Financing Breakthrough Medicine: Opportunities and Obstacles
(A version of this Health Alert was published by Forbes.)
Researchers at RAND Corporation have given a clear and precise description of a new financing mechanism for medical breakthroughs. The proposal would address a problem recognized about a year and a half ago, when healthcare payers launched high-profile complaints about the price of Sovaldi®, a miracle drug that effectively cures a strain of Hepatitis C.
In a nutshell, the problem is that Sovaldi® costs up to $84,000 per course, administered over a short period of 12 to 24 weeks. However, its benefits are lifelong: Hepatitis C patients live for decades with diseased livers. Transplantation is a $300,000 procedure followed by expensive drugs to prevent rejection of the new liver. However, payers with annual budgets do not have adequate incentives to pay in one year for savings that accrue over decades.
Sovaldi® was quickly followed by another Hepatitis C wonder drug, Harvoni®. More generally, the previous generation of blockbusters (now mostly generic) were targeted at chronic conditions like high blood cholesterol. Drugs designed to be taken regularly over many years demand a different pricing model than those designed to be taken only for a short period and lead to a clean cure.
As the RAND authors point out, gene therapy will require a commercialization model that values early intervention with lifelong benefits much more than current models do. The RAND authors were preceded by Scott Gottlieb (American Enterprise Institute) and Tanisha Carino (Avalere Health), as well as Tomas J. Philipson and Andrew C. von Eschenbach (Precision Health Economics), whose proposals I have previously discussed.
The RAND authors describe a borrowing facility (bond, mortgage or line of credit) the drug maker extends to the payer. They give the example of a developing country in need of an expensive vaccine. The credit facility works such that the country would not pay the entire cost of one year’s vaccinations in that year, but over a period of (e.g.) 10 years, plus interest.
They give the example of dengue fever in Brazil. A vaccine for dengue is likely to become available this year. However, one year of vaccinations would cost Brazil $210 billion, half its entire national health budget. Theoretically, this mechanism makes a lot of sense. Vaccinating Brazilians against dengue should lead to a significant increase in national income, making it easier for the country to pay off the debt over many years.
With respect to developed countries, the authors give examples in the Scottish, English, and Italian health systems where drug makers and public payers negotiated payments spread over periods after medicines are supplied. However, this is not really credit financing but paying for value. These payments are often defined as rebates paid to manufacturers if the drugs supplied meet or beat the outcomes observed in clinical trials.
So, although the mechanism can be described as a very straightforward credit financing, it is actually more like a hybrid equity financing, with drug makers bearing significantly more risk than the model describes.
These payment schemes are supposed to solve the problem that outcomes for real-world patients are frequently not as good as they are in research. Even with Sovaldi®, eight percent of patients did not complete the recommended course of treatment. Can drug makers really be held responsible for such outcomes?
The RAND authors conclude that if drug makers are to be held partially responsible for outcomes, they need to be much closer to patients, by sponsoring education and other engagement. Outside HIV/AIDS, where relationships between drug makers and public payers have improved significantly since the early 2000s, it is generally the case that payers, physicians and drug makers view each other as adversaries, not partners, in patient health.
Generally, drug makers’ communications with both patients and prescribing physicians are strictly limited by laws and regulations. This came to a head in the United States in 2011, when the Supreme Court decided Sorrell v. IMS Health, a case wherein organized medicine tried to stop commercial use of physicians’ prescribing data by drug makers.
Without significant liberalization of data about physicians’ prescribing patterns and patients’ adherence, it is difficult to see how drug makers would be willing to bear the significant financial risk of ensuring that patient outcomes in the real word replicate those in clinical trials.
Further, the long-term financing described by the RAND authors assumes that we can somehow get public and private payers to look beyond one-year budgets. Unfortunately, health systems in both developed and developing countries are governed by politicians with very short-term horizons.
Implied, but not specific, commercial carriers may not insure a patient more than the initial year. So, it is not that they have to defer expense recovery over years; someone else (the subsequent insurer) gets all the benefit.
This is less a problem in group coverage where there is more continuity of care, but a real problem in the ACA markets where, by design, customers are encouraged to change carriers frequently.
Thank you. However, the group market is more healthy people (i.e. those with jobs). So, the chronically ill who cannot hold a job are really hooped, to put it technically.
I don’t think the avoided cost argument as justification for the high price of Sovaldi and Harvoni has merit. There are roughly 3.2 million people in the U.S. infected with hepatitis C of which, by the way, 17% are currently in prison as I understand it. If we treated all of them with one of these drugs at $84K each, it would cost $268.8 billion. At the same time, there are approximately 6.600 liver transplants performed annually in the U.S. not all of which are on patients with hepatitis C. Even if they all had their infection cured and lived another 30 years on average, treatment spending would exceed 2.7 times the avoided cost for liver transplants including anti-rejection drugs. At the same time, the longer life expectancy would give these patients more time to develop other diseases and conditions including Alzheimer’s and dementia which required lengthy periods of expensive long term care. So, their average lifetime healthcare costs could easily exceed what they would have been if they were never treated or were treated with older less effective therapies.
Moreover, if these new drugs are such a great value, why is Gilead Sciences selling them for 25%-35% less in other first world countries including Canada, UK and Germany? They say they are pricing based on per capita GDP. The pricing strategy looks more like charging what GILD thinks the market will bear which is a maximum greed mentality, in my opinion. If insurers aren’t prepared to just refuse to pay for overpriced specialty drugs like Sovaldi and Harvoni, they should at least limit access to the sickest patients only which I think is what they are doing.
Well, you know I always trumpet Professor Patricia Danzon’s research on international drug pricing when I can, and this is a chance to do so.
Roughly speaking, “what the market will bear” is determined by GDP per capita, so there is no contradiction between the two.
There is no point attacking GILD for greed: It raised money for investors based on a business model. It is the investors, i.e. the folks who run your 401(k) and will fund your retirement whom you should attack for greed.
You raise the very thorny question of the value of a human life. Should we taxpayers value prisoners’ lives the same as a privately insured person expects his life to be valued?
Our ethics in the U.S. say “yes”: Prisoners should get the same access to medical care as the rest of us. At least, that is what is reflected in current law (as I understand it).
The argument in favor of a high price for Sovaldi and Harvoni is they offer a cure almost all the time after a twelve week course of treatment. The argument against it is the potential patient population is huge – 3.2 million people infected with hepatitis C in the U.S. and about 150 million worldwide while the manufacturing cost is extremely low at less than $2 per pill. The broader issue is just how profitable do these drug companies need to be to attract capital to finance research and development and to provide investors with an attractive and competitive risk-adjusted return vs. other investment alternatives. As someone who spent my career in the money management business as a securities analyst, I don’t need any lectures about investment returns, markets or private enterprise.
In the orphan drug space, drug prices can and sometimes do amount to several hundred thousand dollars per year and they must be taken indefinitely. What good are these drugs if nobody can afford them and we crowd out lots of other worthwhile priorities both public and private?
Many of the newer cancer drugs cost $100-$150K per course of treatment and only extend life by a few months at most and often with low quality at that. Where is the value here? I think insurers need to push back and refuse to cover some of these drugs that just aren’t worth their price based on cost per incremental QALY vs. older therapies already in the market. The insurers would probably need some help from CMS in such an effort in order to provide the necessary political cover. Personally, I would define a reasonable cost per QALY at about $150K which is close to 3X U.S. per capita GDP.
Thank you. The cancer drugs are a different issue if they only extend life by a few months, which is not the case for the Hep C drugs.
WRT to cost per QALY, how about insurance policies that explicitly stated how many $/QALY they would pay?
Spoken like a true utilitarian, Barry.
However, that obviously doesn’t really help an individual patient who may benefit from an expensive but effective drug such as Solvadi. Without new financing/insurance options, individual patients who desperately want to avail themselves of these newer treatments always will be at the mercy of private and governmental behemoths which work mainly at the near-term, “societal” level — which makes eminent sense for them.
But we need something else other than centrally-controlled rationing and the stock answer “sorry, but policies are what they are, and there are no other alternatives.”
“we need something else”
Amen to that. Ironically there is no shortage of theories, recommendations, and proposed solutions. And no shortage of determined opponents to each of them.
I think we’ve fallen down into a tragedy of the commons.
We can’t get up.
Worse, partisan politics Is destroying the cooperation necessary for people to agree on how to get up.
Thank you boomers for your wonderful foresight in handing this problem off to this present era.
I may be off base here, but let me offer the following numbers:
If Sovaldi has 3.2 million potential customers, and if the price of Sovaldi was set by decree at $10,000 a year,
then the makers of Sovaldi would receive $32 billion by the time every potential patient was treated.
Isn’t that enough incentive to make a new drug like this, even if it does require 10 years of research and testing and FDA hurdles?
Many other nations will set the price of a drug like Sovaldi in this way, and sleep soundly at night. We should too.
(note: I realize that this kind of formula does not necessarily work for the real specialty drugs that may only have 100,000 customers. I would vote for a federal research grant pool of some kind (see Dean Baker’s proposals.)
Would the price have been decreed before or after the drug was licensed? And what would prevent the decreed price from dropping a year later?