pharmacists and physicians – not to mention members of the general public -- are still unclear on what biosimilars are and how they perform. There are worries that they are unworthy substitutes for branded biologics.
The FDA has initiated an outreach and education campaign, but, as a June article in STAT claimed, “misinformation about these products” is abundant. Wrote Hillel Cohen and Dorothy McCabe, two pharmaceutical executives who are members of the Biosimilars Forum Education Committee:
Some biologics manufacturers and groups have issued misleading, incomplete, and inaccurate information about the safety and effectiveness of biosimilars in an attempt to slow acceptance of and access to biosimilars. This mischaracterization is pervasive and threatens to stall system-wide health care cost savings and the advancement of biosimilars in the U.S. with untoward fear mongering.
In speech at Brookings last year, Scott Gottlieb, then the FDA Commissioner, pinpointed another obstacle. He called competition in the biologics space “anemic because consolidation across the supply chain has made it more attractive for manufacturers, Pharmacy Benefit Managers [PBMs], Group Purchasing Organizations and distributors to split monopoly profits through lucrative volume-based rebates on reference biologics—or on bundles of biologics and other products—rather than embrace biosimilar competition and lower prices.”
Is Competition Being Thwarted by PBMs and Biologics Makers?
In other words, the high rebates paid to PBMs and others by makers of biologic products – companies that make other popular medicines as well -- are a disincentive for plans to offer biosimilars to members. “The branded drug makers,” said Gottlieb, “thwart competition by dangling big rebates to lock up payors in multi-year contracts right on the eve of biosimilar entry.”
He added that the FDA was “concerned that volume-based rebates may encourage dysfunctional clinical treatment pathways. We’ve heard from multiple sources that some payors are requiring step-therapy or prior authorization on the reference biologic before patients can access a biosimilar. We see no clinical rationale for these practices.”
Joshua Cohen, a pharmaceutical analyst, elaborated on this theme in an article in Forbes:
In some ways, the U.S. biosimilars market behaves more like a branded than a generics market, where, in each therapeutic class consisting of originator biologics, biobetters (follow-on originator biologics), and biosimilars, different brands compete on price or rebates.
Originator biologics manufacturers increase rebates to retain market share, and in some cases negotiate formulary exclusivity with payers to preempt biosimilar competition. If available to them, they also introduce biobetters to the market, which compete on the grounds of improved quality, dosing, or convenience. In turn, biosimilar makers must offer payers substantial rebates to gain market share through favored formulary tier placement. Additionally, it’s vital that they invest heavily in marketing their product to obtain buy-in from payers, physicians, and patients.
The courts may step in to address this problem, or Congress and the Administration might follow through on earlier plans to rein in PBMs, whose opaque rebates enjoy an exemption from anti-kickback laws. But, clearly, a bottleneck exists in the United States but not in Europe.
Another obstacle is patent litigation. Stealing intellectual property is wrong, and patents spur innovation. But critics say that patient access is suffering when biologics makers, especially, game the system. The CRS study stated, “The launch of several biosimilar products has been delayed due to ongoing patent litigation and settlements between brand biologic and biosimilar companies.
For example, AbbVie has been the subject of Congressional inquiry for its use of a so-called ‘patent thicket’ to protect” its biologic Humira. The FDA approved three biosimilars to Humira in 2016, 2017, and 2018, but, under settlements between the manufacturer and AbbVie, none will be launched before Jan. 31, 2023. No doubt, a major reason that European biosimilars reach market more quickly is a difference in patent regimes.
Other obstacles include a confusing system for naming biosimilars that adds four random letters as the suffix to the non-proprietary name, the difficulty that companies developing biosimilars have in obtaining samples from branded biologics makers, and the thorny issue of interchangeability.
While pharmacists can substitute a generic for a branded drug on their own, they cannot substitute a biosimilar for a biologic unless the biosimilar is deemed “interchangeable” – a designation that, so far, no biosimilar has achieved. Speaking at a conference earlier this year, Gal argued that the FDA should “collapse the requirements” for interchangeable and biosimilar products into a single designation. Achieving approval as a biosimilar is already a high bar.
Are Biologics a ‘Natural Monopoly’?
Some analysts are maintaining that policy and educational obstacles are not at the root of the problem. In an article in Health Affairs in April, Preston Atteberry, Peter Bach, and Jennifer Ohn of the Center for Health Policy and Outcomes at Memorial Sloan Kettering Cancer Center, and Mark Trusheim of MIT argued that biologics, unlike small-molecule chemical drugs, should be seen as “natural monopolies.” They write, “The biologic and chemical differences between small-molecule and biologic drugs, not policy decisions” explain why generics have increased competition but biosimilars have not.
Biosimilars, they write, are too expensive and time-consuming to produce, and because they are not exact copies, they will always elicit questions about clinical adoption. “Addressing these challenges consumes development time and money, increases the risk of regulatory failure, increases sales and marketing costs, and raises the expected profit threshold a prospective biosimilar manufacturer requires before considering entering the market,” they add. “Analysts have concluded that biosimilars are unviable for any reference product with annual revenues less than $897 million—a threshold that many biologics fail to meet.”
In a second article, the authors revealed their solution, which, they say, could generate $250 billion to $300 billion in savings over five years. A biologic could retain their exclusivity as intellectual property, as currently, but when that period expires, the government would order the price drastically cut, along the lines of reductions that ensue when generics enter the market of a chemical compound. “The lowered price,” write the authors, “should equal the costs of production (including facility repair and replacement) and market distribution, plus an appropriate profit.”
The article has brought strong responses. Alex Brill and Dominic Ippolito of the American Enterprise Institute, also writing in Health Affairs, argue that biologics are not “natural monopolies” – like, for example, an electric power company – and that the limited evidence shows that biosimilars do, in fact, “appear to generate the kind of competitive forces that most experts had predicted.”
An anonymous response to the first of the Atteberry pieces, points out that the National Health Service in the U.K. “recently secured biosimilar adalimumab at >80% discount, saving >£300 Million GBP/$400 Million in one tender. [Here is a link to an article on the subject.] This was the single most expensive specialty drug on our hospitals’ formularies. The 2018/19 financial year looks to deliver half a billion pounds of savings to reinvest back into healthcare.”
Proposed Policy Changes to Ease the Biosimilar Pathway
While consumers have an incentive to choose a generic that, under a pharmaceutical insurance plan, might cost $10 out-of-pocket over a branded drug that costs $200, no similar consumer incentive exists for a biosimilar over a biologic. That must change.
Prescribers, as well, lack strong incentives. Currently, their reimbursement under Medicare is the same, no matter whether they choose a biologic or a biosimilar. But the bill approved in July by the Senate Finance Committee proposes increasing the add-on payment percentage of the biosimilar from 6% of the manufacturer’s average sales price to 8%. creating greater incentive for physicians to choose the biosimilar product.
There are other potential legislative correctives to encourage biosimilar uptake as well. For example, Medicare plans currently receive stars for achieving certain quality and performance targets. The stars make the plans more enticing to consumers. On Oct. 6, Reps. Paul D. Tonko (D-NY) and Bob Gibbs (R-Ohio) introduced the Star Rating for Biosimilars Act (H.R. 4629), directing HHS to add availability of cost-saving biosimilars as a new condition for achieving stars. That’s an added incentive for plans to encourage biosimilar use.
Employers, however, need to become more active in pushing insurers and PBMs to clarify why biosimilars are not more available to plan members. If a branded biologic has a biosimilar competitor, why isn’t the plan promoting the use of the less expensive biosimilar? The answer may lie in the rebates that the biologic manufacturer is paying to the PBM.
The truth is that the virtuous cycle exists. It took decades for public policy to change so that generics would become more available and competitive. Let’s hope that the process for biosimilars moves faster. Clearly, however, this is not the time to give up on the promise of biosimilars to constrain drug prices.
Frequent comparisons are made between health care costs in the United States and in other wealthy countries. The focus of these comparisons is nearly always pharmaceutical prices. The latest example is a report, issued by the House Ways and Means Committee staff, titled, “A Painful Pill to Swallow.” The report compared drug prices in the United States with those in Canada, Australia, Japan, and a group of Europeans countries. It concluded, “The analysis presented in this report clearly illustrates that, across the board, the U.S. spends more on drugs than other comparable developed countries.”
That’s hardly a surprise. The U.S. health care system is utterly different from that of other countries, where the government is in charge and, as a monopsony buyer, can demand the prices it wants from drug manufacturers. These nationalized health systems may have the benefit of lower prices, but they create significant drawbacks.
What About Innovation?
The Ways and Means report sheds little new light – while casting considerable shade – on a complex subject. The researchers, for example, give short shrift to what is probably the most important issue that faces serious policy makers tackling drug-cost question: the impact of prices on innovation. The U.S. set a new record last year for drug approvals, and the number of new sophisticated biological products jumped from 10 in 2014 to 24 in 2018. Many of these approved medicines target the worst diseases, especially cancer.
The Ways and Means report is clearly meant to provide ammunition for those in Congress (and even in the Administration) who want to force foreign price controls onto the U.S. system. But if that happens, how will innovation be funded? Who will provide the capital to develop the pill that cures Alzheimer’s or AIDS or that extends the life of cancer patients?
As we pointed out in Newsletter No. 52, after examining health spending in the U.S. and other rich countries last year, three Harvard researchers, including Ashish Jha, the dean for Global Strategy at the Harvard T.H. Chan School of Public Health, concluded: “Although the United States’ high prices of pharmaceuticals are controversial, these prices have been viewed as critical to innovation, including U.S. production of chemical entities.”
The effect of price controls is predictable. They will deprive drug manufacturers of the revenues needed to fund research and development and harm the U.S. pharmaceutical industry in the same way they have depleted its European counterpart. As recently as 1990, Europe was spending more than the U.S. on R&D. Today, it’s no contest. Henry Grabowski and Y. Richard Yang wrote in Health Affairs that “U.S. firms overtook their European counterparts in innovative performance or the introduction of first-in-class, biotech, and orphan products. The United States also became the leading market for first launch.”
In a report titled, “The Opportunity Costs of Socialism,” the U.S. President’s Council of Economic Advisers looked at the effects of adopting European-style price controls:
Take the case of pharmaceutical innovation to improve patient health. Empirical research in this industry and others has shown that R&D investments are positively related to market size. For the case of medical innovation, evidence suggests that a 1 percent reduction in market size reduces innovation—defined as the number of new drugs launched—by as much as 4 percent (Acemoglu and Linn 2004).
Given that future profitability drives investment in this way, Lakdawalla and others (2009) examined the impact on medical innovation of the U.S. adopting European-style price controls. The study examined patients over the age of 55 and considered the reduction in R&D and new drugs approved that these price controls would cause. The paper examined increases in mortality for the heart disease, hypertension, diabetes, cancer, lung disease, stroke, and mental illness.
The study’s major finding is summarized in a chart on page 48 of the CEA report. Life expectancy for Americans aged 50-55 would quickly fall by a half-year in the U.S. and keep falling to seven-tenths of a year by 2060. And, because the U.S. develops so many new drugs, life expectancy would drop in Europe as well, by four-tenths of a year by 2040 and seven-tenths by 2060. The conclusion: “Given that innovations are financed by world returns mostly earned in the U.S., the mortality effects on health were substantial both in the U.S. and in Europe.”
R&D Projects Estimated to Fall 30% to 60%
Many U.S. companies now plough one-fifth of their revenues or more into R&D; indeed, R&D spending often exceeds net earnings. A study by Thomas Abbott and John Vernon, published as a working paper by the prestigious National Bureau of Economic Research, found that “cutting prices by 40 to 50 percent in the United States will lead to between 30 and 60 percent fewer R and D projects being undertaken in the early stage of developing a new drug.” David R. Francis revisited the Abbott-Vernon paper on Oct. in the NBER Digest and wrote:
Numerous economic studies indicate that price controls, by cutting the return that pharmaceutical companies receive on the sale of their drugs, also would reduce the number of new drugs being brought to the market. So, a short-run benefit for consumers could lead to a long-run negative impact on social welfare. And, this damage wouldn't be fully felt for several decades because it takes so long to develop new drugs.
Against considerable research, the Ways and Means paper quotes the February congressional testimony of Rachel Sachs, an associate law professor at Washington University of St. Louis, who claims that pharmaceutical companies have “other opportunities to obtain savings” within their current business models. In other words, revenues may fall, but the drug companies can cut expenses to make up for the losses and still maintain R&D levels. Any economist would find this an odd claim. If businesses can save money and thus boost earnings, they would already be doing it. They have a huge incentive: their stock prices.
The Matter of Rebates
Rebates are a way of life in complicated pricing schemes for pharmaceuticals. As HHS explains in a Fact Sheet:
Drug companies pay rebates and other payments to PBMs [pharmacy benefit managers, who work for insurance plans], but these payments are not reflected in patient out-of-pocket drug costs. The average difference between the list price of a drug and the net price after a rebate is 26 to 30 percent. These rebates, negotiated in Medicare Part D and private plans, are typically not used to reduce patients’ cost sharing for a particular drug.
Unfortunately, it is difficult to calculate rebates. According to a study by the research firm Milliman:
Rebate contract terms are trade secrets and vary widely among brands, pharmaceutical manufacturers, and health insurers, but tend to be highest for brands in therapeutic classes with competing products. This secrecy makes cost comparisons of competing brands on the basis of price alone very difficult (if not impossible) to estimate.
What we do know is that rebates are huge, and rising. The IQVIA Institute for Human Data Science found that the difference between invoice spending (that is, the amount paid by drug distributors, or roughly the list price) and net spending (accounting for all price concessions) increased from $74 billion in 2013 to $130 billion in 2017 for retail drugs. HHS found a similar trend of growing differences between list and net prices. Manufacturer rebates were only 10% of gross prescription drug costs in 2008. Today, according to HHS, they represent between 26% and 30% of list prices and in many cases far more.
The Ways and Means study uses 22% -- a figure for the year 2015, as reported this year by the Congressional Budget Office. Why such an old number when the Centers for Medicare and Medicaid Services has more up-to-date figures?
In a table, the Ways and Means report lists average drug prices for different countries and then states what the U.S. rebate would have to be in order to match it. On average, 61 drugs were examined per country -- with a range from 37 drugs from Portugal to 78 for the U.K., so, obviously we are not talking about direct comparisons here. Again, on average, the U.S. rebate to match foreign prices would have to be 73% -- with a range from 61% for Denmark to 82% for Japan.
The actual average rebate, as we noted, is probably around 28% -- but we can’t tell what the figure would be for the 37-78 drugs examined in the Ways and Means report. That report, to the committee staff’s credit, also looked at GDP per capita in the comparison countries. Clearly, richer countries, with more demand for medicines, should naturally have higher prices. Much of the price disparity can be explained by adjusting for GDP per-capita differences and subtracting rebates. For example, Canada’s GDP per capita is 27% lower than that of the U.S., and we can assume a 28% percent rebate.
Putting Drug Prices in Perspective
While prescription drug prices seem to be the obsession of the day, they represent only 10% of total health care costs, according to official National Health Expenditures data. An additional 4% of health care costs are attributed to drugs that are administered in hospitals and doctors’ offices. By contrast, hospitals account for 33% of U.S health costs, and physician and clinical services for 20%.
The truth is that the prices of nearly all health care services are higher in the United States. According to the Peterson-Kaiser Health System Tracker, an overnight hospital stay in the U.S. costs $5,220 versus $765 in Australia. The average price of an angioplasty in a U.S. hospital is $31,620, compared with $7,264 in the U.K., and a Caesarean delivery is $16,106 in the U.S. versus $9,965 in Switzerland. An MRI in the U.S. costs an average of $1,119; in Australia, $215. And an appendectomy costs twice as much in the U.S. as in the U.K.
Physician compensation in the United States is higher as well: an average $313,000 a year, according to an international compensation survey published this year in Medscape. That compares with $163,000 in Germany; $138,000 in the U.K., and $108,000 in France. Part of that difference is owed, as mentioned above, to disparity in GDP per capita, which is roughly 50% higher in the U.S. than, for instance, in France.
In addition, U.S. doctors have a heavier burden of medical malpractice insurance in a litigious society plus higher administrative costs that they must absorb themselves. A 2014 study published in BMC Health Services Research by Aliya Jiwani and colleagues found that billing and insurance-related activities added an additional $70 billion to physician-practice expenses, or about $80,000 per doctor in 2012, which would be about $100,000 today.
Remember, as well, that Americans have won or shared the Nobel Prize in Physiology or Medicine in 29 of the past 40 years. Not only our pharmaceuticals but our physicians are the best in the world.
Lack of Access in Other Countries
But health care is useless without access. The CEA report provides a comparison that shows, for different nations, the proportion of seniors who waited “at least four weeks to see a specialist in the past two years.” Of the 12 countries studied, the U.S. did best, with only 21% of seniors waiting that long. A sampling of the others: France, 42%; U.K., 51%; Canada (worst of the 12), at 59%.
Lung cancer is the number-one killer of cancers world-wide. While treatment for non-small-cell lung cancer (NSCLC) has improved considerably because of new drugs, in many rich countries access is limited. A study by HIS Markit for PhRMA found that, for five countries studied (Canada, South Korea, France, the U.K., and Australia), the average delay between regulatory approval of a drug to treat the disease and the first actual reimbursement of a patient was 589 days, or more than a year and a half. In the U.S., the delay is just 30 days.
The long delays in the other countries mean that many patients don’t survive to benefit from the effects of the drugs. By contrast, says the study, “American patients who were diagnosed with locally advanced and metastatic NSCLC between 2006-2017 are estimated to have gained 201,700 life years in total due to innovative medicines.”
An analysis by the U.S. Department of Health and Human Services found that only 11 of the 27 advanced medicines available under Medicare Part B in the United States were available in all 16 of the rich countries examined by HHS.
Rather than the U.S. importing European-style price controls, other wealthy countries should relax the tight grip of government, pay market prices, and give their citizens access to the best medicines. A study published last year by Dana Goldman and Darius Lakdawalla of the USC Schaeffer Center study notes:
We estimate that if European prices were 20 percent higher, the resulting increased innovation would generate $10 trillion in welfare gains for Americans, and $7.5 trillion for Europeans over the next 50 years. Encouraging other wealthy countries to shoulder more of the burden of drug discovery — including higher prices for innovative treatments — would ultimately benefit patients in the United States and the rest of the world.
We have entered a Golden Age for new medicines. Shouldn’t it benefit us all?
Policy makers are recognizing that smarter trade deals – rather than European-style price controls – could be the key to narrowing the gap between what Americans pay for pharmaceuticals and what others in rich countries pay for the same medicines. Trade agreements are also seen as an efficient route to ensuring governments protect patents, which in turn are the spur to innovation.
Lately, the U.S. Mexico Canada Agreement (USMCA), the successor to NAFTA, has brought new visibility to the importance of pharmaceutical commitments in trade negotiations. We will examine the USMCA later in this newsletter, but first consider how trade can be a solution to one of the most vexing problems in drug pricing.
Securing Fair Value for Innovative Medicines Through Trade Deals
The disparity between pharmaceutical prices in the U.S. and other developed nations has become a torrid political issue. President Trump commented in October: “I’ve seen it for years, and I never understood. Same company, same box, same pill, made in the exact same location. And you’ll go to some countries, and it would be 20 percent the cost of what we pay, and in some cases much less than that.”
In an attempt to narrow the difference, the Administration last October proposed using an index of other countries’ prices to set U.S. prices of some for the most advanced U.S. drugs: a policy called “reference pricing.” Butcritics point out that this approach would almost certainly lead to a significant decline in pharmaceutical research and development, fewer new medicines, reduced health and shorter lives – both in the U.S. and abroad.
A study by the research firm Vital Transformation found that the IPI “penalizes innovation, targets companies with the most advanced, newest products in the market for what are often the most challenging diseases.”
Said an article in JAMA last year by three Harvard researchers, “Although the United States’ high prices of pharmaceuticals are controversial, these prices have been viewed as critical to innovation, including U.S. production of chemical entities.” The Vital Transformation study concluded, “Reducing revenue…via IPI impacts investment and radically impacts the probability of successful market entry” of new medicines.
Price controls severely weakened the European pharmaceutical industry, which as recently as 1990 was spending more than the U.S. on research and development. Henry Grabowski and Y. Richard Yang wrote in Health Affairsthat “U.S. firms overtook their European counterparts in innovative performance or the introduction of first-in-class, biotech, and orphan products. The United States also became the leading market for first launch.” As a result, Americans have faster, broader access, for instance, to the most advanced cancer medicines. Some 95% of the cancer drugs approved from 2011 to 2018 are available in the U.S., but only 74% are available in the U.K. and just 8% in Greece.
U.S. companies plough their revenues, mainly domestic, into research and development that helps patients everywhere. In typical examples, Merck’s 2018 financial report showed the company’s R&D spending represented 23% of total revenues; for Eli Lily, the proportion was 22%. In fact, for many large drug manufacturers, R&D spending annually exceeds profits. It is understandable that the President and others are distressed. Other rich countries are “free-riding, or taking unfair advantage of the United States’ progress in this area,” as a February study by the President’s Council of Economic Advisors (CEA), titled “Reforming Biopharmaceutical Pricing at Home and Abroad,” explained.
In a public letter 15 years ago, more than 200 U.S. economists tackled the price-disparity issue. They wrote: “The ideal solution would be for other wealthy nations to remove their price controls over pharmaceuticals. America is the last major market without these controls. Imposing price controls here would have a major impact on drug development worldwide, harming not only Americans but people all over the world. On the other hand, removing foreign price controls would bolster research incentives."
Exactly. But how to address those overly restrictive foreign price controls?
One answer heard more and more frequently is improved trade rules. After all,President Trump frequently refers to his ability to negotiate better trade deals. The use of trade deals to narrow the price gap should be right in his wheelhouse.
The current unfairness seems evident. When a Lexus is shipped to the United States from Japan, our government does not require that it be sold for only $20,000 so that more consumers can afford it. But that is exactly what is happening with U.S. drugs. Europe is saying, “Send us your medicines to save the lives of our citizens but only charge what we tell you to charge.” That kind of policy appears to flout the concept of free and fair trade.
President Trump has torn up some trade deals and renegotiated others. He has recognized the impact of unfair trade practices on the U.S. economy and, specifically, on American workers. Now, his Administration is beginning to require trading partners to change their ways when it comes to pharmaceuticals.
The U.S.-Japan Bilateral
Proof that the Administration is making headway could come in the U.S.-Japan bilateral agreement scheduled to be signed during his month’s United Nations General Assembly meeting in New York. The Office of the U.S. Trade Representative (USTR) set as one of its negotiating objectives: “Seek standards to ensure that government regulatory reimbursement regimes are transparent, provide procedural fairness, are nondiscriminatory, and provide full market access for U.S. products, particularly under relevant Japanese measures.”
As an example of the obstacles American firms face, consider the discrimination wrought by recent revisions to Japan’s Price Maintenance Premium (PMP) system. A London-based online journal last year described PMP as a program…
…that adds price premiums to innovative new drugs and protects this price for the duration of the period of exclusivity or patent period. This had made it more attractive for pharma companies to develop new drugs for Japan early as there was a mechanism in place to get a reimbursed price that would reduce towering research and development costs.
In a letter to USTR, Jay Taylor of PhRMA, the U.S. industry trade association, wrote, “Under the new criteria, several U.S. global best-selling products have been deemed ‘non-innovative’ and stripped of their PMP eligibility. Further, the PMP company criteria appear to be inherently biased towards domestic companies and seriously call into question Japan’s commitment to fair and non-discriminatory policies consistent with its WTO obligations.”
Japan also provides weaker intellectual-property protection than the United States and suffers from deficiencies in transparency and enforcement. U.S. negotiators have the chance to bring Japan up to American standards, helping not just U.S. companies but Japanese consumers, who have access to fewer than half of newly developed cancer drugs.
The Potential U.S.-U.K. Trade Deal
Whenever the U.K. actually withdraws from the European Union – which could be as soon as next month -- the two countries will negotiate a new bilateral agreement. “We’re going to do a very big trade deal—bigger than we’ve ever had with the U.K.,” said President Trump recently. One element of that deal could be commitments to ensure fair value for U.S. medicines, ensuring transparency and due process in the pricing and reimbursement process.
“The United States, which sought to challenge a similar scheme in Australia during trade negotiations, argues that lower set prices are unfair on its pharmaceutical companies and leave U.S. consumers footing the bill,” said aReuters report earlier this year. But Boris Johnson, the British Prime Minister, said before meeting President Trump at the G-7 meeting in France that health care was not up for discussion.
“Americans have long wanted Britain to liberalize how the NHS [National Health Service] decides which drugs to offer British patients and at what prices,” said a Wall Street Journal editorial on Aug. 28. “Decisions on access are often driven more by cost than health benefit.” Because of reference pricing used in many other countries, “Britain’s price demands then become the basis for U.S. drug companies’ negotiations with buyers around the world.”
A Special Pharmaceutical Negotiator
In negotiations like these, Rep. Mark Meadows (R-NC), the chair of the House Freedom Caucus, believes the USTR needs help. So in April he introduced “The Fixing Global Freeloading Act” (H.R.2209). The bill, according to Meadows’s website, “would establish a Chief Pharmaceutical Negotiator” in the USTR’s Office. This new official would be “responsible for conducting trade negotiations and enforcing trade agreements to ensure that the United States’ pharmaceutical innovations are appropriately rewarded.”
In an op-ed in The Hill on May 7, Meadows elaborated:
For too long, we’ve let the world take advantage of the United States and nowhere is this problem worse than it is for medicines. In fact, many other American industries, such as agriculture and manufacturing, have negotiators advocating for, and protecting their innovation—it’s high time we assign a dedicated chief negotiator to the very industry most impacted by this freeloading from foreign interests who are supposed partners and allies.
In a Special 301 Report earlier this year, the USTR stated that it “has been engaging with trading partners, including Algeria, Argentina, Australia, Canada, China, Colombia, Ecuador, Egypt, India, Indonesia, Japan, Korea, Mexico, New Zealand, Saudi Arabia, Turkey, and the United Arab Emirates (UAE), to address concerns related to IP protection and enforcement and market access barriers with respect to pharmaceuticals and medical devices so that trading partners contribute their fair share to research and development of new treatments and cures.”
But other than USMCA, USTR has yet to score a major victory.
South Korea is our sixth-largest trading partner, and, in its revision of the U.S.-Korea bilateral trade agreement of 2012, the U.S. insisted that Korea end its policy of favoring its own pharmaceutical industry and restricting imported drugs to below-market prices. The USTR stated that as part of the renegotiation, “Korea will amend its Premium Pricing Policy for Global Innovative Drugs to…ensure non-discriminatory and fair treatment for U.S. pharmaceutical exports.” That treatment was supposed to have been ensured in the original KORUS bilateral deal seven years ago. Korea has agreed to comply in the new version, but it is still by no means clear that it will do so.
Biosimilars in the USMCA
One of the most contentious trade issues involving pharmaceuticals currently is a provision of the USMCA. The leaders of the three countries signed the deal November 30, but Democrats in the U.S. House are threatening to refuse to approve it. One major issue is enforcement of labor standards in Mexico, but another involves commitments designed to help manufacturers of biological products (“biologics”) – highly sophisticated large-molecule medicines – to protect their innovation. Biologics are the fastest-growing class of therapeutics.
Under Chapter 20 of the agreement, makers of biologics would be allowed 10 years of protection for the data they used to win approval. “After a decade has elapsed,” explains the New York Times, “competing drug companies are allowed to rely on the original company’s data to get product approvals for their own drugs, without repeating clinical trials, as long as they can show they have produced a similar drug.”
Currently, Canada provides eight years of data protection for biologics. Mexico provides five years – although some legal experts are skeptical of whether there is any real protection for biologics in Mexico. In the U.S., data are protected for 12 years, a duration that will not change with ratification of the agreement. The U.S. wants to set a minimum of 10 years in order, as President Trump put it, to “make North America a haven for medical innovation and development.” But the USMCA will also help advance a global standard for future trade agreements. Other developed countries, such as Australia, New Zealand, and Chile, have only five-year protections. (Japan has eight years, and the U.S. pharmaceutical industry has urged the USTR to extend the limit to twelve in a new bilateral.)
Democrats argued in a letter to the USTR, Robert Lighthizer, that “we believe it is critical that the United States remains the leader in health care innovation. However, we also believe that Americans are entitled to timely access to affordable health care and medicines.”
They worry that longer data protection means fewer biosimilars – that is, drugs that are, in the words of the FDA, “highly similar to” and with “no clinically meaningful differences from” existing FDA-approved reference biologics. Biosimilars hold enormous promise in the effort to constrain drug prices – in the same manner as generics for small-molecule medicines. But only 23 biosimilars have been approved in the U.S., and just nine of those are being marketed here.
A strong counter-argument, however, is that a short period of exclusivity will discourage innovation, so that there will be fewer biologics for biosimilars-makers to copy. Marc Bush, a professor of international business diplomacy at Georgetown University, wrote last month in the Detroit News:
It takes roughly $2.6 billion to create just one new medicine. Without a reasonable data exclusivity period, competing firms could simply copy a new biologic and sell it for a bottom-dollar price. It would be extremely difficult for investors to recoup their development costs. So innovators would have little incentive to invest in new biologic research in the first place.
If investment in biologics dries up, biosimilars will disappear too. That’s because scientists can’t reverse-engineer nothing, and without data exclusivity to seed research on new biologics, that’s exactly what there will be to copy: nothing.
U.S. Law Calls for Trade Deals to Bring Other Countries
Up to U.S. Standards
Opponents of the biosimilars provision of the USMCA have claimed that the pharmaceutical industry wants the 10-year restriction in the agreement in order to prevent future reductions in the U.S. standard by Congress. But a new paper by Miriam Sapiro, who was deputy U.S. Trade Representative in the Obama Administration, argues that “USMCA obligations would not constrain Congress’ authority or ability to revise U.S. law or policy.” Sapiro, who is a senior advisor to a group pushing to pass USMCA, writes:
If lawmakers have concerns with existing U.S. laws, they can work to change those laws at any time, regardless of whether there is a trade agreement in place with Canada, Mexico or any other trading partner…. The language of existing trade agreements – and their implementing statutes – preserves Congress’ ability to legislate at any point.
Sapiro also notes that Congress has clearly stated that trade deals should aim to bring other countries up to U.S. standards. She quotes Trade Promotion Authority (TPA) legislation:
[t]he principal negotiating objectives of the United States regarding trade related intellectual property are…ensuring that the provisions of any trade agreement governing intellectual property rights that is entered into by the United States reflect a standard of protection similar to that found in United States law.
According to a Congressional Research Service analysis that was updated this June, the TPA law, signed by President Obama in 2015, also specifically “seeks to eliminate government price controls and reference prices ‘which deny full market access for United States products.’”
It is these principles, approved on a bipartisan basis, that led USTR to negotiate commitments that could result in narrowing the gap between U.S. and foreign drug prices, while at the same time continuing to spur innovation and make people healthier – here and around the world.
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