Issue No. 69: FDA Approves 53 New Drugs in 2020 Despite Challenges of COVID, and 2021 Off to Record-Setting Pace
As officials of the Biden Administration consider changes to health care policy, they might want to take notice of how well drug innovation is working – and why. Of the five vaccines against COVID-19 either being widely distributed or in final Phase 3 clinical trials, three were developed by U.S. companies and one by a U.S.-German partnership. The only FDA-approved therapeutic for COVID was also developed by a U.S. firm.
Just as remarkable, despite directing tens of billions of dollars to address the challenge of the coronavirus and despite having clinical trials curtailed by the pandemic, pharmaceutical manufacturers in 2020 won approval from the U.S. Food & Drug Administration (FDA) for 53 “new molecular entities and new therapeutic biological products.” That’s the second-highest total of novel drug approvals in history.
The record, 59 new drugs, was set in 2018. Already, in the first 62 days of 2021, the FDA has approved 11 new medicines, a pace that would break the 2018 mark.
Between 2018 and 2020, the FDA has approved 160 novel medicines, or 42% more than in any such period since 1938, when President Roosevelt signed the Food, Drug and Cosmetic Act. Between 2007 and 2010, for example, just 71 novel drugs were approved.
The total of 53 drugs for 2020 does not tell the whole story of innovation last year. The figure does not include vaccines, blood products, cellular and gene therapy products, plasma derivates, and other therapies approved by the FDA’s Center for Biologics Evaluation and Research. Among those biologic approvals were a meningococcal vaccine, a treatment for bleeding disorders suffered by patients with hemophilia, and T-cell immunotherapy for a type of lymphoma that currently has a five-year survival rate of only 50%.
Generics and Biosimilars
The list also does not include emergency-use approvals, such as those for the Pfizer-BioNTech, Moderna, and Johnson & Johnson vaccines against COVID-19. Nor does the total include new indications for previously approved drugs. For example, Taltz, an Eli Lilly injectable that was originally approved by the FDA in 2016 for psoriasis, was approved in May for treating axial spondyloarthritis, a disease that causes severe, chronic back pain.
On Feb. 11, the FDA announced it had approved or tentatively approved 948 applications for generics, which are copies of branded drugs. That figure in a pandemic year is remarkable, only 6.5% shy of last year’s record. Seventy-two of the 2020 approvals were for the first generic copies of a branded drug, including treatments for HIV, multiple sclerosis and prevention of stroke. All generics, which now represent 90% of prescriptions, dramatically reduce overall drug prices by adding competition, and the FDA said in its report that “first generics are particularly important to public health.”
Unfortunately, only three biosimilars – that is, drugs that are highly similar to and has “no clinically meaningful differences” from already-approved biological products – were approved in 2020, compared with 10 in 2019 and seven in 2018. There’s a sad story that explains this paucity of biosimilars, and we will tell it in a subsequent newsletter.
Faster Approvals, Well Ahead of Other Countries
The good news, as Patrizia Cavazzoni, the acting director of the FDA’s Center for Drug Evaluation and Research, pointed out, is that 75% of the 53 novel drugs for 2020 were approved in the U.S. before any other country, giving Americans quicker access to innovative medicines.
Some 92% of the 53 drugs were approved on the first cycle – that is, the time from when the FDA accepts an application until it decides to approve. Between 2011 and 2019, the first cycle rate was 85%. In addition, 68% of approved drugs used one or more of the FDA’s programs “intended to facilitate and expedite development and review of new drugs to significantly advance treatment or address unmet medical needs for a serious or life-threatening condition,” said Cavazzoni.
A Cascade of Cancer Drugs
Of the 53 new drugs approved, 18 were for what Cavazzoni called “a wide array of cancers, particularly lung cancers,…two of which were also approved for thyroid cancer.” Lung cancer is by far the most deadly cancer in the world, with 1.8 million deaths annually, more than twice the fatalities of second-place colorectal cancer, according to the World Health Organization. (Already in 2021, four new cancer drugs have been approved.)
An example of a cancer drug approved in 2020 is Tabrectra, which treats small-cell lung carcinoma (NSCLC) that has metastasized, or spread to other parts of the body. NSCLC accounts for 85% of all lung cancers. Two other drugs for metastatic NSCLC, Gavreto and Zepzelca, were also approved last year.
The FDA started the year by approving Ayvakit, Developed by Blueprint Medicines of Cambridge, Mass., Ayvakit showed in clinical trials that it reduced gastrointestinal stromal (or connective tissue) tumors in almost 85% of patients, according to Richard Pazdur, director of the FDA’s Oncology Center of Excellence.
Also approved in 2020 were treatments for patients with urothelial cancer, which begins in the urinary tract, and for those with colorectal cancer that has metastasized or for which surgery is not an option. The FDA also approved two treatments for prostate cancer, including Orgovyx, the first hormone therapy for advanced forms of the disease. Approved as well were:
As we noted in Issue No. 59 of this newsletter, cancer in a normal (non-COVID) year is responsible for one-fifth of the deaths in the United States, but rates have been dropping quickly. Age-adjusted male rates of both lung and prostate cancer have each fallen by more than half since the early 1990s. Colon cancer rates have decreased nearly as much. For women, breast cancer rates are down by about one-third.
Behind the Rise in 5-Year Cancer Survival Rates
There are several reasons for the declines, including the reduction in tobacco use, earlier detection through better imaging techniques, and improved surgical procedures. But 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.
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. Five-year survival rates for breast cancer vary widely, based on the stage at which detection occurs. The rate is 99% for a cancer that has not spread, 85% for one that has spread minimally beyond its original site, and 27% for distant-stage disease, according to a 2017 American Cancer Society report. Overall for breast cancer, the five-year survival rate is 90%; for prostate cancer, 98%; for melanoma, 92%.
Progress against all cancers will depend heavily on new medicines, whose main source will undoubtedly be the United States. According to PhRMA, the trade association, “1,300 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 in January said, the U.S. is “where you want to get cancer.” The piece cited a 2019 study in The Lancet 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. A major reason is that drugs that are developed in the U.S. become available more quickly to American patients.
Between the start of 2017 and March 3 of this year, the FDA had approved 58 new cancer drugs, many of them using new immunotherapy techniques. The journal Nature notes that, on average over the past five years, 25% of new drug approvals were for cancer. Last year, the proportion was 34%.
Drugs for COVID, Hormone Deficiency, Migraine, Nausea, Malaria, Parkinson’s, and Much More
Cancer was not the only disease targeted by the 53 novel drugs of 2020. Perhaps the most widely recognized was remdesivir, the first FDA-approved medication in the U.S. for the treatment of hospitalized adults and adolescents with COVID-19. Now called Veklury by its Silicon Valley developer, Gilead Sciences, it was given Emergency Use Authorization in May and final approval in October, just nine months after the pandemic began. Gilead was expected to produce 2 million courses of the drug, which is administered intravenously, by the end of 2020.
There were other approvals for drugs to fight infectious disease as well: Rokubia, developed by Viiv Healthcare of North Carolina, for patients with HIV that can’t be treated successfully by other medications because of resistance or intolerance, plus drugs for chronic hepatitis C and for hospital- and ventilator-acquired bacterial pneumonia.
The sheer variety of new therapies approved in 2020 is impressive. Some examples:
Other drugs approved in 2020 treat severe obesity, head lice, Duchene muscular dystrophy, acne, severe malaria, overactive bladder, rare conditions related to premature aging, Parkinson’s Disease, multiple sclerosis, high cholesterol, chronic constipation, and more.
It’s significant that many of the medications were developed by smaller companies, which count on capital investment over many years with no guarantee that a drug will complete successful clinical trials and be approved for use. The average cost of bringing a single drug to market is about $3 billion, as this Scientific American article explains.
Drugs Account for More Than One-Fourth of R&D
The National Center for Science and Engineering Statistics, a division of the National Science Foundation, reported in January that “businesses performed $114.5 billion of research and development [R&D] with health or medical applications in the United States in 2018,” the latest data. That is fully 26% of the total $441 billion spent in R&D by businesses that year. According to the Center, pharmaceutical manufacturing accounted for 62% of health-related R&D, or $75 billion. Biotechnology R&D for pharmaceutical manufacturers has soared, the Center reported, from $17 billion in $46 billion in 2018.
This is a system that seems to work. Developers have an incentive to plough billions into discovering new pharmaceuticals. As Dhruv Khullar and colleagues wrote in the New England Journal of Medicine last year:
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).
Those competitors drive down prices, creating what many consider a virtuous cycle of innovation. The result: vaccines and therapeutics against COVID-19 produced in record time and 52 other new medicines approved by the FDA in the trying circumstances of 2020.
Threats to a Virtuous Cycle
The system, however, has its opponents. Four months before leaving office, Donald Trump ordered certain Medicare drug prices to be linked to prices in European countries with price controls – in effect, importing those controls to the United States and artificially putting a lid on prices. The result, inevitably, will be less innovation. In a study of an original, milder attempt at international indexing in legislation that passed the House, the consulting firm Vital Transformation concluded that such reference pricing “penalizes innovation, targets companies with the most advanced, newest products in the market for what are often the most challenging diseases.”
Reference pricing, the study found, “will radically reduce the amount of liquidity available for investments into new products/mergers/partnerships etc., negatively impacting market entry of new medicines.” The analysis examined 64 drugs that came to market over the past 10 years under biotech partnerships that have been so productive lately. With an international pricing index 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.
An earlier study by Thomas Abbott and John Vernon, published as a working paper by the 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.”
The executive order issued by former President Trump was blocked by a federal judge in late December, just before it was set to take effect on the grounds that it had been rushed through without giving the public a chance to comment. Litigation remains active in several states. So far, the Biden Administration has not taken a position on what Trump called a “most-favored nation” pricing index. If the new President looks at health care reform in a comprehensive way, he will almost certainly recognize that….
At any rate, it’s hard to dispute that, in the difficult year of 2020, dozens of newly approved medicines are something to celebrate.
With only weeks left in its tenure, the Trump Administration’s ambivalence toward pharmacy benefit managers (PBMs) appears to have been resolved at last. On Nov. 20, HHS Secretary Alex Azar and the HHS Office of Inspector General (OIG) “finalized a regulation to eliminate the current system of drug rebates.”
The finalizing took awhile. In a Rose Garden speech back in May 2018, President Trump used brutal language to condemn “the dishonest double-dealing that allows the middleman to pocket rebates and discounts that should be passed on to consumers and patients.” But it took until Feb. 6, 2019, for the Department of Health and Human Services (HHS) to place a proposed PBM rebate rule in the Federal Register. Azar, in a speech on June 13, said he would end a system that “pushes prices perpetually higher.”
But just a month later, on July 11, 2019, 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.” Almost precisely a year later, the rebate plan was revived when President Trump on July 24 signed four executive orders intended to “deliver lower prescription drug prices to American patients.” And on Nov. 30, the 148-page final rule was published in the Federal Register. It is presented as a revision of the original proposed rule of February 2019. Major parts would go into effect as soon as Jan. 29, 2021. The final version varies only slightly from the original proposal.
The Rise of the Middleman
PBMs were created as middlemen between insurance plans (including Medicare and Medicaid) and patients. Their job is to negotiate prices with pharmaceutical manufacturers and pharmacies, administer benefits, and validate a patient’s eligibility. Today, the largest PBMs have been subsumed within huge corporations. For example, CVS Caremark, a PBM with 103 million members, is owned by CVS Health, the largest pharmacy chain in America, and ranks fifth on the Fortune 500 for revenues; UnitedHealthcare, the largest U.S. health insurer, owns OptumRx, whose members fill 1.3 billion prescriptions annually; and two years ago, Cigna, the fourth-largest health insurer, bought Express Scripts, a PBM with 83 million members, for $67 billion.
PBMs have clout, and one way they use it is by demanding rebates from drug manufacturers in return for placing medicines in their formularies, or lists of drugs approved for reimbursement, and for putting those medicines in favored tiers, or categories with varying co-payment or co-insurance requirements.
Rebates – along with other concessions such as discounts, fees, and chargebacks – have been rising sharply in recent years. According to the blog Drug Channels, the average annual increase from 2015 to 2019 has been 11.5%, and what editor Adam Fein calls the “gross-to-net bubble,” the gap for brand-name drugs between their sales at list prices and their sales at net prices after rebates and other concessions, reached $175 billion. In a Dec. 21 article in Health Science Journal, Wayne Winegarden of the Pacific Research Institute and Robert Popovian of Pfizer point out that drug list prices rose 41.5% over the past five years but net prices (the actual market prices after rebates and other concessions) rose just 8.5%, compared with overall medical inflation of 14.5%.
Rebates now average 26% to 30% of the list price of a drug-- and much higher (over 60%) in some cases. Rebates’ proportion of total Part D spending doubled from 2006, according to a report by the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.
Ending the ‘Safe Harbor’
Rebates have become massive, and, for Medicare prescriptions, they appear on their face to run afoul of the law. According to the OIG at HHS:
The Federal anti-kickback statute provides for criminal penalties for whoever knowingly and willfully offers, pays, solicits, or receives remuneration to induce or reward, among other things, the referral of business reimbursable under any of the Federal health care programs.
But HHS created a “safe harbor” to allow PBM rebates – a harbor that would be eliminated under the final rule that was filed on Nov. 30. The rule applies to the Medicare Part D benefit, which serves 46 million seniors. Instead of rebates, HHS wants discounts at the pharmacy counter, so Part D beneficiaries would, under this new process, pay less for individual prescriptions. In addition, the price on which a beneficiary’s out-pocket costs are based is generally the gross price before rebates, and if rebates are prohibited, co-insurance and co-pay outlays would also decline. Says a 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 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.
An ICER white paper by Amanda Cole and colleagues in March 2019 explained how the rebate system is especially harmful to patients who require specialty drugs for chronic conditions:
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.”
The July 10, 2019, Meeting Leads to Reversal
The Trump Administration identified “high and rising out-of-pocket costs for consumers” as one of the top four challenges in its May 2018 American Patients First blueprint. Rebate reform would seem to be a good way to meet that challenge. Then why did the White House balk in the summer of 2019 when it withdrew its plan? And why is this time different?
The decision to withdraw the original rebate proposal in the Federal Register 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 (he’s now back in Chicago); Kellyanne Conway, Counsellor to the President; and Seema Verma, Administrator of the Centers for Medicare and Medicaid Services (CMS).
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 also pointed to a possible revenge motive: getting even for the Administration’s “recent loss in a lawsuit that challenged a rule requiring drugmakers to put their list prices in direct-to-consumer advertising.” Ideology may have played a role as well. Philipson and Kudlow are well-known free-market advocates, averse to government standing between negotiations between private parties.
In addition, the insurers and PBMs, with considerable political clout, mounted strong opposition. As Fein wrote at the time, “The removal of the rebate rule is a big win for PBMs. In the short term, changing the rebate game was an existential threat to an important element of PBMs’ profitability.”
The main issue, however, appeared to be costs. 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, estimating that spending for Medicare and Medicaid would rise by a total of $177 billion between 2020 and 2029. In an earlier study, the Office of the Actuary at CMS estimated that cost to the government will total $196 billion.
"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.
Reducing Out-of-Pocket Costs for Seniors
While $177 billion looks like a large number, it is actually only 1% of projected Medicare and Medicaid spending over the 10-year period, and, more important, it is offset by reduced costs for beneficiaries. Under this analysis, Medicare (the Medicaid effect is tiny, and Medicaid was eliminated from the final rule), is a loser mainly because, as an insurer, it would not receive previous rebates. But Medicare beneficiaries are winners, and the Administration, after all, has as its goal reducing out-of-pocket costs for seniors.
The CBO report was controversial. Change assumptions about behavior generated by new incentives under the rule, and you get much different results. For example, 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.
The threat of premium increases for Part D beneficiaries is an even greater political obstacle than increased government spending. But, again, the amount of those increases – or even if they will occur at all – is under debate. In their December paper, Winegarden and Popovian use data from the annual report of the California Department of Managed Health Care to conclude that “if the insurer wanted to maintain current revenues” in the face of rebate losses, “it would have to increase premiums by $3.41 per month…. This implies that the total Medicare Part D premiums would rise from $350 annually to $391 annually.” The premium increases would be minuscule compared with out-of-pocket savings on co-pays and co-insurance, especially for the sickest Medicare patients. The authors write:
The policy trade-off is a $1,451 reduction in costs for the patients bearing the brunt of the affordability crisis in exchange for a $41 increase in annual premiums for all Medicare Part D enrollees.
Static Vs. Dynamic Effects of Rebate Reform
The authors call these “static effects.” As for dynamic effects: It stands to reason that lower out-of-pocket costs will increase adherence to prescriptions that often go unfilled when seniors can’t afford them. And a lack of adherence to prescribed medicines, as many studies have shown, mean higher costs in other parts of the health care system as, for example, patients with diabetes land in the hospital. CBO has estimated that a 1 percent increase in the number of prescriptions filled by beneficiaries causes Medicare spending on medical services to fall by roughly 0.2%. Taking increased adherence into account leads to between $381 and $1,522 in average annual per-capita government cost savings overall for the 1 million highest-cost Medicare Part D patients.
A separate study found that the majority of Medicare Part D members would see no increase in premiums 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, estimated 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 premiums or qualify for low-income subsidies.
OptumRx 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.
The Confirmation Question and Other Challenges
The final rule includes a condition that the HHS Secretary confirm that rebate reform will not raise costs for government or beneficiaries – and won’t even raise premiums. When the provision was revealed, “understandably, many people thought this condition was a loophole that would ultimately prevent a final rule and that the Rebate EO [executive order] itself was purely theatrics,” said a Mintz.com commentary.
But the confirmation requirement turned out to be no poison pill. Wasting no time, Azar issued a statement on Nov. 20:
My extensive experience in this field, coupled with the fifteen-year history of the program, supports my projection that there will not be an increase in federal spending, patient out-of-pocket costs, or premiums for Part D beneficiaries under the Final Rule implementing the Executive Order. The rule will make beneficiary medications more affordable and lead to lower cost sharing for patients as chargebacks will decrease the costs they ultimately pay at the pharmacy counter by up to thirty percent of the drug's list price.
It is worth reading Azar’s entire confirmation statement, which also makes the point that costs and premiums depend on the reaction of PBMs to margin pressure as a result of not receiving Medicare rebates. The Secretary writes:
There is a discrete set of possibilities: (i) the middlemen could see their margins decline; (ii) insurers and manufacturers could agree to greater concessions; (iii) insurers could increase beneficiary premiums; or (iv) some combination of these possibilities. In terms of stakeholder analysis, the vigorous opposition of middlemen to regulatory reform that would so clearly benefit patients and allow their client insurers to attract and maintain customers suggests that the middlemen believe the outcome would be compression of their margins.
Azar’s confirmation is critical to the final rule, and it may be challenged on the grounds that it does not comport with previous estimates by CBO and CMS, nor does it present its own analytical data for costs and premiums.
Another danger for implementing the rule -- noted by, among others, Rachel Sachs of Washington University in St. Louis in an article in Health Affairs -- is the question of whether HHS actually withdrew its original proposed rule in 2019. OMB’s Unified Agenda entry for the rule lists it as “withdrawn” as of July 2019. “Ordinarily,” writes Sachs, “if an agency withdraws a previous proposed rule, it cannot proceed directly to the final rule stage (as it did here) if it changes its mind about the withdrawal.” Instead, the agency has to start all over again at the Notice of Proposed Rulemaking stage, requesting comment and going through a longer process. Sachs writes that “if it is determined that the rule was officially withdrawn in 2019, the final rule could be invalidated.”
The Pharmaceutical Care Management Association, the trade group for PBMs, has already stated that it “will explore all possible litigation options to stop the rule from taking effect and destabilizing the Medicare Part D program that millions of beneficiaries rely on.”
Biden’s Administration, And Trump’s
Finally, there’s the new Administration. Trump is placing his successor in a position where it will be difficult to rescind a rule that lowers out-of-pocket costs for seniors. He is doing the same with the most-favored-nation plan for imposing European prices on certain Medicare drugs, as we discussed in Issue No. 65.
As worthy as rebate reform may be, however, President Biden could decide on more comprehensive changes, perhaps in the form of legislation that can survive the executive orders of future presidents. He could try, for example, to extend the rebate ban to commercial policies. Fein predicts that if rebates end across the board, current drug prices will fall and then rise more slowly each year, biosimilars (generic-like therapies for complex biological products) will be adopted more quickly, and pharmaceutical companies will bid for formulary inclusion in open auctions.
Despite the on-again-off-again nature of its support for rebate reform, the current Administration has spent time and political capital promoting the merits of discounts at the pharmacy counter over what can be characterized as kickbacks to insurers and their middlemen. If rebate reform remains intact, it could become both an important legacy for Donald Trump and certainly a boon to Medicare beneficiaries.
Issue No. 67: Memo to New Administration: Heed KFF Report That Says Drugs Not ‘Primary Culprits’ in Health Costs
Joe Biden promised during the campaign to “protect and build on the Affordable Care Act,” signed into law 11 years ago. He said he would expand access and make health care less expensive and, using the rhetoric that politicians of both parties seem unable to resist, vowed to “stand up to abuse of power by prescription drug corporations.”
Before proposing the details of an improved Obamacare, the President-Elect and his advisors would be well advised to read a short and powerful Axios piece by Drew Altman, the president and CEO of the Kaiser Family Foundation (KFF). The headline on the Sept. 30 article: “Drugs aren't the reason the U.S. spends so much on health care.”
Altman wrote, “Voters care a lot about drug prices, but they’re not the main reason the U.S. spends so much on health care. The big picture: The U.S. spends twice as much per person as other wealthy nations,..and hospitals and outpatient care are the primary culprits.”
U.S. Inpatient and Outpatient Spending 144% Higher Per Person
The piece was derived from data published the week before by the KFF-Peterson Health System Tracker, an invaluable resource. The Tracker looked at U.S. spending per capita compared with average spending in nine comparable countries: Austria, Belgium, Canada, France, Germany, Netherlands, Sweden, Switzerland, and the U.K.
The comparison found that U.S. per-capita spending on “prescription drugs and other medical goods (including over-the-counter and clinically-delivered pharmaceuticals as well as durable and non-durable medical equipment)” was $1,397 in 2018; in the comparable countries, spending was $884. So spending in the U.S. was 58% higher – not a small disparity, though recognize that more than one-third of that difference (21 percentage points) is explained by the considerably higher GDP per capita in the U.S. compared with the other nine nations.
Now, compare the gap in drug and device spending with the gap in the category KFF-Peterson calls “inpatient and outpatient care.” It includes “payments to hospitals, clinics, and physicians for services and fees such as primary care or specialist visits, surgical care, and facility and professional fees.” Inpatient and outpatient spending was $6,624 in the U.S. compared with $2,718 in comparable countries, making the U.S. figure 144% higher, again compared with 54% for drugs and devices.
Overall, U.S. per-capita spending on health care is nearly twice that in comparable countries. But, as Altman writes, “The overwhelming majority of the difference — 76% of it — came from spending on inpatient and outpatient care — not drugs, which get more attention but represent just 10% of the difference.”
Here are the KFF-Peterson data in the form of a table:
Where Are Costs Rising the Fastest? Not Pharmaceuticals
Looking at the table, if you were setting out to make health care costs more affordable in America, where would you start? An article in Modern Healthcare last year concluded: “Hospital prices are the main driver of U.S. healthcare spending inflation, and that trend should direct any policy changes going forward.”
The Centers for Disease Control reported that hospitals represented 38.6% of all U.S. health spending in 2017, up from 36.1% in 2007, and that pharmaceuticals represented 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.
Similarly, recent KFF-Peterson report looked at where health prices have been rising the most over the past decade. Overall, the increase in the U.S. from 2008 to 2018 was 3.6%, according to the report. Driving higher costs has been inpatient-outpatient spending with a 3.9% hike and administrative spending at 5.4%. The increase in prescription drugs and medical goods costs was just 2.7%.
Pharmaceutical cost increases have modulated in recent years, with the prices of prescriptions flat overall. The best source of current information is data published by the pharmaceutical benefit managers (PBMs) that serve insured Americans. Caremark, the largest PBM with 30% of the U.S. market, reported that total drug costs rose 1.4% between 2018 and 2019, entirely because of more utilization of medicines; the average prescription filled by its member actually cost 0.1% less. For Express Scripts, with 23% of the market, total drug costs rose 2.3%, again mainly because its members were using more medicines; the average prescription price rose just 0.9%.
As the KFF-Peterson report states:
Political discourse on health spending often focuses on prescription drug prices and administrative costs as being the primary drivers of high health spending in the U.S. compared to other nations. Current policy proposals aim to address prescription drug pricing.
Drug prices are, indeed, higher in the U.S. than in other high-income countries, but as this analysis shows, reducing drug spending alone would have a comparatively smaller effect on the gap between health costs in the U.S. and comparable countries. The biggest contributor to the difference in costs between the U.S. and peer nations is spending on inpatient and outpatient care.
The average cost of a hospital stay in the U.S. for pneumonia, for example, is $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.
Putting Pressure on Hospitals to Reduce Costs Is ‘Politically Risky’
It's no secret that policy makers are obsessed with drug prices and pay little, if any, attention to inpatient or outpatient costs. A good question is why.
One reason is the design of health insurance policies, which require Americans to reach deep into their own pockets for co-pays and co-insurance. The out-of-pocket portion is 14.1% of total pharmaceutical spending but only 2. 9% of hospital costs and 8.4% of physician and clinical services costs. For Medicare beneficiaries, the gap is even greater. A Kaiser Family Foundation analysis last year found that Medicare patients 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.
On a dollar basis, out-of-pocket spending in 2018 (latest data) was 38% greater for prescription drugs than it was for hospitals even though hospitals account for more than three times the cost of drugs overall. See Tables 7, 8, and 16 of the National Health Expenditure (NHE) data from the Centers for Medicare and Medicaid Services here.
Insurance companies make more money from pharmaceutical insurance than for other kinds of health insurance. 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.
While total out-of-pocket costs per capita is not particularly high for drugs – only about $12 per month, according to the NHE data – the sickest Americans can face large bills, ratcheting up anxiety and political pressure both on the part of those facing bills and those who worry they will.
A study last year by Michael Mandel of the Progressive Policy Institute pointed out that for Americans who perceive their own health as “excellent,” drugs represent just 13% of their total health care out-of-pocket spending, but for Americans who says their health is “poor,” drugs represent 43%. (See Figure 2, here.) The person in excellent health spends $45 a year out-of-pocket on drugs while the person in poor health spends more than $600. “As people become less healthy,” writes Mandel, “they see their out-of-pocket drug spending soar faster than other medical expenses or overall incomes. No wonder they are angry with drug companies!”
Seniors, especially, are saddled with huge bills if they need the most advanced medicines because Medicare has no cap on what they are required to pay out of pocket each year. As we pointed out in Issue No. 64 of this newsletter, a study in the journal Arthritis Care & Research found that Medicare beneficiaries not qualifying for low-income subsidies paid an out-of-pocket average of $484 for a one-month prescription of a Part D biologic agent to combat the disease. Largely as a result of the cost, only 61.2% of the 886 beneficiaries studied filled their prescription, leading to more sick people for expensive physician and hospital care.
A research piece last year by Juliette Cubanski, Tricia Neuman, and Anthony Damico of the Kaiser Family Foundation found that a total of 1,016,660 enrollees had out-of-pocket spending on drugs that exceeded the catastrophic threshold, with average annual costs of $3,214). Average out-of-pocket spending on the 10 highest-cost medications was more than $5,000; for one anti-inflammatory drug, the average exceeded $12,000.
Another reason that politicians fixate on drug costs is that they consider hospitals to be protected health care species – in large part because hospitals are among the two or three largest employers in many congressional districts. Hospitals employ 5.1 million Americans while pharmaceutical manufacturers employ just 300,000.
Putting pressure on hospitals to constrain costs, Altman writes, is “politically risky” – which may be an understatement.
Drug spending reduces hospital spending
The best discipline on hospital spending has come, ironically enough, from the development of new pharmaceuticals. Research has shown consistently that drugs keep people out of the hospital, reducing overall health spending. The Boston Consulting Group decades ago found that the number of annual surgeries for peptic ulcers dropped from 97,000 in 1977, when H2 antagonists were introduced, to 17,000 ten years later. In research published in 1995, Frank Lichtenberg of Columbia University concluded that “a $1 increase in pharmaceutical expenditure is associated with a $3.65 reduction in hospital care expenditure.”
A subsequent study by Lichtenberg, released as a National Bureau of Economic Research working paper in 2002, looked at the ability of newer medicines to cut hospital costs. Lichtenberg concluded:
In the Medicare population, a reduction in the age of drugs utilized reduces non-drug expenditure by all payers 8.3 times as much as it increases drug expenditure; it reduces Medicare non-drug expenditure 6.0 times as much as it increases drug expenditure. About two-thirds of the non-drug Medicare cost reduction is due to reduced hospital costs. The remaining third is approximately evenly divided between reduced Medicare home health care cost and reduced Medicare office-visit cost.
Drugs that lower cholesterol and treat high blood pressure have produced dramatic reductions in hospital stays around the world. A 2014 study, published in the European Heart Journal, looked at the effect of five years of treatment with statin drugs for 1,000 patients. Savings for the National Health Service totaled 710,000 British pounds, or about $1,000 per patient after accounting for the cost of drug and safety monitoring. The drugs reduced hospital stays for the 1,000 patients by 1,836 days. This accounting does not even quantify the value of the lives saved and enhanced.
For a more recent example of drugs reducing hospital spending, consider remdesivir, the first therapeutic approved by the FDA for COVID-19. A randomized double-blind trial, conducted by NIH’s National Institute of Allergy and Infectious Diseases, found that Remdesivir, which now goes by the brand name Veklury, reduced the median recovery time for patients in the hospital by a median of five days compared with the placebo group, according to a peer-reviewed article in the New England Journal of Medicine on Nov. 5.
The drug, according to the Department of Health and Human Services, has a cost of approximately $3,200 for a full five-day course. Compare that $3,200 to the savings from cutting a hospital stay by five days. According to a study released in November by FAIR Health, a non-profit, the cost of a COVID hospital stay of 11 to 15 days for a patient over 60 years old was $152,388 while the cost of a stay of 6 to 10 days was $89,973 – a difference of more than $60,000.
‘Protectionism on Behalf of Hospitals’
Government actions have actually raised hospital costs. In an article last year in the National Interest, Chris Pope, a Manhattan Institute fellow, wrote that the U.S. 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.”
Hospital admissions in the U.S. dropped from 39 million in 1980 to 35 million in 2015 (incredibly enough, the latest data from the Centers for Disease Control and Prevention) even as the population rose by 100 million, and the average length of a hospital fell by 40%. In 1997, some 6.6% of insured Americans had at least one hospital stay, but by 2017 the proportion had dropped to 5.3%. But, meanwhile, hospital employment has been rising sharply. As The Economist magazine reported: “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. Hospitals just don’t behave like other markets. Consolidation, which in most industries is a way to increase efficiency and bring down costs, has actually raised 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 in December 2018 in December titled, “Reforming America’s Healthcare System Through Choice and Competition,” by the departments of HHS, Treasury and Labor, also pinned much of the blame for poor hospital productivity on government, citing “misallocation of resources and widespread inefficiency in the healthcare system, particularly in public programs.” Says the report:
Since the government share of healthcare spending is so large, government rules impose inefficiencies on private firms dependent on public funding, even if they also serve privately funded patients. Simply put, government has played a large role in limiting the value Americans obtain for their healthcare spending.
Hospital Concentration Has Not Led to Lower Costs
The HHS-Treasury-DoL report also pointed out that both hospitals and physician services have become more and more concentrated, with fewer players in big markets. The number of physicians employed by hospitals or health care systems rose by 78% between 2012 and 2018 and is now about half of all doctors, according to a study last year by Avalere Health and the Physicians Advisory Institute. Zack Cooper, an associate professor of health policy at Yale University, was quoted in Modern Healthcare as saying:
What is most worrying to me is that there has been fairly profound consolidation among hospitals and when they gain market power they have the ability to raise prices. They have the ability to gain more favorable contractual terms, which allows them to raise prices and resist the new, more sensible payment reforms.
A study published in Health Affairs in 2014 found “that an increase in the market share of hospitals with the tightest vertically integrated relationship with physicians--ownership of physician practices--was associated with higher hospital prices and spending.”
For the 10 years ending in February 2018, a study found, an average of 14 community oncology practices a month have been closed, acquired, or merged into hospitals. Another study found that between 2004 and 2014, the proportion of chemotherapy infusions conducted in hospitals for commercially insured patients rose from 6% to 43% -- and the cost of such treatment in a hospital as opposed to a doctor’s office for a day was more than twice as high on average
The 340B Subsidy
Rather than reducing inefficiencies through better management, hospitals address them through government subsidies like the 340B program. As we noted in Issue No. 57 of our newsletter, the program was established in 1992 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 steep discounts to certain hospitals that serve lower-income communities. The hospitals are then allowed to claim full reimbursement at undiscounted rates for private payers. The difference is 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. It has encouraged hospitals to swallow up 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.
A December 2019 study by the research firm Milliman, commissioned by Pharmaceutical Research and Manufacturers of America (PhRMA), found that, on average, reimbursements to hospitals under 340B were 294% of drugs’ acquisition costs. The average treatment studied by Milliman received a reimbursement of $4,673, of which $3,082 was retained by the hospital itself.
A separate study by the Berkeley Research Group, also commissioned by PhRMA and released in October, looked at outside pharmacies that contracted with hospitals under the 340B program – a practice that was unleashed with a government decision in 2010. Today, 27,000 contract pharmacies are in the program. The research found that 340B prescriptions carried profit margins of 72%, compared with 22% for non-340B prescriptions dispersed through independent pharmacies.
Certainly, there are ways to hold down drug costs while maintaining high levels of innovation, and we have examined them in this newsletter many times: redesigning health insurance capping monthly out-of-pocket outlays by insured Americans, putting a ceiling on the catastrophic phase of Medicare Part D, allowing rebates to flow to patients themselves, and designing regulations with an eye to bringing biosimilars (that is, generic-equivalent versions of biological products) to increase competition. All of those changes can be effected by the Biden Administration in the first 100 days.
Just as important, however, if it wants to expand coverage and at the same time constrain costs and assure all Americans of the best care, the new Administration should look at the health care system broadly – not in sub-sectors. Clearly, policies that encourage drug innovation reduce inpatient and outpatient costs. And, just as clearly, it makes little sense to focus attention on medicines that constitute one-seventh or one-eighth of total expenditures when hospitals are where the savings are.
Social distancing, masks and therapeutics help, but to snuff out the current COVID-19 pandemic and protect against another one, the world needs a vaccine – that is, a preventive medicine that mobilizes the immune system to fight off the SARS-CoV-2 virus that causes the disease.
According to a World Health Organization tracking report, nearly 200 COVID vaccine candidates are in development, and 44 of them are in clinical trials, with 14 in Phase 2 and 10 in final Phase 3 evaluation, which involves assessing safety and effectiveness among thousands of people.
On Nov. 9, Pfizer and BioNTech, the U.S. firm’s German partner, announced that their Phase 3 vaccine candidate “has demonstrated evidence of efficacy against COVID-19…based on the first interim efficacy analysis” conducted by an external, independent data monitoring committee. The vaccine was “found to be more than 90% effective in preventing COVID-19” in a study enrolling 43,588 participants. The companies announced 94 confirmed cases of infection but said that the clinical trial will continue “to final analysis at 164 confirmed cases in order to collect further data.” In a later update, the companies said the final analysis of 170 cases found the vaccine to be 95% effective and had no serious side effects.
Pfizer and BioNTech on Nov. 20 submitted a request to the U.S. Food & Drug Administration (FDA) for an Emergency Use Authorization (EUA), which would “potentially enable use” of the vaccine candidate, dubbed BNT 162b2, “in high-risk populations in the U.S. by the middle to end of December.”
Meanwhile, on Nov. 16, Moderna, a Cambridge, Mass.-based biotech, announced that its own vaccine candidate registered 94.5% effectiveness in early trial data. Moderna, too, is expected to request an EUA.
Normally, it can take more than a decade to develop a vaccine. It took 20 years for polio. In this case, however, vaccines went into development in January, when Chinese scientists published the 30,000-letter genetic code for SARS-CoV-2. At the time, only 41 cases and one death had been identified in Wuhan. The code allowed researchers all over the world to make their own synthetic versions of the virus. Moderna took its vaccine to clinical trials in 66 days, believed to be a record.
While some of the Phase 3 trials have been interrupted to evaluate safety concerns and take the time to ensure that the trials can proceed, at least one of the U.S. or European vaccines will almost certainly be authorized under an EUA by December or early 2021. Tony Fauci, director of NIAID at the National Institutes of Health, told CBS in early October that scientists would know by December whether a vaccine will be safe and effective – and his prediction appears correct. Ensuring the safety and efficacy of a vaccine is a serious undertaking – necessary for consumers, providers, and public health leaders to build confidence in this important preventive measure and help drive uptake.
Such a vaccine could then be available widely in the U.S. by April. But achieving the objective of vaccinating enough people to create global immunity is daunting. An article in September by Barry R. Bloom of the Harvard T.H. Chan School of Public Health and colleagues in the New England Journal of Medicine made these calculations:
Data from antibody testing suggest that about 90% of people are susceptible to Covid-19. Accepting that 60 to 70% of the population would have to be immune, either as a result of natural infection or vaccination, to achieve community protection (also known as herd immunity), about 200 million Americans and 5.6 billion people worldwide would need to be immune in order to end the pandemic. The possibility that it may take years to achieve the vaccination coverage necessary for everyone to be protected gives rise to difficult questions about priority groups and domestic and global access.
All of the vaccines in Phase 3 trials are being tested in two doses, taken three to four weeks apart – a process that stretches the time to full global immunization even further.
Speeding and Accepting
The Trump Administration has tried to move the vaccine development and production process along with a program called Operation Warp Speed, with a goal “to produce and deliver 300 million doses of safe and effective vaccines with initial doses available by January 2021.” The program was funded with up to $10 billion, and money has quickly been made available for development, manufacturing, and distribution, including $1.5 billion to Johnson & Johnson, $2 billion to Moderna and $1.6 billion to Novavax. Pfizer chose to risk only its own money on vaccine research. The U.S. government committed $1.95 billion for delivery of up to 100 million doses of the vaccine developed by Pfizer and BioNTech upon EUA approval. The agreement also lets the U.S. acquire up to 500 million additional doses.
The often-confusing White House efforts to address COVID-19 more generally and the unfortunate political atmosphere around those efforts may affect acceptance of a vaccine by the public. In September testimony, government health officials told Congress that they would not speed approval for political reasons, and around the same time, nine pharmaceutical companies issued a joint pledge that they would “stand with science” and not put out a vaccine that had not been until it had been thoroughly vetted for safety and efficacy. Nevertheless, on Oct. 19, California Gov. Gavin Newsom said he would set up an independent state board to “independently review and monitor any vaccine trials to guarantee safety.” Newsom said, “Of course, we don’t take anyone’s word for it.”
The FDA has final say on approval, and it receives recommendations from the independent Vaccines and Related Biological Advisory Committee, made up mainly of practitioners and academics.
Americans, nevertheless, have not exactly embraced the idea of being vaccinated for COVID. A recent Stat/Harris Poll survey found that only 54% of Americans said they would get vaccinated as soon as they can. The problem is not cost. The vaccine will be free. But some 79% said they worry about a vaccine’s safety if it is approved too quickly. Still, this hesitation may vanish as people see their neighbors vaccinated and as the benefits of personal immunization become more obvious.
Sharp Decline in Non-COVID Vaccine Use, Except for Flu
While vaccines against the novel coronavirus were being developed at a record pace, vaccines with other life-saving uses, developed years ago, were sitting on shelves waiting to be used. The COVID-19 epidemic itself, including challenges in assessing vaccines in traditional locations during the pandemic shutdown and building vaccine confidence, are raising risks that other vaccine-preventable diseases could spread.
A WHO survey in June found that 85% of the 61 countries polled had experienced declines in vaccinations. The disruptions, to both outreach and inoculation services, were worst in Africa and the Americas. When asked why, 48% of respondents said patients worried about getting COVID-19 when they go to a doctor’s office, clinic or hospital to be vaccinated; 33% cited lockdowns or limited public transport. Other problems include lack of personal protective equipment, or PPE, for health workers – and the low availability of those workers, busy fighting the coronavirus.
On July 15, the WHO reported “an alarming decline in the number of children receiving life-saving vaccines around the world…. This is the first time in 28 years that the world could see a reduction in DTP3 [diphtheria, tetanus and pertussis] coverage – the marker for immunization coverage within and across countries.”
More recent data, though sparse, show a slight rebound. Vaccinations will probably return to previous levels as the pandemic moderates – though that may not happen for another six months or longer. Research by the Bill and Melinda Gates Foundation, released in September, found that while global vaccination rates for pediatric measles, mumps and rubella fell from 84% to 70% because of COVID, they are forecast to rebound within a year.
The situation in the U.S. during the early COVID period was particularly challenging. Between the week of Feb. 16 and the week of April 5, administration of measles, mumps and rubella shots dropped 50%; diphtheria and whooping cough shots by 42%; HPV [human papilloma virus] vaccines, by 73%. A separate study by the Centers for Disease Control (CDC) found that measles shots for children aged 2 to 18 dropped 90% over the period.
Even before COVID-19, however, Americans were displaying an increasing lack of confidence in vaccinations. The proportion of respondents saying it is “very important” for children to be vaccinated dropped from 81% to 72% between 2008 and 2018, according to a study by Research America and the American Society for Microbiology. A separate Gallup survey confirmed the decline and found that 16% of parents with children under 18 believe that “vaccines are more dangerous than the diseases they prevent.”
Such fears were behind the lower vaccination rates that existed prior to the epidemic. For example, only 69% of California children aged 18 months to four years had had all of their shots as of 2018, and only 45% of adults received flu shots for the 2017-18 season, according to the CDC. Among adults over 65, only 69% had been vaccinated for influenza over the past 12 months and just 64% had ever had a pneumococcal vaccine while 34% had had a shingles vaccine. Overall, the flu vaccination rate for Americans over six months during the 2019-20 season was just 52%, including just 44% of those with chronic conditions, the
But although COVID depressed other vaccinations, it has inspired more Americans to receive flu shots, at least so far – in part because of fears of a double-whammy with the coronavirus. From Aug. 7 to Oct. 2, some 23.5 million got shots, compared with 12.6 million during the same period last year.
Developing a Vaccine
“The traditional vaccine timeline is 15 to 20 years. That would not be acceptable here,” says Mark Feinberg, president and CEO of the International AIDS Vaccine Initiative, quoted by the STAT news service. “When you hear predictions about it taking at best a year or a year and a half to have a vaccine available,…there’s no way to come close to those timelines unless we take new approaches.”
And those new approaches are, in fact, being taken. Researchers are working simultaneously on steps that would normally be taken sequentially, such as testing prospective vaccines on mice at the same time they are tested on humans. Vaccines have a long history of safety, and, whatever means are used to speed up the approval process, it’s certain that regulators are conscious of not increasing risks.
A big reason that the vaccine can be approved relatively quickly is the speed with which Chinese scientists published code that allowed researchers all over the world to make their own synthetic versions of the virus. Also, while no one knew that the next pandemic would come from a coronavirus, vaccine researchers had hedged their bets by focusing on such pathogens, which they had seen before with SARS (2002) and MERS (2012). “The speed with which we have [produced vaccine candidates] builds very much on the investment in understanding how to develop vaccines for other coronaviruses,” said Richard Hatchett, CEO of the Coalition for Epidemic Preparedness Innovations (CEPI), quoted by Laura Spinney in The Guardian.
Also helping push the development process have been multiple sources of government and non-profit funding. For example, CEPI, an Oslo-based non-profit, has provided initial funding to Moderna, Curevac, Inovio, Novavax, Themis, the Institut Pasteur in Paris, and the Universities of Oxford, Pittsburgh, Hong Kong, and Queensland to develop COVID-19 vaccines. CEPI has raised $690 million of the $2 billion it says it needs, with funding from such governments as the U.K., Germany, and Canada. Meanwhile, Inovio, a small Pennsylvania biotech that has also received funding from the Gates Foundation, became the second firm to start Phase 1 testing on a vaccine and is now in Phase 2.
Another advantage has been the eagerness of global drug companies and research institutions to cooperate. The small German firm, BioNTech, as noted above, has partnered with Pfizer (whose Prevnar 13 vaccine targets pneumococcal disease) while Oxford University is working with the British-Swedish firm AstraZeneca and Moderna with the National Institute of Allergy and Infectious Diseases (NIAID). EpiVax, a Providence, R.I.-based immunology company has a partnership with the GAIA Vaccine Foundation, a U.K. non-profit, to crowd-source funds for a project that “is using advanced computational tools to accelerate a COVID-19 vaccine candidate (EPV-CoV19) for healthcare workers.”
GlaxoSmithKline (GSK), based in London, struck a deal with China’s Xiamen Innovax Biotech to develop a vaccine and, more broadly, is making its adjuvant technology, which boosts immune response, “available to scientists and organizations working on promising COVID-19 vaccine candidates.”
Novavax, a Maryland company, previously developed vaccines for MERS and SARS which, according to a press release, “demonstrated strong immunogenicity and 100% protection against virus challenge in preclinical testing.” The Sars-CoV-12 virus shares 80% to 90% of its genetic material with the virus that causes SARS, and Novavax, working with an NIH grant, is repurposing its previous coronavirus vaccines to work against COVID-19, and its RNA-based vaccine is now in Phase 3 trials.
The Sars-CoV-12 virus is made up of RNA (ribonucleic acid) inside a protein capsule, whose distinctive spikes lock onto ACE2 receptors on human cells. The RNA breaks into the cell, makes copies of itself, and the upper and lower airways Traditionally, vaccines have introduced part or all of the pathogen (in a live but weakened form, or else rendered inactive) into the human body, whose immune system recognizes the danger and starts producing disease-fighting antibodies to fight it. The antibodies continue to work for months, years, or a lifetime, depending on the vaccine.
Edward Jenner founded the science of modern vaccinology when, in 1796, he injected a 13-year-old boy with vaccina virus, or cowpox and demonstrated immunity to smallpox. A century later, Louis Pasteur deployed live weakened cholera vaccine and inactivated anthrax vaccine. In the early 1950s, Jonas Salk grew large quantities of polio virus on cultures of monkey cells, then killed the virus with formaldehyde, creating a vaccine that would save millions of lives.
No Live Virus Necessary
Today, instead of killing an actual live virus, some pharmaceutical companies are instead using new technologies. Novavax says it “uses recombinant protein technology to imitate the structure of a virus to provide protection without the risk of infection or disease.” For COVID-10, according to Spinney, “This involves extracting the genetic code for the protein spike on the surface of Sars-Co-V-2, which is the part of the virus most likely to provide an immune reaction in humans, and pasting it into the genome of a bacterium or yeast – forcing those microorganisms to churn out large quantities of the protein.”
Moderna and CureVac are building their vaccines not from proteins but from genetic instructions themselves. Pfizer and BioNTech are using technology that they developed working together in recent years on influenza vaccines, synthetically producing RNA. “When a person is injected with the RNA, their own muscle cells would turn into vaccine ‘factories,’ creating proteins that stimulate the immune response,” says a Pfizer description.
Innovation is being spurred by an industry that is researching both competitively and collectively. “Across the whole industry we are seeing lots of coordination,” said Michael Breen, associate director of infectious diseases at GlobalData, speaking on a FiercePharma panel of experts. “This is actually a proven method for success in vaccines for pathogens related to outbreaks," he added, referring to Merck’s Ebola vaccine Ervebo, which started at a research institute in Canada and was originally licensed by NewLink Genetics, based in Iowa. The Ebola outbreak, however, began in 2014, and Ervebo was approved only in December 2019. The world can’t wait that long for a COVID-19 vaccine.
Manufacturing the Vaccine
A vaccine not only must be researched, developed and approved; it has also to be manufactured in enough doses for billions of people around the world. Hatchett, the CEO of CEPI, said in an interview with STAT in early February that he believed there would be several vaccine candidates developed quickly, but he added:
And then for each candidate, you need to ask yourself the question: How do you produce that? How do you get that candidate to a point where regulators are comfortable with it being used widely and how are you going to get to that point with production at a scale that is meaningful in the context of a disease that is going to infect the whole of society?
The good news is that manufacturing is being ramped up well before vaccines are approved. CEPI announced Oct. 21 that it had reserved manufacturing capacity for one billion doses of vaccine globally, signing agreements with Biofabri of Spain and GC Pharma of South Korea.
Bill Gates, told Trevor Noah on “The Daily Show” April 2 that his foundation will work with seven makers of a potential vaccines to build factories now, before approval. Said Gates: “Our early money can accelerate things. Even though we’ll end up picking at most two of them, we’re going to fund factories for all seven, just so that we don’t waste time in serially saying which vaccine works and then building the factory.” He could lose billions on the choices that don’t pan out. “A few billion,” he said, “is worth it.”
The Trump Administration’s Warp Speed program has invested billions of dollars for this purpose. As an example, back in June, the Department of Health and Human Services announced $204 million in funds for Corning to expand the domestic manufacturing capacity to produce approximately 164 million glass vials per year for vaccines. And on Oct. 13, HHS and the Pentagon announced a $31 million agreement with Cytiva, a supplier to pharmaceutical companies, to expand manufacturing capacity for products that are essential in producing COVID-19 vaccines, such as cell culture media. The Defense Department and HHS also announced a $138 million contract with ApiJect for more than 100 million prefilled syringes for distribution by the end of this year, as well as the development of manufacturing capacity for the ultimate production goal of over 500 million prefilled syringes by 2021.
Pfizer is already manufacturing millions of doses of its vaccine and expects to have as many as 50 million doses globally ready by year-end, according to a company official. The UK’s Daily Mail on Oct. 18 published video showing a manufacturing plant in Puurs, Belgium, with thousands of doses of the vaccine coming off the production line. According to FiercePharma, Pfizer earlier “tagged sites in Kalamazoo [Mich.], Andover, Massachusetts, and St. Louis for its U.S. COVID-19 production.”
The company’s complicated logistical operation was described Oct. 21 by the Wall Street Journal. For example:
To keep the vaccines safe in transit and to move them fast, Pfizer designed a new reusable container that can keep the vaccine at ultracold temperatures for up to 10 days and hold between 1,000 and 5,000 doses. The suitcase-sized boxes, which are packed with dry ice and tracked by GPS, will enable Pfizer to avoid the larger, temperature-controlling containers used in transportation, giving it more flexibility to ship the vaccines faster since planes and trucks won’t have to wait for the standard refrigerated metal boxes.
Many of the emerging vaccine candidates, including Pfizer’s, will be easier to manufacture in large quantities than traditional vaccines, which are typically developed from viruses grown on primary cells such as chicken eggs. And researchers are innovating with mass-production firmly in mind. For example, in announcing a vaccine candidate that will be delivered through a finger-sized patch with tiny needles, University of Pittsburgh scientists stated:
The system also is highly scalable. The protein pieces are manufactured by a "cell factory" -- layers upon layers of cultured cells engineered to express the SARS-CoV-2 spike protein -- that can be stacked further to multiply yield. Purifying the protein also can be done at industrial scale. Mass-producing the microneedle array involves spinning down the protein-sugar mixture into a mold using a centrifuge. Once manufactured, the vaccine can sit at room temperature until it's needed, eliminating the need for refrigeration during transport or storage.
"For most vaccines, you don't need to address scalability to begin with," said Pittsburgh researcher Andrea Gambotto. "But when you try to develop a vaccine quickly against a pandemic that's the first requirement."
Getting the Vaccine to the People: The Role of Pharmacies
The final step in the process is getting vaccines to the people who need them, which, in this case, is practically everyone in the world except perhaps those who already have immunity, having survived the illness.
How will vaccines be distributed if physician office visits have been supplanted by telemedicine and hospitals are still overwhelmed with COVID-19 cases? Even if these obstacles are gone by the time a vaccine is available, the obvious answer is pharmacies.
There are 67,000 pharmacies in the U.S., staffed by more than 300,000 licensed pharmacists, nearly all of whom have continued to work through the pandemic. Nine out of ten Americans live within five miles of a pharmacy, and “in rural and underserved communities and in areas experiencing physician shortages, pharmacists may be the only healthcare provider that is immediately accessible to patients,” says a briefing paper on the COVID-19 crisis signed by the CEOs of a dozen associations representing pharmacists.
In September, HHS authorized “state-licensed pharmacists to order and administer, and state-licensed or registered pharmacy interns acting under the supervision of the qualified pharmacist to administer, COVID-19 vaccinations to persons ages 3 or older.”
That HHS had to issue the order highlights the restrictions that many states place on pharmacists’ immunizing Americans against other diseases.
As Wayne Winegarden of the Pacific Research Institute noted in a Forbes article, “All accredited Doctor of Pharmacy programs require to obtain an immunization certification, and all pharmacists that administer vaccines are trained on the CDC’s national immunization standards and recommendations.” But while every state permits pharmacists to administer flu vaccines, state regulations vary for other vaccines, and in many states current rules would either prevent pharmacists from administering COVID-19 vaccines or delay immunizing Americans by requiring prescriptions from physicians.
A LawAtlas study found that, as of 2016, just ten states allow pharmacists to administer vaccines independently; another five states do not specifically grant them authority without prescriptions but do not expressly prohibit the practice either. The remaining states allow immunization only according to a protocol approved by a physician or an institution.
The value of immunizations by pharmacists, who, unlike most physicians, can vaccinate people on a weekend, in the evening, and without an appointment, is undeniable. A 2018 study published in the journal Vaccine by researchers at the Johns Hopkins School of Public Health is especially relevant today. The study used a computer simulation model to find the effect of adding pharmacies as locations to dispense flu vaccinations. During a mild epidemic, this approach would have…
averted up to 17.1 million symptomatic cases, prevented up to 104,761 deaths and saved $1 billion in direct medical costs, $49.3 billion in productivity losses and up to $50.3 billion in societal costs (direct medical and indirect costs combined). In a more severe epidemic, adding pharmacies averted up to 23.7 million symptomatic cases, prevented up to 210,228 deaths and saved $2.8 billion in direct medical costs, $97.1 billion in productivity losses and $99.8 billion in overall costs.
In their briefing paper, the pharmacists’ organizations urge that, in adding to vaccinating Americans, pharmacists should be allowed to initiate treatment. Already in Idaho, pharmacists are authorized to prescribe products to treat strep and flu, and “Florida recently passed a law permitting pharmacists to test and treat for strep, flu and other non-chronic ailments.”
Certainly, physicians and hospitals will play a major role in the immunization effort, but they can’t do it alone. Now is the time – in the months before a vaccine is approved and manufactured – for all states to review their laws and make the necessary changes to expand access. As a statement by the American Disease Prevention Coalition put it:
Every state must ensure that all pharmacists can administer FDA-approved or ACIP [Advisory Committee on Immunization Practices]-recommended vaccines. States should make these changes now so that pharmacists can administer a COVID-19 vaccine as soon as it reaches the market. The lives of millions of Americans may depend on it.
The approach that officials are taking with COVID contrasts with the barriers against other vaccinations. In a good illustration of an innovative approach that could be adopted for many diseases, HHS and DoD last month announced agreements with CVS and Walgreens to vaccinate residents of the nation’s long-term care facilities. Pharmacy staff will administer the immunizations on-site at no out-of-pocket cost to residents.
Still, even with COVID vaccines, there are obstacles. All but three states have registries to keep track of vaccinated residents. Registries help physicians and pharmacists remind people to get a second dose for vaccines that require them – was well as preventing people from getting vaccinated for the same disease too many times. But the registry system needs federal guidance for uniformity and easy access by professionals.
Who Pays for Vaccines?
The federal government has announced that the COVID-19 vaccines that it has purchased during the pandemic will be free for all Americans.
The CDC on Oct. 13 made an announcement about priorities, saying that the Advisory Committee on Immunization Practices was “considering four groups to possibly recommend COVID-19 vaccination for if supply is limited.” Those groups are healthcare personnel, workers in “essential and critical industries,” people who are at high risk “due to underlying medical conditions,” and people over 65.
Seniors suffer the highest fatality rates from COVID-19. As an article in Health Affairs by Richard Hughes IV of the consulting firm Avalere and two co-authors noted, Congress in the 1980s required that “influenza, pneumococcal, and hepatitis B vaccines be covered under Medicare Part B with zero cost sharing.” Other immunizations fall under Medicare Part D, for which there is an out-of-pocket component. But the recently enacted Coronavirus Aid, Relief, and Economic Security (CARES) Act added coverage of a COVID-19 vaccine without cost sharing.
For non-Medicare beneficiaries, the Affordable Care Act (2010), passed on the heels of the 2009 H1N1 influenza outbreak “requires that all vaccines recommended by [ACIP] be covered without cost sharing by non-grandfathered commercial health insurance plans and Medicaid expansion programs.”
“If you have private health insurance in this country, you will not have to worry about any out-of-pocket costs when it comes to COVID-19 vaccines,” said Dr. A. Mark Fendrick, director of the University of Michigan’s Center for Value-Based Insurance Design (V-BID) in Ann Arbor, quoted by Healthline.
The federal government, however, needs to tie up some loose ends. It has to set an adequate, flat reimbursement fee for physicians and pharmacists to cover the cost of administering the vaccine and counseling patients. While these professionals are conscientious and public-spirited, they need the incentive of compensation, especially to encourage those in low-income neighborhoods and rural areas to get vaccinated. In addition, the government should clarify that no Americans should be faced with cost-sharing for having their vaccine shots administered.
Access to vaccines is the final step in the process of protecting Americans – and the world – from COVID-19, and, unless we’re flexible and innovative, it could be the most difficult.
President Trump on Sept. 13 issued a new executive order that would set strict price controls on Medicare drugs. Pharmaceutical companies would be limited to charging here at home the lowest price that other wealthy countries pay. The White House has proposed variations on this theme before, but the new order is more expansive and, if it goes into effect, will push price controls to their most egregious.
Medicare covers about 40 million older Americans, but the program’s policies often spread to commercial plans as well. If enacted, the change would be profound, and studies show it would hamper the ability of pharmaceutical manufacturers to conduct research at today’s levels.
The order follows ambivalence within the Administration about imposing price controls, which have in the past been advocated by Democrats rather than Republicans. In its May 2018 blueprint, “American Patients First,” a comprehensive strategic document on reducing drug costs, the Department of Health and Human Services (HHS) expressed skepticism about the kind of index, or reference, pricing that is at the heart of the Sept. 13 order:
In 2013, the World Health Organization published a paper describing the growing use of external reference pricing, or the practice of using the price of a medicine in one or several countries to derive a benchmark or reference price for the purposes of setting or negotiating the price of the product in a given country. Every time one country demands a lower price, it leads to a lower reference price used by other countries.
Such price controls, combined with the threat of market lockout or intellectual property infringement, prevent drug companies from charging market rates for their products, while delaying the availability of new cures to patients living in countries implementing these policies.
The crux of the matter, as the WHO paper states, is that price controls come at a cost, as we will see.
Details of a Reference-Pricing Model
The Sept. 13 order follows a promise the President made on July 24, when he unveiled four orders to lower drug costs. The other three – including rebate reform and drug importation – previously advanced to a lengthy rulemaking process by HHS. For the fourth order, which Trump called “the granddaddy of them all,” the President, stated, “We’re going to hold that until August 24, hoping that the pharmaceutical companies will come up with something that will substantially reduce drug prices. The clock starts right now.” Ultimately, negotiations between the Administration and the industry failed to yield an agreement – though both sides say one was close – and the order was issued.
The order is based on what’s usually termed an external reference pricing, or ERP, model – that is, one country’s prices are determined by the prices in other countries. The executive order, however, uses different terminology, referring to the system as a “payment model on the most-favored-nation price.”
The order states, “It is the policy of the United States that the Medicare program should not pay more for costly Part B or Part D prescription drugs than the most-favored nation price.” The July 24 order applied only to Medicare Part B drugs, administered in doctors’ offices; the new order extends the policy to Part D drugs purchased from pharmacies. Also, the term “costly” is unclear; it does not seem to cover all Medicare drugs, but which?
The most-favored-nation (MFN) price is defined as “the lowest price” for a drug that a “manufacturer sells in a member country of the Organization for Economic Cooperation and Development (OECD) that has a comparable per-capita gross domestic product.” The price is also adjusted for “volume and differences in national gross domestic product” – a vague formulation.
An OECD database lists U.S. GDP per capita in 2019 as $61,000. The only truly “comparable” countries (that is, with rates that are within plus or minus $5,000) are Switzerland, at $62,000, and Norway, at $66,000. Other candidates for comparison, but at rates in the low-$50,000s, are Austria, Denmark, Germany, the Netherlands, and Iceland. All of these countries have nationalized health care systems with government agencies determining prices.
Criticism of the Plan From Conservatives
Reliable Trump supporters have criticized ERP plans as imposing on Americans the health policies of socialist or social democratic countries. For example, Grace-Marie Turner, president of the conservative Galen Institute, wrote in Forbes that the President’s order threatens to “import price controls from countries with government-run health systems.” The piece was headlined, “Say No to Importing Foreign Price Controls for Drugs.” According to a FiercePharma article Sept. 14, “Republicans in Congress…say they think adopting drug prices from countries where prices are set by the government is effectively importing socialism.”
President Trump himself threatened to veto H.R. 3, the Democrats’ drug-pricing bill, which contains an international reference-pricing provision. The bill passed the House in December but won’t come up for a vote in the Republican-controlled Senate.
In an editorial two years ago, when a less expansive plan than the current one was proposed, a Wall Street Journal editorial stated, “The reason European countries pay less for drugs is because they run single-payer health systems and dictate the prices they’re willing to pay. Don’t like it? They’ll then vitiate your patents and make a copycat.”
Origins of the Sept. 13 Proposal
The plan that was the target of the Journal’s scorn followed President Trump’s January 2018 State of the Union Address, when he said was “very, very unfair” that people who live in other rich countries pay less for medicines than Americans do. The May HHS blueprint made the same point, listing as one of “four major challenges” that “foreign governments [are] free-riding off of American investment in innovation.” In a Senate hearing the next month later, HHS Secretary Alex Azar said that he looked at the idea of ERP but said, “I don’t think it would be effective” because companies could simply raise prices abroad to gain leeway in setting prices here.
But in a few more months, the model was back on the table. On Oct. 25, 2018, the White House solution proposed a plan to set drug prices in this country based on 126% of an average price derived from an index of what 14 other countries, 12 in Europe plus Canada and Japan, are paying. The plan was entered in the Federal Register as a proposed rulemaking of the Centers for Medicare and Medicaid Services five days later and then languished.
Those earlier price controls would have applied only to single-source drugs and biologicals in Medicare Part B, such as infusions of cancer medicines. The system “would be phased in over a five-year period [and] would apply to 50 percent of the country.” It would, in effect, be a limited and long-lasting pilot program.
Prices under the new order would almost certainly be set lower than under the 2018 model. Rather than about one-fourth more than an average of several countries, a price would be identical to the lowest of the low. How low? In a September 2019 comparison of the prices of about 60 pharmaceuticals by the House Ways & Means Committee staff, the U.S. drugs sampled had an average list price of $466, but the average list price in Switzerland was $116; in the Netherlands, $153; in Denmark, $182. Because of rebates, “list prices” are not the prices Americans, or even their insurance plans, actually pay. Still, a most-favored-nation model could easily mean reductions of one-third to one-half.
The Order and the Election
The Sept. 13 executive order does not put the new pricing system for Medicare into effect immediately. Instead, it directs Azar to “develop and implement a rulemaking plan” for a model that will “test whether, for patients who require pharmaceutical treatment, paying no more than the most-favored-nation price would mitigate poor clinical outcomes and increased expenditures associated with high costs.” It is unclear how long the plan and the test would take, but an article in the New York Times said “the process could take months, if not longer, and it would almost certainly be challenged in court.”
Also unclear is whether HHS will examine the effect of MFN on future “clinical outcomes.” If reduced revenues lead to reduced R&D, which seems inevitable, then fewer new drugs will be available – with a devastating effect on outcomes.
The new MFN order itself “does not by itself do anything,” as Kaiser Family Foundation executive vice president of health policy Larry Levitt wrote on Twitter. “It has to be followed up by regulations, which will take time.”
The Times article also noted that the President has already “made the executive order – the war that has broken out with the pharmaceutical industry – a centerpiece of his campaign for re-election.” The original July 24 order ignited an explosive reaction from drug companies and their supporters, which, in turn, was followed by a tough TV spot from the Trump for President campaign committee. It begins, “Greedy drug companies seeking even bigger profits are lying about President Trump. Here’s what President Trump’s plan really does: Reduces Medicare and prescription drug prices.”
The Effect of Price Controls on U.S. Drug Innovation
If pharmaceutical revenues are sharply reduced by price controls, drug companies argue that their investment in research and development will fall as well. The result will be a falloff in new treatments – and in overall health – for Americans as well as the foreigners who depend on U.S. innovation.
In Newsletter No. 63, we used the example of Regeneron’s popular Eylea, an injectable Medicare Part B treatment for macular degeneration, a disease that leads to blindness. An MFN rule would cut Eylea revenues by at least one-third. Regeneron is currently spending large sums to develop a double antibody cocktail for the treatment and prevention of COVID-19. That drug entered late-stage clinical trials on July 6, and the company last month announced that results will be coming soon. Regeneron also announced that its research and development costs rose 36% to $580 million, or 36%, mainly as a result of its COVID-19 work. R&D costs represented 30% of revenues in the quarter and 65% of net income.
Would potentially life-saving medicines – not just for COVID but for many other diseases – even be developed if an MFN rule slashes future revenues?
A study of the original, milder October 2018 plan by the consulting firm Vital Transformation concluded that reference pricing “penalizes innovation, targets companies with the most advanced, newest products in the market for what are often the most challenging diseases.”
The study notes that many of the most innovative drugs are developed not by pharmaceutical giants but by smaller biotechs, which are often purchased by the larger companies. Reference pricing, the study found, “will radically reduce the amount of liquidity available for investments into new products/mergers/partnerships etc., negatively impacting market entry of new medicines .”
The study also casts doubt on the notion that, in response to an ERP model, drug companies will raise prices in Europe so that reference prices will rise. The study calls this scenario “highly unlikely and could lead to compulsory licenses against U.S. products” – that is, outright confiscation of American intellectual property by foreign governments. The study also concludes that if ERP applies only to the most advanced drugs, then R&D will skew away from those medicines.
A earlier study by Thomas Abbott and John Vernon, published as a working paper by the 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.” The 2018 plan would have reduced prices by 30%, and interpolating from the Abbott and Vernon calculations, we figure that R&D projects would drop between 20% and 40% – a disaster for global health. The new Sept. 13 MFN plan would cause an even deeper price cut.
Already in 2020, the Food & Drug Administration has approved 40 new drugs, fighting such diseases as lung cancer, HIV/AIDS, multiple myeloma, muscular dystrophy, migraine, malaria, thyroid eye disease and more. At this rate, by year end, more than 50 new drugs will be approved. Imagine that 10 or 20 of those were never developed.
The U.S. has taken the lead in pharmaceutical innovation because of our relatively free market. As Europe and Japan have moved to monopsony (single-buyer) price controls, their drug industries have suffered. We can expect the same if the U.S. adopts reference pricing.
How to Tackle Free-Riding?
What is to be done, then, to address the unfairness of free-riding?
More than 200 U.S. economists, including several Nobel Prize winners, tackled the price-disparity issue in a public 2004 letter. 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.”
But how to get those “other wealthy nations” to do the right thing? The best answer is for the Trump Administration to play to its professed strength in trade negotiations. Through tough bargaining, the U.S. can pressure other rich countries to relax, or end, their price controls. Those countries could still provide tax credits or direct subsidies to their citizens for drugs and other health services if their aim is to ease the burden of health-care costs, but they should not be allowed to set prices for American medicines – any more than the U.S. government should be able to set prices for German cars.
Price controls badly distort trade and may be impermissible under current trade agreements – and can certainly be changed in future ones. The U.S. could begin the process by appointing a special USTR negotiator with jurisdiction over complicated issues of pharmaceutical trade, sanctions for countries that cheat on current agreements, and tough negotiations for future agreements.
Unfairness or Out-of-Pocket Costs?
The real problem, however, is not so much unfairness as high out-of-pocket costs for Americans. That is a subject we addressed at length in our last newsletter, which offered five ways for the Administration to reduce the amount that people pay themselves, especially the sickest patients: easing co-pay assistance so that manufacturers can assist Medicare beneficiaries in the same way they assist the commercially insured, enforcing insurance caps on monthly spending (here, states are out in front of the White House), placing a ceiling on Part D Medicare expenditures by beneficiaries (easy to do), changing regulations to speed biosimilars to market (thus increasing competition to drive down prices of the most advanced drugs), and reforming the opaque and corrupt rebate system (the object of one of the Administration’s orders).
Meanwhile, the first rule in health care is to do no harm. It’s critical that the U.S. avoid steps that would harm pharmaceutical innovation – and the nation’s health at the same time.
The executive orders that President Trump issued last month had as their goal to “deliver lower prescription drug prices to American patients.” But for nearly all patients, the price of a drug is practically meaningless. After all, 92% of Americans have health insurance, and what they pay for a medicine is determined by the conditions of their policies. The important question is how deeply consumers have to dig into their own pockets to pay for medicines at the pharmacy counter.
In our last newsletter, we discussed the drawbacks of several of the changes the White House proposed, especially drug importation, which imperils safety and won’t cut prices anyway, and a “most-favored nation” policy that imports foreign price controls to the U.S., harming domestic innovation and access to the best medicines.
There are, however, productive alternatives that could reduce out-of-pocket costs immediately, in most cases without Congressional action. One of those is rebate reform, discussed extensively in the last newsletter as well as in No. 58 and No. 45. Rebate reform was resurrected in the July 27 executive orders after being proposed first by the Department of Health and Human Services (HHS) two years ago, placed in the Federal Register, and then rescinded.
We will get to rebate reform at the end of this newsletter, but, first, it’s important to understand the nature of out-of-pocket (OOP) spending on drugs.
Twelve Dollars a Month
When we look at how much Americans pay from their own wallets on drugs, there’s a seeming contradiction. Average OOP spending by Americans is remarkably low, which is why a survey last year by the KFF Health Tracking Poll found that 46% of those filling prescriptions said they found it “very easy” to afford their medicines and another 29% said it was “somewhat easy.” Only 9% said paying for drugs was “very difficult.”
National Health Expenditures (NHE) data, reported in December by the Centers for Medicare and Medicaid (CMS), show that overall health spending (the amount paid by insurers, governments, employers and individuals combined) per capita in 2018 was $10,638. Of that, the bulk ($3,649 a person) was for hospital care and another large chunk ($2,221) was for physician and clinical services. Spending on prescription pharmaceuticals was just $1,026.
Out of the $1,026 for drugs, the actual yearly cost to the patient was $144 per American (see Table 16 of the NHE data). That comes to $12 per month. Out-of-pocket (OOP) spending on drugs is lower now than it was in 2005, when it peaked at $174. More recently, CVS Caremark, the giant PBM with 30% of the U.S. market, reported that “more than two out of three members spent less than $100 out of pocket in 2019.” That’s less than $9 a month.
OOP spending on drugs in the U.S. is in line with the rest of the developed world. As a study last year by Michael Mandel of the Progressive Policy Institute pointed out, “OECD data shows that average out-of-pocket spending ($143 in 2017) is actually lower than countries such as Canada ($144), Korea ($156), Norway ($178), and Switzerland ($215).”
Mandel notes that average OOP spending for persons with at least one prescribed medication dropped 27% from 2009 to 2016, according to a report by the Agency for Healthcare Research and Quality. Plus, “data from the Bureau of Labor Statistics Consumer Expenditure Survey shows that average household spending on prescription drugs fell by 11% between 2013 and 2018.”
The Paradox: OOP Spending Low, Anxiety and Outrage High
These OOP spending averages are low, but consumer anxiety and political outrage are high. Why? Because some people face very high OOP costs for their medicines, and nearly all people worry they may have the same dire situation in the future. For example, Mandel points out that for Americans who perceive their own health as “excellent,” drugs represent just 13% of their total health care OOP spending, but for Americans who says their health is “poor,” drugs represent 43%. (See Figure 2, here.)
The person in excellent health spends $45 a year out-of-pocket on drugs while the person in poor health spends more than $600. “As people become less healthy,” writes Mandel, “they see their out-of-pocket drug spending soar faster than other medical expenses or overall incomes. No wonder they are angry with drug companies!”
The purpose of insurance is to protect against loss – especially the kind of major loss that people have a hard time coping with themselves. So it would make sense for health insurance to provide the most cushioning for those who are most sick and in need of advanced medicines. Instead, those people are often hit the hardest with OOP requirements while the least sick can purchase their medicines for, literally, pennies per week.
Another anomaly is that health insurers design their policies so that Americans pay a far higher proportion out of pocket for prescription drugs than for other health services: 14% compared with only 2.9% for hospital care and 8.4% for physician and clinical services. (See the NHE data at Tables 16, 7, and 8.) This is counterproductive. You would think the insurers would want to encourage the use of medicines. After all, pharmaceuticals lower other costs by keeping people out of hospitals and doctors’ offices. In Newsletter No. 56, we reported extensively on how effectively drugs to combat heart disease and Hepatitis C (HCV) reduce costs in the health care system overall.
We noted, for example, that Hepatitis C “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 the original HCV drug Solvaldi. Today, through competition, the cost of HCV drugs has dropped considerably.
We can achieve substantially more adherence to prescriptions if OOP costs fall. For example, a study in the journal Arthritis Care & Research found that Medicare beneficiaries not qualifying for low-income subsidies paid an OOP average of $484 for a one-month prescription of a Part D biologic agent to combat the disease. Only 61.2% of the 886 beneficiaries studied filled their prescription, leading to more sick people for expensive physician and hospital care.
Back in 2015, before he served Commissioner of the Food & Drug Administration (FDA), Scott Gottlieb, a scholar at the American Enterprise Institute, told CNBC’s “Squawk Box” that America did not really have a drug cost problem. “What we have,” he said, “is an under-insurance problem. People are now under-insured, especially if they get a disease like cancer.”
In some cases, people are making their own decisions to under-insure, but in most cases, people cannot possibly get the coverage they need. Insurers demand too much co-insurance for specialty drugs.
With that background, let’s look at five ways to lower OOP costs immediately: 1) allowing co-pay assistance for Medicare Part D, 2) limiting monthly OOP spending for state residents, 3) capping OOP payments for Part D, and 4) easing the path for bringing biosimilars to market, and 5) rebate reform.
Five Areas for OOP Reductions….
1. Co-Pay Assistance
In recent years, co-pay assistance – typically, through the use of cards or coupons – has become critical for many families with commercial insurance as high deductibles, co-pays (flat fees), co-insurance (proportional payments), and rising annual spending limits have become regular features of health insurance policies.
When high OOP costs deter people from filling their prescriptions, they get sicker and often have to seek hospital care, raising overall costs in the health care system, as dozens of studies have shown. Here are just two pieces of research….
For the sickest Americans, however, OOP costs are rising, and, as the situation worsens, co-pay coupons, which now cover hundreds of drugs for millions of Americans insured through commercial plans, have been filling the gap. Issued by drug manufacturers and distributed by physicians or pharmacists, coupons can save patients around $6 for every $10 they have to pay out of pocket.
A statewide study of coupons released in July by the Massachusetts Health Policy Commission found:
Coupon programs and their uptake have expanded in Massachusetts. The number of branded drugs that offered coupons rose from 278 in 2012 to 701 in 2018. Among commercial prescription fills where a coupon could have been used, the percent of claims in which a coupon was used increased from 2.1% in 2012 to 15.1% in 2018. The average coupon value per claim was $229 in 2018, more than double the average in 2012.
But these coupons apply only to commercially insured Americans. The Office of the Inspector General (OIG) for the Department of Health and Human Services (HHS) has ruled that “pharmaceutical manufacturers may be liable” under the federal Anti-Kickback statute if they offer coupons for “drugs paid for by Medicare Part D.” The statute prohibits the “solicitation, receipt, offer, or payment of remuneration to induce the purchase of any item or service” under a federal health program.
The OIG’s ruling, however, is an interpretation that can change – especially during this period of high unemployment and widespread anxiety over family finances because of COVID-19. It seems hardly fair that seniors on Medicare are deprived of co-pay relief that is widely offered to younger Americans with commercial policies.
As an alternative to a revised ruling by the OIG of HHS, President Trump could direct the federal Center for Medicare and Medicaid Innovation (CMMI), which is charged with “developing new payment and delivery service models,” to test a model allowing drug manufacturers to provide co-pay assistance to Part D beneficiaries.
The policy would be a temporary one, tied to the COVID-19 pandemic, which has put extra pressure on family finances.
Insurers argue that, by footing all or part of the bill, pharmaceutical companies are encouraging patients to use more expensive brand-name drugs, rather than cheaper generics. But, in fact, the whole idea of co-pay relief is to help people who can’t pay for costly medicines.
A study by IQVIA examined prescription data from 2013 to 2017 and found that co-pay coupons used by commercially insured patients on branded drugs that have lost patent exclusivity represent only “0.4% of the total commercial market volume.” The Massachusetts study found that “the percentage of all drug claims that used a coupon in 2018 was quite low (3%) because most prescription fills are for generic drugs (which do not offer coupons).” Remember as well that patients attempting to use coupons for branded drugs have already been approved by their insurer for that medicine.
Still, if they really think generics are being avoided because of coupons, the OIG and CMMI could simply order that coupons can be applied only to branded drugs for which a generic does not exist.
2. State Caps on Monthly Spending
A New England Journal of Medicine study found that at least 21 states to limit OOP costs for prescription drugs (see Table S1 here). In most of those states, legislation still awaits passage, but on Jan. 21, the Governor of New Jersey signed into law a bill that requires that at least one-fourth of the plans that each health insurer offers in the state must include a cap on monthly OOP payments for a single prescription. For silver, gold and platinum plans, that limit is $150; for bronze plans, $250. The cap applies to deductibles, co-pays, and co-insurance.
Other states have variations on the theme. Vermont imposes annual, rather than monthly caps. California’s law is much the same as New Jersey’s but with higher ($250 and $500) caps. Washington state requires capped co-pays (that is, flat fees) rather than co-insurance (a proportion of the cost of the drug) for its silver and gold plans. Four out of five insurance plans have specialty tiers for advanced medicines, with co-insurance typically ranging from 20% to 50%. Delaware, Louisiana, Connecticut and Maryland apply caps only to drugs in specialty tiers. New York bans such tiers altogether.
States are not waiting for the federal government to tackle the OOP problem. They are moving on their own to new standardized plan designs. A feasibility study in Washington state, for example, found that residents wanted lower deductibles and “more transparent and predictable cost sharing (co-payments rather than co-insurance)” and that these aims can be achieved with only modest increases – or even decreases – in premiums.
Research published in the New England Journal of Medicine on Aug. 6 concluded that OOP savings can be achieved “without detectable increases in health plan spending, a proxy for future insurance premiums.” The article by Kai Yeung of the Kaiser Permanente Washington Health Research Institute and colleagues examined the effects of requirements in Delaware, Louisiana and Maryland that capped monthly OOP outlays at $150 per 30-day supply of specialty medicines only.
The researchers worked with a sample of 27,161 commercial-plan members who had rheumatoid arthritis, multiple sclerosis, hepatitis C, psoriasis, psoriatic arthritis, Crohn’s disease, or ulcerative colitis – diseases that call for specialty drugs. Yeung and colleagues found that the patients in the 95th percentile of spending saved an average of $351 a month each. But patients with lower spending needs (even in the 75th percentile) were largely unaffected. The researchers wrote:
Our results suggest that the [monthly cap] policies may be well aligned with health economic principles for insurance coverage. Insurance functions best when it provides coverage for treatments that are high-cost, that are for rare conditions, and that patients value…. Aside from being used to treat relatively rare conditions, specialty drugs may be good candidates for generous coverage because they tend to be clinically important medicines.
Society should want to encourage the development of such medicines – not deter innovation, which would be the consequence of the “most-favored nation” proposal that we discussed in the last newsletter. That reference-pricing measure was aimed directly at specialty drugs.
Importantly, the researchers conclude, “Since a primary function of insurance is to spread the financial risk of catastrophically high spending for a small population, we interpret the caps as strengthening this risk-spreading function without detectably increasing spending for the broader population.” In other words, premiums would be unlikely to rise.
Not only is it economically baffling to place such a heavy burden on the sickest Americans, it appears highly unfair. A study published by the Centers for Disease Control and Prevention (CDC) last year looked at spending among cancer survivors aged 18 to 64. The CDC report stated:
Financial hardship was common; 25.3% of cancer survivors reported material hardship (e.g., problems paying medical bills), and 34.3% reported psychological hardship (e.g., worry about medical bills). These findings add to accumulating evidence documenting the financial difficulties of many cancer survivors.
Insurance companies and PBMs, however, oppose redesigning their policies to limit monthly OOP costs (the PBMs argue that caps will encourage physicians and patients to choose more expensive branded drugs over generics), and not just state but Congressional legislators are stepping in. Sens. Elizabeth Warren (D-Mass) and Ron Wyden (D-Ore) in 2018 introduced the Capping Prescription Costs Act, which set a limit of $250 per month in OOP costs for individuals and $500 for families. The bill died in committee.
The Trump Administration could boost the chances for monthly caps by publicly supporting legislation in the states and in Congress.
3. A Ceiling for Part D
Incredibly enough, Medicare Part D -- the pharmaceutical benefit, mainly for seniors, that was introduced in 2006 -- does not provide any cap on annual OOP spending on prescription drugs. In addition to paying monthly premiums, beneficiaries pay some level of cost-sharing for each prescription (either a flat co-pay or a percentage of the cost of the drug, depending on the tier the drug is on) until they have spent several thousand dollars. Then they enter what is called the “catastrophic phase” of coverage, where they have to pay co-insurance of 5% on the price of their drugs. The official Medicare website says that after you hit this phase, the system “assures you only pay a small coinsurance amount or copayment for covered drugs for the rest of year.”
Small? Not really. For the people who have drug costs high enough to get into the catastrophic phase, their expenses are significant. A research piece last year by Juliette Cubanski, Tricia Neuman, and Anthony Damico of the Kaiser Family Foundation examined the effects of the lack of a Part D OOP cap on Medicare enrollees. Among their findings:
Under authorities associated with the CMMI, HHS Secretary Alex Azar can develop and implement reimbursement reforms to Medicare. When it comes to bringing relief at the pharmacy counter to seniors, there’s a simple one waiting for him: expand on an existing pilot model called the Part D Senior Savings Model (which helps patients with diabetes by capping costs for insulin at $35 per month) and broaden the focus to high-cost drugs and reduced cost-sharing in the catastrophic phase of the benefit.
Essentially, this would create a cap on the amounts that seniors have to pay out-of-pocket each year for high-cost specialty drugs by eliminating their 5% obligation in the catastrophic phase of Part D. Manufacturers who want to participate in the pilot would have to put more skin in the game by negotiating rebates with plans that cover the 5% cost sharing and the additional costs plans may expect.
Congress has been considering an OOP cap for Part D for many months now, but the legislation is stalled. In the meantime, the Administration can take action.
4. Easing the Route to Market for Biosimilars
In the past few years, pharmaceutical price increases have moderated significantly and, by some measurements, have actually declined. Express Scripts, a large PBM with a 23% market share, stated in its latest Trend Report that the average prescription filled by its members cost 0.9% less in 2019 than the year before. A big reason is that early in the Trump Administration, the FDA initiated regulatory changes that have led to more generic drug approvals – a record 1,171 last year. Competition from generics, which account for nine out of ten prescriptions, drives down the prices of branded drugs.
Generics are copies of small-molecule drugs, the vast majority of medicines. But some of the most dramatic innovations are coming from what are called biological products (or biologics), which are complex, large-molecule treatments “produced through biotechnology in a living system, such as a microorganism, plant cell, or animal cell,” according to the FDA. A biosimilar’s relationship to a biologic is nearly the same as the relationship of a generic is to a small-molecule drug. Or, as the FDA states, a biologic is “highly similar to and has no clinically meaningful differences from an existing FDA-approved” biological product.
Biological products are among the most costly medicines. For example, the biologic Humira, a monoclonal antibody which treats various types of arthritis, Crohn’s Disease, and other conditions, was the top-selling drug in the world last year, with $20 billion in sales. Other biologics among the 10 best-selling drugs are Herceptin and Avastin for cancer and Rituxan, which treats lymphoma, leukemia and rheumatoid arthritis.
Unfortunately, U.S. approvals of biosimilars have lagged. The FDA has approved only two so far in 2020 and 28 in all. Even then, biosimilars are delayed or prevented from reaching the market because of expensive battles to surmount patent thickets or because of pressure applied by incumbent branded drugs to PBMs. Several companies, for instance, engaged in settlements to delay until 2023 the launch of biosimilars with Humira as reference product – even though some of those biosimilars were approved by the FDA as early as 2016 and 2017.
By contrast, Europe has approved more than 60 biosimilars, and they face fewer barriers in getting to market. The U.K. alone is expecting to save about $400 million from Humira biosimilars by next year, and just one U.S. firm, Biogen, estimates that it saved patients in 20 European countries a total of more than $2 billion from its biosimilars in 2019.
An IQVIA study found that total net spending on all biologics rose from $84 billion to $126 billion between 2014 and 2018 while spending on biosimilars increased from $200 million to a mere $1.9 billion. There is no doubt that biosimilars can have an impact. For instance, the market share of the insulin biologic Lantus fell 30% in a little over two years after the introduction of a biosimilar. But biosimilars clearly are not fulfilling their promise.
In an early study, the CBO estimated that biosimilars would reduce prices by 40%. Research by the Pacific Research
Issue No. 63: With Fanfare, White House Issues Four Orders on Drug Prices, But What Would They Actually Mean?
President Trump on July 24 signed four executive orders intended to “deliver lower prescription drug prices to American patients.” Some of the orders resurrect ideas that have been discussed for years. Some could have beneficial effects on Americans’ out-of-pocket costs and on their health. Others are likely to be harmful or impossible to implement. STAT News called the orders “a last-ditch effort by the White House to cut drug costs before the November election.” And, according to Reuters, “experts say they are unlikely to take effect in the near term and in some cases lack specifics.”
Regulatory orders can take months, even years, to implement. For example, the White House first announced a rebate reform order two years ago, placed it in the Federal Register eight months later, then rescinded it five months after that and is now bringing it back.
Still, the newly announced orders are worth examining in detail. Even if they do not affect policies this year, some may be brought back in the future, perhaps by a Biden Administration. Democrats could find it easier to pass legislation similar to Speaker Nancy Pelosi’s H.R. 3, the Lower Drug Costs Now Act, by pointing to the Trump Administration’s own price-control proposals.
President Trump has already achieved a major (but rarely recognized) success in constraining drug prices by removing regulatory barriers that harmed competition. The Administration could continue on that path by adopting a variety of policies that would quickly reduce out-of-pocket expenses, especially for seniors. We will mention some at the end of this newsletter.
For now, let’s turn to the July 24 orders. The three most important concern requirements that: 1) prices for certain Medicare Part B drugs not exceed what any other wealthy country pays, 2) pharmacy benefit managers (PBMs) pass on to consumers the rebates that the PBMs demand from drug manufacturers, and 3) the Department of Health and Human Services (HHS) ease the way for states to import drugs from Canada, where they are generally cheaper. All three, in slightly different forms, have long histories. Let’s take them in turn:
Price Controls Based on What Other Countries Pay
This rule would require Medicare to cap what it pays for a drug at the lowest price paid by in countries that have roughly the same income levels as the United States. The rule would apply only to a limited number of the most expensive Part B medicines (administered in doctors’ offices and hospitals), but it would provide a model for broader price controls.
When he announced the order, however, President Trump said, “We’re going to hold that until August 24, hoping that the pharmaceutical companies will come up with something that will substantially reduce drug prices. The clock starts right now.” So far, such alternatives have not been made public. Indeed, as Politico headlined on July 28: “Drugmakers refuse to attend White House meeting after Trump issues executive orders on costs.”
The change closely tracks a previous proposed rule that was placed in the Federal Register on Oct. 30, 2018. In that case, the price of an affected Part B drug would be capped based on a formula derived from an average of prices charged by a group of foreign countries, called an International Pricing Index (IPI).
In a speech five days earlier, President Trump criticized pharmaceutical companies for having “rigged the system” by charging higher prices in the U.S. than abroad. In fact, those companies would be thrilled to be able to charge as much in Paris as in New York. The system-riggers are not drug firms but foreign countries, nearly all of which operate nationalized health care systems, where prices are set -- and access to medicines determined -- by government agencies.
The IPI was widely mocked for including such countries as Greece in a basket of foreign prices from which the Centers for Medicare and Medicaid would derive a mandatory U.S price ceiling. Left out of the basket were Switzerland, which ranks second to the U.S. in per-capita drug spending, as well as seven of the nine countries with the highest per-capita global GDP.
The new proposal is even harsher. Rather than 126% of the mean price of the basket, the U.S. price would be reduced to the lowest price among other wealthy countries. This new reference, or index, price would be termed the “most-favored nation” (MFN) price.
The Costs of International Reference Pricing
The original 2018 proposal was eventually dropped, perhaps because of research showing that price controls of this nature would have a devastating effect on pharmaceutical innovation. It is still unclear which drugs would be affected, but Part B payments for some critical drugs are substantial. For example, reimbursements for Regneron’s Eylea, for example, which treats macular degeneration, a disease that leads to blindness, totaled $2.5 billion in 2017, without subtracting rebates. An MFN rule could cut revenues by 30%.
Regeneron is currently spending large sums to develop a “double antibody cocktail for the treatment and prevention of COVID-19.” The drug entered late-stage clinical trials on July 6. Would potentially life-saving medicines like these even be developed if an MFN rule slashes future revenues?
As we wrote in our Newsletter No. 47:
Drug companies would like nothing better than to insert some equity into what American and patients in other countries are paying for drugs, but they can’t without the help of their own government. Most foreign nations run monopsony drug purchasing operations; in other words, government agencies are the only purchaser of pharmaceuticals. The result, as the President said, is that “American consumers…subsidize lower prices in foreign countries through higher prices in our country.”
The gap is real, but to adopt an IPI or MFN scheme is to import a critical component of foreign nationalized health care systems. While that component is limited, it is a classic foot in the door, and according to new research, it will have immediate and detrimental consequences.
When the IPI was first proposed by the White House, one reaction was to urge the President to exert pressure on the Europeans, Canadians, and others, mainly through trade agreements, to end their own price controls and stop their free-riding. Instead, the White House has returned to what’s called “reference pricing” – letting others determine what Americans pay.
In its press release on the orders, the Department of Health and Human Services (HHS) listed rebates first – and with strong language. The order, said HHS, would…
End a shadowy system of kickbacks by middlemen that lurks behind the high out-of-pocket costs many Americans face at the pharmacy counter. Under this action, American seniors will directly receive these kickbacks as discounts in Medicare Part D. In 2018, these Part D discounts totaled more than $30 billion, representing an average discount of 26 to 30 percent.
Like international indexing, rebate reform has a bumpy history. On May 11, 2018, President Trump declared that it 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.”
After a long delay, HHS on Feb. 6, 2019, placed a highly detailed proposal for a rebate-reform rule in the Federal Register. In a speech on June 13, HHS Secretary Alex Azar took dead aim at a rebate system that, he said, “pushes prices perpetually higher.” PBMs require rebates of drug manufacturers to secure a favored place in their formularies. Favored drugs are placed in lower tiers, with lower cost-sharing required, so patients and physicians have an incentive to choose them. The proposed rule, said Azar, would replace “this rebate system with upfront discounts for seniors at the pharmacy counter.”
Rebates are notoriously opaque, but it is clear that they have grown rapidly. A 2018 study by the research firm Altarum placed the total in 2016 at $89 billion, more than doubling in four years. Nearly the entire amount goes to insurers. By turning rebates, which are particularly high for Medicare Part D, into discounts for patients, not only would medicines be less expensive but the price on which co-insurance payments are calculated would be reduced.
The HHS proposal in 2019 would have ended the safe harbor from liability afforded rebates to PBMs under the federal Anti-Kickback statute, which is part of the Social Security Act. Instead, it would protect “point-of-sale reductions in price on prescription pharmaceutical products.”
But less than a month after Azar’s June 2019 speech, 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.” Now, a year has passed, and rebate reform is back.
Why did the White House balk? One objection raised by presidential aides was that insurers, forced to pass rebates on to consumers, would make up the lost revenue by raising premiums. In addition, a Congressional Budget Office study estimated that spending for Medicare and Medicaid would rise by a total of $177 billion between 2020 and 2029 as a result of losing rebates. That figure may sound high, but it is only 1% of total Medicare and Medicaid spending projected over the period.
Lower Out-of-Pocket Costs Improve Health
Even those estimates were questioned at the time by critics who argued that lower out-of-pocket costs would encourage patients to fill prescriptions they were neglecting because of the expense. Higher adherence would improve health, which in turn would lower overall care costs for federal programs.
A Milliman study in January 2019 for the Assistant Secretary of HHS for Planning and Evaluation looked at six scenarios, including 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.
Then, there is the matter of premiums. “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 , 2019, to decision to pull the plug.
In fact, premium increases would almost certainly be a small percentage of a small number. For 2020, the Part D base beneficiary monthly premium is $32.74, a decline from the previous year. A study by the California Department of Managed Healthcare estimates the average increase as a result of rebate reform at 0.4%. A separate study found that the majority of Medicare Part D beneficiaries 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.” This tiny rise in Part D premiums would be overwhelmed by the out-of-pocket savings for seniors at the drug counter.
Besides modeling data, we also have real-world evidence of the extent to which patients may benefit. Last year, Optum, a PBM and part of the United Health Group, released data regarding its own program that follows the outline of rebate reform. Optum concluded that, when negotiated prescription plan discounts are passed on at the point of sale patients saved an average of $130 per eligible prescription. In addition, prescription drug adherence improved by 4% to 16%. In other words, patients paid less out of pocket and were more compliant with the medications that they were prescribed.
The new executive order, however, contains what sounds like a poison pill: premiums can’t rise. That appears to be an effort to kill rebate reform, which would have the most beneficial effect of any of proposed changes. Still, it can be saved if the proposal is improved as the precise terms are written.
The third major proposed change affects the importation of drugs from other countries – another contentious issue that is revived every few years. According to a July 24 HHS press release, the executive order actually takes three separate steps. It would “create a pathway for safe personal importation through the use of individual waivers to purchase drugs at lower cost from pre-authorized U.S. pharmacies” and “authorize the re-importation of insulin products made in the United States” if the HHS Secretary finds that it’s necessary for “emergency medical care.” The third step is the most important. It instructs the Secretary to “finalize a rule allowing states to develop safe importation plans for certain prescription drugs.”
Under a provision in a 2003 law, HHS has the power to approve state programs to import medications from Canada. But to gain that approval, the HHS Secretary has to certify the practice would pose “no additional risk” to the public’s safety and “result in a significant reduction” in cost for the “American consumer.” As a Wall Street Journal editorial on April 16, 2019, commented, “These are high bars,” and “No secretary has ever made such a judgment, and it’s hard to see why Florida deserves such a special federal blessing.” The editorial referred to Florida because the state passed legislation permitting importation.
Eight months later, the Food & Drug Administration, an HHS agency, issued a draft rule that “would allow states, wholesalers and pharmacies to import certain medicines from Canada.” But again, while there was fanfare, there has been action. Now, the President is ordering HHS to set a final rule.
The FDA has a long record of opposition to importation, in both Democratic and Republican administrations. Scott Gottlieb, Trump’s first FDA Commissioner, was a staunch foe. Three years ago, just before Gottlieb took office, his four predecessors – two appointed by President Obama and two by President George W. Bush – came out against legalizing drug importation, writing that it would ‘‘harm patients and consumers and compromise the carefully constructed system that guards the safety of our nation’s medical products.’’
Policing drug imports – even from Canada and even of medicines made in the United States initially – would be a nightmare for the FDA, which is responsible for the 3.8 billion prescriptions filled domestically.
The FDA explains on its website:
We appreciate that there is a significant cost differential between drugs available here and those in other countries/areas. However, many drugs sold in foreign countries/areas as "foreign versions" of approved prescription drugs sold in the United States are often of unknown quality with inadequate directions for use and may pose a risk to the patient's health….FDA cannot assure the consumer that the drug purchased in the foreign country/area would be the same product his or her physician's prescription is written for.
Former FBI Director Louis Freeh led a team on an extensive study in 2017 of the effects of importation on security. He concluded that importation “would increase the threat of illegitimate products entering the United States, fueling criminal organizations’ activities and profits “and that “already overburdened law enforcement and regulatory capacity would be unable to ensure a safe prescription drug supply.”
The Dangers of Counterfeit Drugs
But aren’t Canadian drugs safe? An FDA official testified in 2007, “Of the drugs being promoted as ‘Canadian,’ 85 percent appeared to come from 27 countries around the globe.” Gottlieb said last year, “When a consumer goes online to buy medicines purportedly from Canada, they may get a medicine sourced from elsewhere that could be counterfeit, expired or misbranded.”
Counterfeiting is an enormous problem globally. As Reuters reported in 2018 on a law-enforcement operation that led to 859 arrests:
Coordinated police raids in 116 countries have netted 500 tons of illicit pharmaceuticals available online, including fake cancer medications, counterfeit pain pills and illegal medical syringes, the Interpol police organization said.
Importation would be a bonanza for criminals. The Freeh report noted, “Counterfeiters certainly understand that the U.S. market is highly profitable and will readily exploit any deregulation of currently strict drug importation laws as a means to get their illegitimate products into the U.S.”
Another issue is that even if safety is assured, drugs imported from Canada won’t come close to meeting U.S. demand. Canada’s population of 39 million is less than one-eighth that of the United States. It is unlikely that drug manufacturers will send extra supplies of medicines to Canada, only to have them re-imported into the U.S. at lower cost.
As Azar, until recently a foe of importation, said in 2018:
[Canada is] a lovely neighbor to the north, but they’re a small one. Canada simply doesn’t have enough drugs to sell them to us for less money, and drug companies won’t sell Canada or Europe more just to have them imported here.
In fact, Canada itself would be likely to outlaw a flow of pharmaceuticals to the United States. But suppose it did not and suppose U.S. manufacturers did send extra drugs to Canada. In that case, we can expect that middlemen, including distributors and PBMs, would certainly take a cut. Simple economic theory would lead to the conclusion that the price of imported drugs would rise to meet the price of U.S. drugs.
In 2004, during a congressional session when a drug-import bill passed the House but died in the Senate, the Congressional Budget Office (CBO) issued what is probably the most definitive report on the prospective effects of importation.
The CBO concluded that “permitting the importation of foreign-distributed drugs would produce at most a modest reduction in prescription drug spending.” Even if imports were allowed from “a broad set of industrialized countries,” the reduction would be about “$40 billion over 10 years, or about 1 percent. Permitting importation only from Canada would produce a negligible reduction in drug spending.”
Azar may have had it right when, two years ago, he called re-importation “just a gimmick.”
Insulin and Epi-Pens
The final executive order is narrowly drawn. It would require federally qualified health centers (FQHCs) that “purchase insulins and epinephrine in the 340B program to pass the savings from discounted drug prices directly on to medically underserved patients.”
FQHCs are hospitals, clinics and other health care providers that provide primary care services in underserved areas. The 340B program, which has generated much of its own controversy because of how much it has expanded and how lightly it is enforced, requires drug manufacturers to provide outpatient medicines at significantly reduced prices. Responding to complaints that patients are not getting the benefits of price reductions and that the cost of insulin and injectable epinephrine has risen so much, the President wants Americans with little or no health insurance to get discounts for treatment of diabetes and severe allergies. Diabetes afflicts 34 million Americans, including 27% of those 65 years or older.
The US Can Do More to Constrain Prices
President Trump promised at the start of his Administration to reduce what Americans pay for drugs. He has, in fact, achieved – or is well on the way to achieving – that goal through American solutions. The most effective method has been to boost generic competition through regulatory changes. That market-based approach is far different from the direct intervention to set prices that the executive order on MFN requires.
The FDA approved a record 1,171 generics last year, including 107 first-time generics. Caremark, the largest pharmaceutical benefit manager (PBM) with 30% of the U.S. market, reported that the average prescription filled by its members cost 0.1% less in 2019 than in 2018. Express Scripts, with 23% of the market, reported an average price increase of just 0.9% last year. Out-of-pocket (OOP) drug costs for Caremark members declined $1.50 per month over the year, and two-thirds of members had annual OOP expenses of less than $100 in 2019. Another PBM, Prime Therapeutics, reported that prices for members of its Medicare plan declined by 0.4%.
The Trump Administration’s accomplishment, however, has been little understood by the public, in part because of a stream of media reports that focus on list prices, which are meaningless figures that ignore discounts and rebates. Typical is this Consumer Reports headline from last November: “The Shocking Rise of Prescription Drug Prices.” In fact, the Bureau of Labor Statistics reports that drug prices in 2019 rose less than prices of food, shelter, and medical care as whole.
It is ironic that a Republican White House that has already done more to constrain drug prices than another other administration would be proposing price controls and drug importation as solutions – multiple times.
There Are Alternative Routes to Reductions
Instead, the President could follow the path that has been so effective with generics by insisting on regulatory changes that would increase the use of biosimilars, which are, as the FDA puts it, “highly similar to and has no clinically meaningful differences from an existing FDA-approved” biological product, that is, a complex, large molecule “produced through biotechnology in a living system, such as a microorganism, plant cell, or animal cell.”
Biological products are among the most costly medicines, and biosimilars would provide competition that could reduce prices in a breathtaking way – as generics have done for small-molecule drugs. Only a handful of biosimilars have entered the market in the U.S., in glaring contrast to Europe, where they are already driving down prices. The Administration could make a major effort to ease not just FDA approval but market access to biosimilars.
In addition, the White House could immediately change rules that prohibit the use of co-pay assistance for Medicare. Co-pay cards and coupons, issued by pharmaceutical companies, have saved members of commercial health insurance plans billions of dollars, but such assistance is prohibited for Medicare. Why, especially now during the COVID crisis, should seniors be forced to pay large sums out of their own pockets when manufacturers are willing to defray the cost?
Finally, Medicare Part D could be revised, to place a cap on catastrophic expenditures by seniors. Incredibly, while such caps exist for commercial plans, they are absent for Part D. The Administration currently has the authority to provide this protection to the 22 million enrollees in Medicare Advantage plans, though legislation would be required to apply it throughout Part D.
Media reports on the new executive orders have stressed the upcoming election and the previous false starts, with the implication that the President is acting cynically and politically. Perhaps. While rebate reform is a simple change, long overdue, other proposals will certainly make it easier for politicians of both parties to enact changes that will bring the U.S. closer to a European-style nationalized health care system. Those changes could ultimately harm Americans’ health by making future pharmaceutical breakthroughs far less likely. Worse, they appear unnecessary at a time when alternatives to lowering out-of-pocket costs abound.
With COVID 19, Americans have learned just how dangerous the spread of pathogens can be. There is another health threat that needs addressing before it’s too late: antimicrobial resistance, or AMR. Over the years, bacteria, fungi and other microorganisms mutate and find ways to survive against medicines meant to attack them. “Unfortunately, resistance has been seen to nearly all antibiotics that have been developed,” writes C. Lee Ventola in a paper titled, “The Antibiotic Resistance Crisis,” in the journal Pharmacy and Therapeutics. “As a result, says the World Health Organization, “the medicines become ineffective and infections persist in the body, increasing the spread to others.”
Concludes a World Bank study: “If this trend continues unchecked, the world will confront a reality where many infectious diseases have ‘no cure and no vaccine.’”
Microorganisms that develop effective resistance are nicknamed “superbugs,” and they can be fatal. According to a report last year by the Centers for Disease Control (CDC), “More than 2.8 million antibiotic-resistant infections occur in the United States each year, and more than 35,000 people die as a result.” Deaths worldwide are estimated at 700,000, and if current trends continue, AMR will be the leading global cause of death by 2050, killing 10 million and reducing the world’s GDP by 2.2%, according to the Review on Antimicrobial Resistance, also called the O’Neill report.
The World Bank study, published in 2017, found that under a “pessimistic high-AMR scenario, global economic output would be 3.2 percent lower in 2030 and then fall further, so that in 2050, the world would lose 3.8 percent of its GDP, relative to the base case.”
Economic Costs of AMR May Be as Severe as During the Financial Crisis
Source: World Bank Group, “Drug-Resistant Infections: A Threat to Our Economic Future,” March 2017.
Currently, due to unique challenges facing new antibiotics that we will describe below, too few pharmaceutical researchers are working to develop new antibiotics to overcome AMR, but, with good policies, a dire situation can change, as we will see.
Antibiotic Resistant Bacteria and COVID 19
We expect that the COVID-19 crisis has exacerbated the AMR crisis. “It is of the utmost importance that the potential of the global pandemic to increase antimicrobial resistance (AMR) is taken seriously,” said an editorial in the journal Nature on May 20, adding….
A peek under the hood of studies reporting on patients hospitalized with coronavirus disease 2019 (COVID-19) reveals widespread use of antimicrobial therapies as part of the package of clinical care in some countries. For example, in a retrospective cohort analysis of 191 patients from two hospitals in Wuhan, Zhou et al. write that 95% of patients were treated with antibiotics and 21% were treated with antivirals.
Antibiotics work against bacteria, and they are useless against a virus like SARS-CoV-2, the cause of COVID-19. But a virus can unleash secondary bacterial infections. A Bloomberg article on March 8 explained one way in which COVID-19 kills:
The lungs are vulnerable to an invasive secondary bacterial infection. Potential culprits include the germs normally harbored in the nose and throat, and the antibiotic-resistant bacteria that thrive in hospitals, especially in the moist environments of mechanical ventilators. Secondary bacterial infections represent an especially pernicious threat because they can kill the critical respiratory tract stem cells that enable tissue to rejuvenate….
During the 1918 pandemic of Spanish flu, which killed an estimated 50 million people worldwide, including 675,000 in the United States, "the majority of deaths...likely resulted directly from secondary bacterial pneumonia caused by common upper respiratory-tract bacteria,” according to a study in the Journal of Infectious Diseases co-authored by scientists Tony Fauci, David Morens, and Jeffrey Taubenberger, of the National Institute of Allergy and Infectious Diseases. At the time, of course, there were no antibiotics to combat the bacteria.
It is now becoming clear, however, that fears of bacterial infections resulting from COVID have been overblown. SARS-CoV-2, the virus the world is now facing, is not the Spanish flu. Certainly, some patients do acquire bacterial coinfections (often from the hospital environment itself), and for them, antibiotic treatment is appropriate, says the Nature editorial.
“But these patients may be in a minority,” the editorial continued. “Writing in Clinical Microbiology and Infection, a group of European clinicians admit that it can be difficult to differentiate COVID-19 from bacterial pneumonia, which means that some patients without bacterial infections are receiving unnecessary antibiotics.”
A New York Times article by Andrew Jacobs on June 4 carried the headline, “Doctors Heavily Overprescribed Antibiotics Early in the Pandemic.” It quoted the director of epidemiology and antibiotic stewardship at the Detroit Medical Center as saying, “During the peak surge, our antibiotic use was off the charts.” Antibiotics were being administered to 80% of arriving patients. It became clear that this was a mistake, Dr. Chopra said.
“Nearly all severe COVID-19 patients” in the U.K. were being “treated with antibiotics, which may have limited efficacy,” wrote Jose Bengoechea and Connor Bamford of the Wellcome-Wolfson Institute for Experimental Medicine in the journal EMBO Molecular Medicine. They added….
Unfortunately, as the pandemic continues, we anticipate a significant increase in AMR through the heavy use of antibiotics in COVID‐19 patients. Even in a normal scenario, ICUs are epicentres for AMR development. This may have devastating consequences in those hospital settings with already a high prevalence of multidrug‐resistant strains. It is evident that as SARS‐CoV‐2 is transmitting in hospitals, also multidrug‐resistant bacteria are, leading to an increase in the mortality due to the limited arsenal of antibiotics to treat hospital‐acquired infections.
As Tedros Adhanom, the director general of the World Health Organization, noted, “COVID-19 has led to an increased use of antibiotics, which ultimately will lead to higher bacterial resistance rates that will impact the burden of disease and deaths during the pandemic and beyond.”
Unless we seriously tackle the AMR threat, we could arrive soon at time when antibiotics – miracle drugs that have saved hundreds of millions of lives -- won’t work.
The Vanishing Promise of Antibiotics
Last year’s CDC report, “Antibiotic Resistance Threats in the United States,” begins with the story of a woman named Anne Miller of New Haven in 1942. She was very ill:
Infectious germs had made their way into her bloodstream. Desperate to save her, doctors administered an experimental drug: penicillin, which Alexander Fleming discovered 14 years earlier. In just hours, she recovered, becoming the first person in the world to be saved by an antibiotic. Rather than dying in her thirties, Ms. Miller lived to be 90 years old. Today, decades later, germs like the one that infected Mrs. Miller are becoming resistant to antibiotics.
An antibiotic is a drug to treat bacterial infections, which range from salmonella to syphilis to impetigo to meningitis to pneumonia. Penicillin, developed from a mold, and other early antibiotics were substances produced by one microorganism that inhibits the growth of another. Later, synthetic antibiotics were developed that had the same effects. Antibiotics, most of which are inexpensive generic drugs, save millions of lives around the world each year.
The problem is that germs fight back by altering their composition through mutations, blocking the entry of drugs or developing pumps to get rid of them, and can achieve the “ability to defeat the antibiotics designed to kill them,” says the CDC. Antibiotic resistance “does not mean your body is resistant to antibiotics” but that bacteria and fungus are.
AMR moves fast. Just a decade after penicillin became widespread, “more than half of common Staphylococcus bacteria in big hospitals were resistant to it,” according to an article in The Economist last year. “In response, drug firms churned out new antibiotics at a steady pace to replace ineffective ones. But as the 20th century drew to a close this arms race in antibiotics became harder because of their rampant use worldwide – on humans, livestock and crops.” The more an antibiotic is used, the faster bacteria develop mutations that confer resistance to it.
In its report late last year, the CDC identified five resistant bacteria as “urgent threats,” 11 as “serious threats,” and five more as “concerning” or earning a place on a “watch list.” Among the urgent threats are drug-resistant Candida auris, which causes severe blood-borne infections around the world, and Neisseria gonorrhoeae, which causes 1.1 million sexually transmitted infections a year, half of them drug-resistant. Such popular antibiotics as penicillin, tetracycline and ciprofloxacin are no longer recommended for gonorrhea, which can cause permanent health problems in both men and women.
The CDC calls another of those in the “urgent category,” drug-resistant Acinetobacter, which turned out to be one of the bacteria found in COVID 19 patients, “a challenging threat to hospitalized patients because it frequently contaminates healthcare facility surfaces and shared medical equipment.” The CDC first flagged Acinetobacter in 2013, and cases dropped from 10,300 that year to 8,500 in 2017, mainly because of better hospital practices. Some types of bacteria are resistant to carbapenem, which is usually a highly effective antibiotic class. Unfortunately, “treatment options for infections caused by carbapenem-resistant Acinetobacter baumannii are extremely limited. There are few new drugs in development.”
Where Are the New Drugs?
“Antimicrobial resistance continues to erode our therapeutic armamentarium,” said an editorial last year in the New England Journal of Medicine. So where are the reinforcements? Where are the new antibiotics to replace those that have become ineffective?
The Economist points out that in 1980, there were “25 large pharma companies working on new antibiotics; by 2020, there were just three.”
A paper accepted June 25 by the journal Clinical infectious Diseases by Nidhi Dheman and colleagues notes that the number of investigational new drug (IND) applications to fight bacteria dropped to an 11-year low in 2019, “and the number of antibacterial INDs initiated with the FDA from 2010-2019 was lower than any of the previous three decades.” The paper also points out that while antibacterial drug development programs in the 1980s and 1990s “had high success rates, with over 40% of INDs obtaining marketing approval, in a median time of about six years,” later programs had a success rate of just 23% with development time averaging 8.2 years.
The Pew Charitable Trusts in April found that 41 new antibiotics are currently in clinical development, many of them addressing resistant bacteria. But 41 antibiotics in Phase 1, 2, or 3 of clinical trials is a tiny number in the world of pharmaceutical R&D. Compare it to more than 300 drugs in development for skin diseases and 1,100 for cancer, according to PhRMA.
Why, in the midst of an AMR crisis, are here so few potential new medicines for antibiotics?
On March 18, STAT published an article by Isaac Stoner, a biomedical entrepreneur who in 2018 founded Octagon Therapeutics, focused on producing more effective antibiotics. “It turned out to be a disaster,” Stoner wrote. He and his colleagues had found a powerful new compound they wanted to bring to market. But “investor after investor turned us down. Antibiotics, they said, were practically guaranteed money losers. Sadly, it turns out they are right.” So his company dropped the antibiotic.
Another firm that found trouble was Achaogen, a startup biotech, which in June 2018 gained FDA approval for Zemdri, a treatment for urinary tract infections resistant to multiple antibiotics. Sales were minuscule – less than $1 million the first year. By April, as Wired recounted the story, Achaogen was bankrupt, with $120 million in debt. “Even a company that succeeds in bringing an innovative new antibiotic to market can’t necessarily survive,” said Allen Coukell of Pew, quoted in CIDRAP News.
“I’m worried the remaining small biotech companies won’t be here this time next,” said Greg Frank, director of Working to Fight AMR, an advocacy group. “The longer we wait,” said Frank, quoted by the New York Times, “the deeper in the hole we’re in and the more expensive it’s going to be to solve the problem.”
The economics killing innovation to battle AMR is not intuitive. Consider the usual model of drug development. If there are no drugs that effectively treat a disease, manufacturers have an incentive to develop a new medicine that can. The cost of bringing a single new, approved medicine to market is high – an average of nearly $3 billion – with very few therapies actually successfully making it through the R&D process and receiving FDA approval, but the investment can be justified by the potential prospect of future revenues, especially if a large number of patients needs the drug.
Pricing Divorced From Value
But the market for antibiotics is different. In his first-person story, Stoner explained:
Last-resort antibiotics, the ones that are effective against the most dangerous bacteria, are an option that doctors rarely turn to, prescribing them only in limited emergency scenarios. If such novel antibiotics are overused, bacteria will develop resistance to them. This caution is scientifically sound, but it creates a problem for companies developing new treatments: the number of patients receiving them will — hopefully — always be low.
Stoner also writes that “insurers are incredibly tight-fisted when reimbursing doctors and health systems for their use of antibiotics,” and Medicare pays hospitals the same to treat patients with infections “whether they use cheap generics or more effective — and more expensive — cutting-edge drugs.”
So pricing is divorced from value, and, Stoner concludes:
At current price points, and with responsible prescribing practices, companies developing new and effective antibiotics have no hope of recouping the massive development costs needed to bring them to market.
A 2016 study by Wayne Weingarden of the Pacific Research Institute pointed to two additional obstacles for new antibiotics. First, the drugs “are prescribed for a relatively short period of time – the prescription’s duration is measured in days or weeks, the time it takes to kill the infection, rather than in years as is the case with other potential innovations. The shorter prescription time…limits potential antibiotic sales and consequently potential revenues.” Also, he writes:
The development costs for new antibiotic and antiviral therapies will likely be higher because the clinical trials require a highly selective patient population (e.g. those patients who are afflicted with the resistant microorganisms). There are simply fewer of these patients available, therefore, this requirement makes the clinical trials more difficult to carry out.
Drugs to battle AMR, then, are victims of a kind of market failure. They are expensive to develop, but physicians use them sparingly and insurers deny them the kind of premium they deserve.
Patient groups, foundations, international organizations, and health care providers, and drug manufacturers have proposed solutions -- some behavioral and informational, some economic. The Davos Declaration, signed by more than 80 companies in 2016, called for, among other measures, stewardship strategies for “ensuring antibiotics are only used by patients who need them” and increased surveillance. A database called ATLAS (Antimicrobial Testing Leadership and Surveillance) was launched by Pfizer in 2017, providing physicians and public health workers with access to data on the efficacy of antibiotic treatments and emerging resistance patterns around the world. Pfizer, Wellcome, and the governments of Ghana, Kenya, Malawi and Uganda announced a partnership last month to provide increased surveillance for data-gathering.
The CDC is working to prevent the number of infections – and thus reduce the need for antibiotics in the first place – by encouraging vaccinations (the PCV13 vaccine, for example, protects against 13 forms of pneumococcus, including resistant ones) and safe-sex practices and by stopping the spread of germs in hospitals and non-hospital institutions, such as nursing homes.
“Greater focus on infection prevention and control, using antibiotics only when needed, as well as innovations in diagnostic testing, alternative treatments, and effective vaccines, will better prepare the United States for the resistance that will continue to emerge worldwide,” said the CDC report.
There’s evidence that those steps are working, but it is clear that something more is required: an economic fix. In a letter to Congress, Pew, the Infectious Diseases Society of America, the Trust for America’s Health and 23 other groups called for a “package of economic incentives to reinvigorate the stagnant pipeline of antibiotics.” The letter noted that of antibiotics in development today, only 11 have the potential to address the superbugs that the World Health Organization considers the most dangerous. That is just 11 of the total 7,000 drugs in development for all diseases.
The letter recognized that Congress previously had taken some steps to battle AMR, such as the Generating Antibiotics Incentives Now (GAIN) Act of 2012 “to extend the market exclusivity period for certain antimicrobials and, four years later, creating the Limited Population Antibacterial Drug regulatory approval pathway to facilitate the development of antibiotics and antifungals for patients who have few or no treatment options.”
But those steps, as well as increased funding for NIAID and BARDA to support antibiotic R&D, have not been enough. (Achaogen received help from BARA, the Biomedical Advanced Research and Development Authority, but the company still failed.)
Economic solutions need to address what Seth Seabury and Neeeraz Sood in the Health Affairs Blog call “pull incentives,” that is, “demand-based tools designed to make the market more attractive for a successfully developed product.” New antibiotics “are intended to have limited initial use,” so vast sales are unlikely. What are ideas that can create enough pull to inspire investment in antibiotics?
One popular idea is government payments to companies that successfully develop therapies targeted against the most threatening infections. A discussion guide for a January conference in Washington held by the Duke Margolis Center for Health Policy emphasized the particular value of “post-approval market entry rewards,” or MERs. Said the guide:
According to a thorough literature review and stakeholder analysis conducted by DRIVE-AB, an entry reward is the most commonly recommended potential pull incentive. Such a reward would likely take the form of multiple annual payments to a developer following the approval of a new antimicrobial…to ensure consistent revenue.
Awards, said the O’Neill Commission, “would ‘de-link’ the profitability of a drug from its volume of sales, supporting conservation goals by eliminating the commercial imperative for a drug company to sell new antibiotics in large quantities.”
Sen. Michael Bennet (D-Colo) is sponsoring the PASTEUR (Pioneering Antimicrobial Subscriptions to End Surging Resistance) Act, which sets up an expert committee on Critical Need Microbials to develop a list of microbes for which drugs are needed and to provide subscription contract awards, payable over up to three years, to developers of the drugs.
Another idea is awarding to an antimicrobial innovator a grant of an exclusivity extension that “could be applied to some other, existing drug on a one-time basis,” write Seabury and Sood. The extension would be tradeable, “so an innovator with no existing product could sell the extension to a manufacturer with a drug close to patent expiry.”
Developing Novel Reimbursement Models
Last year, Democratic Sen. Bob Casey of Pennsylvania and Republican Sen. Johnny Isakson of Georgia (who retired in December) introduced the Developing an Innovative Strategy for Antimicrobial Resistant Microorganisms (or DISARM) Act. DISARM would reimburse novel antibiotics targeted against resistance infections with additional payments to hospitals, helping to drive better access for patients that need these therapies. A separate bill was introduced by a bipartisan group in the House headed by Rep. Danny Davis (D-Ill).
The U.K.’s National Health Service last year launched a pilot program to encourage the use of new antibiotics, paying “pharmaceutical companies up front for access to effective antibiotics, rather than reimbursing them based on the quantity of antibiotics sold…. Under the new model, drug makers would still be reimbursed by the NHS even if the new drugs are kept in reserve.”
"Today we are sending a strong signal to the rest of the world that there are workable models to stimulate investment in these vital medicines and that together we can tackle" antimicrobial resistance, Health Minister Nicola Blackwood said.
The truth is that possible remedies to the AMR crisis abound. Matthew Renwick of the London School of Economics and two colleagues identified 47 different ones in a paper in the Journal of Infectious Diseases in 2016. What is undeniable is that action is required now to prevent million of deaths in the future. Waiting, as we have certainly learned with the current coronavirus pandemic, is not an option.
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.
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