Drug Pricing and Value in Oncology.

This paper first reviews the evidence on price levels, price growth, and value for cancer drugs. The available evidence suggests that prices for originator (brand-name) drugs are rising significantly more rapidly than general inflation, but the available data are inadequate for robust comparisons between cancer and other categories of specialty drugs. We then examine the factors contributing to high and rising prices for cancer drugs. This analysis focuses mainly on the USA, which accounts for 46% of global expenditures on cancer drugs. It is the country of first launch for most cancer and other specialty drugs and frequently has the highest prices for drugs.

Affordability Challenges to Value-Based Pricing: Mass Diseases, Orphan Diseases, and Cures.

OBJECTIVES: To analyze how value-based pricing (VBP), which grounds the price paid for pharmaceuticals in their value, can manage "affordability" challenges, defined as drugs that meet cost-effectiveness thresholds but are "unaffordable" within the short-run budget. METHODS: Three specific contexts are examined, drawing on recent experience. First, an effective new treatment for a chronic, progressive disease, such as hepatitis C, creates a budget spike that is transitory because initial prevalence is high, relative to current incidence. Second, "cures" that potentially provide lifetime benefits may claim abnormally high VBP prices, with high immediate budget impact potentially/partially offset by deferred cost savings. Third, although orphan drugs in principle target rare diseases, in aggregate they pose affordability concerns because of the growing number of orphan indications and increasingly high prices. RESULTS: For mass diseases, the transitory budget impact of treating the accumulated patient stock can be managed by stratified rollout that delays treatment of stable patients and prioritizes patients at high risk of deterioration. Delay spreads the budget impact and permits potential savings from launch of competing treatments. For cures, installment payments contingent on outcomes could align payment flows and appropriately shift risk to producers. This approach, however, entails high administrative and incentive costs, especially if applied across multiple payers in the United States. For orphan drugs, the available evidence on research and development trends and returns argues against the need for a higher VBP threshold to incentivize research and development in orphan drugs, given existing statutory benefits under orphan drug legislation.

Objectives, Budgets, Thresholds, and Opportunity Costs-A Health Economics Approach: An ISPOR Special Task Force Report [4].

The fourth section of our Special Task Force report focuses on a health plan or payer's technology adoption or reimbursement decision, given the array of technologies, on the basis of their different values and costs. We discuss the role of budgets, thresholds, opportunity costs, and affordability in making decisions. First, we discuss the use of budgets and thresholds in private and public health plans, their interdependence, and connection to opportunity cost. Essentially, each payer should adopt a decision rule about what is good value for money given their budget; consistent use of a cost-per-quality-adjusted life-year threshold will ensure the maximum health gain for the budget. In the United States, different public and private insurance programs could use different thresholds, reflecting the differing generosity of their budgets and implying different levels of access to technologies. In addition, different insurance plans could consider different additional elements to the quality-adjusted life-year metric discussed elsewhere in our Special Task Force report. We then define affordability and discuss approaches to deal with it, including consideration of disinvestment and related adjustment costs, the impact of delaying new technologies, and comparative cost effectiveness of technologies. Over time, the availability of new technologies may increase the amount that populations want to spend on health care. We then discuss potential modifiers to thresholds, including uncertainty about the evidence used in the decision-making process. This article concludes by discussing the application of these concepts in the context of the pluralistic US health care system, as well as the "excess burden" of tax-financed public programs versus private programs.

Defining Elements of Value in Health Care-A Health Economics Approach: An ISPOR Special Task Force Report [3].

The third section of our Special Task Force report identifies and defines a series of elements that warrant consideration in value assessments of medical technologies. We aim to broaden the view of what constitutes value in health care and to spur new research on incorporating additional elements of value into cost-effectiveness analysis (CEA). Twelve potential elements of value are considered. Four of them-quality-adjusted life-years, net costs, productivity, and adherence-improving factors-are conventionally included or considered in value assessments. Eight others, which would be more novel in economic assessments, are defined and discussed: reduction in uncertainty, fear of contagion, insurance value, severity of disease, value of hope, real option value, equity, and scientific spillovers. Most of these are theoretically well understood and available for inclusion in value assessments. The two exceptions are equity and scientific spillover effects, which require more theoretical development and consensus. A number of regulatory authorities around the globe have shown interest in some of these novel elements. Augmenting CEA to consider these additional elements would result in a more comprehensive CEA in line with the "impact inventory" of the Second Panel on Cost-Effectiveness in Health and Medicine. Possible approaches for valuation and inclusion of these elements include integrating them as part of a net monetary benefit calculation, including elements as attributes in health state descriptions, or using them as criteria in a multicriteria decision analysis. Further research is needed on how best to measure and include them in decision making.

Approaches to Aggregation and Decision Making-A Health Economics Approach: An ISPOR Special Task Force Report [5].

The fifth section of our Special Task Force report identifies and discusses two aggregation issues: 1) aggregation of cost and benefit information across individuals to a population level for benefit plan decision making and 2) combining multiple elements of value into a single value metric for individuals. First, we argue that additional elements could be included in measures of value, but such elements have not generally been included in measures of quality-adjusted life-years. For example, we describe a recently developed extended cost-effectiveness analysis (ECEA) that provides a good example of how to use a broader concept of utility. ECEA adds two features-measures of financial risk protection and income distributional consequences. We then discuss a further option for expanding this approach-augmented CEA, which can introduce many value measures. Neither of these approaches, however, provide a comprehensive measure of value. To resolve this issue, we review a technique called multicriteria decision analysis that can provide a comprehensive measure of value. We then discuss budget-setting and prioritization using multicriteria decision analysis, issues not yet fully resolved. Next, we discuss deliberative processes, which represent another important approach for population- or plan-level decisions used by many health technology assessment bodies. These use quantitative information on CEA and other elements, but the group decisions are reached by a deliberative voting process. Finally, we briefly discuss the use of stated preference methods for developing "hedonic" value frameworks, and conclude with some recommendations in this area.

A Health Economics Approach to US Value Assessment Frameworks-Summary and Recommendations of the ISPOR Special Task Force Report [7].

This summary section first lists key points from each of the six sections of the report, followed by six key recommendations. The Special Task Force chose to take a health economics approach to the question of whether a health plan should cover and reimburse a specific technology, beginning with the view that the conventional cost-per-quality-adjusted life-year metric has both strengths as a starting point and recognized limitations. This report calls for the development of a more comprehensive economic evaluation that could include novel elements of value (e.g., insurance value and equity) as part of either an "augmented" cost-effectiveness analysis or a multicriteria decision analysis. Given an aggregation of elements to a measure of value, consistent use of a cost-effectiveness threshold can help ensure the maximization of health gain and well-being for a given budget. These decisions can benefit from the use of deliberative processes. The six recommendations are to: 1) be explicit about decision context and perspective in value assessment frameworks; 2) base health plan coverage and reimbursement decisions on an evaluation of the incremental costs and benefits of health care technologies as is provided by cost-effectiveness analysis; 3) develop value thresholds to serve as one important input to help guide coverage and reimbursement decisions; 4) manage budget constraints and affordability on the basis of cost-effectiveness principles; 5) test and consider using structured deliberative processes for health plan coverage and reimbursement decisions; and 6) explore and test novel elements of benefit to improve value measures that reflect the perspectives of both plan members and patients.

Pharmaceutical pricing in emerging markets: effects of income, competition, and procurement.

This paper analyzes determinants of ex-manufacturer prices for originator and generic drugs across countries. We focus on drugs to treat HIV/AIDS, TB, and malaria in middle and low-income countries (MLICs), with robustness checks to other therapeutic categories and the full income range of countries. We examine the effects of per capita income, income dispersion, competition from originator and generic substitutes, and whether the drugs are sold to retail pharmacies versus tendered procurement by non-government organizations. The cross-national income elasticity of prices is 0.27 across the full income range of countries but is 0.0-0.10 between MLICs, implying that drugs are least affordable relative to income in the lowest income countries. Within-country income inequality contributes to relatively high prices in MLICs. Although generics are priced roughly 30% lower than originators on average, the variance is large. Additional generic competitors only weakly affect prices, plausibly because generic quality uncertainty leads to competition on brand rather than price. Tendered procurement that imposes quality standards attracts multinational generic suppliers and significantly reduces prices of originator and generic drugs, compared with their respective prices to retail pharmacies.

Commercial importation of prescription drugs in the United States: short-run implications.

The option of legalizing the commercial importation of prescription drugs is of continued policy interest as a way to reduce U.S. drug spending. Using IMS data, we estimate potential savings from commercial drug importation under assumptions about percentage of drugs likely to attract imports; potential supply from foreign countries; and share of savings passed on to payers. Our base case estimate is that $1.7 billion per year, or 0.6 percent of total drug spending, would be saved by payers; sensitivity analyses range from 0.2 to 2.5 percent under plausible assumptions and up to 17.4 percent under unrealistic assumptions about unlimited foreign supply, costless trade, and zero profits for intermediaries. Estimated savings to payers are less than the average price differentials between the United States and foreign countries because proposed legislation exempts certain drugs from importation; foreign markets are small relative to the United States; regulatory and other constraints may limit the volume of exports; trade is costly; and intermediaries will retain some savings. Although savings to U.S. payers/consumers would likely be small and have minimal impact on total U.S. health care spending, costs to other countries could be significant, due to reduced access and possibly higher prices. In the long run, reduced investment in R&D could adversely affect consumers globally.

Drug pricing and value in oncology.

This paper examines the issue of prices, relative to value, for cancer drugs. The analysis focuses on the effects on manufacturer pricing incentives of insurance coverage, specifically, the effectiveness of patient cost sharing, incentives created by reimbursement rules for physician-dispensed drugs, and payer ability and incentives to negotiate discounts. For pharmacy-dispensed cancer drugs, both Medicare Part D prescription drug plans (PDPs) and private payers' pharmacy benefit managers are increasingly placing these drugs on specialty tiers that offer no leverage for negotiating discounts and imply often unaffordable cost sharing for patients who lack catastrophic coverage. Simulation analysis of financial risks faced by PDPs confirms their incentives to place costly drugs on specialty tiers if more preferred formulary placement would increase use, possibly because of adverse selection risk. Faced with largely price-insensitive consumers and payers, manufacturers would rationally charge high prices. This situation is exacerbated for physician-dispensed cancer drugs, where Medicare's average selling price plus 6% reimbursement rule favors high-priced drugs. Because U.S. payers do not require evidence on prices relative to value, U.S. data are unavailable to test whether prices are higher, relative to value, for cancer drugs than for other drugs. Evidence from the Canadian Common Drug Review on cost-utility values suggests that cancer drugs are relatively high priced, although conclusions are tentative because of very small samples and non-U.S. data. Making such outcomes-adjusted prices available in the U.S. would be helpful to physicians, payers, and patients and indirectly constrain pricing to align with value.

Differential Pricing of Pharmaceuticals: Theory, Evidence and Emerging Issues.

Differential pricing-manufacturers varying prices for on-patent pharmaceuticals across markets-can, in theory, lead to increased patient access and improved research and development (R&D) incentives compared with charging a uniform price across markets. Theoretical models of price discrimination and Ramsey pricing support differentials based inversely on price elasticities, which are plausibly related to average per capita income. However, these models do not address absolute price levels and dynamic efficiency. Value-based differential pricing theory incorporates insurance coverage and addresses static and dynamic efficiency. Limited empirical evidence indicates a weak positive relationship between prices and gross domestic product (GDP) per capita. External referencing and parallel trade undermine differential pricing. We discuss previously neglected factors that undermine differential pricing in practice. High price growth relative to GDP in the USA leads to widening differentials between the USA and other countries. Concerns over the effects of confidential rebating challenges acceptance of this approach to implementing price differentials. The growth of branded generics in low- and middle-income countries leads to complex markets with product and price differentiation.

Vaccine supply: a cross-national perspective.

In U.S. vaccine markets, competing producers with high fixed, sunk costs face relatively concentrated demand. This tends to lead to exit of all but one or very few producers per vaccine. Detailed evidence of exits and shortages in the flu vaccine market demonstrates the importance of high fixed costs, demand uncertainty, and dynamic quality competition. A comparison of vaccine suppliers in four industrialized countries compared with the United States shows that smaller foreign markets often have more and different vaccine suppliers. High, country-specific, fixed costs, combined with price and volume uncertainty, plausibly deters these potential suppliers from attempting to enter the U.S. market.

Productivity in pharmaceutical-biotechnology R&D: the role of experience and alliances.

Using data on over 900 firms for the period 1988-2000, we estimate the effect on phase-specific biotech and pharmaceutical R&D success rates of a firm's overall experience, its experience in the relevant therapeutic category, the diversification of its experience across categories, the industry's experience in the category, and alliances with large and small firms. We find that success probabilities vary substantially across therapeutic categories and are negatively correlated with mean sales by category, which is consistent with a model of dynamic, competitive entry. Returns to experience are statistically significant but economically small for the relatively straightforward phase 1 trials. We find evidence of large, positive and diminishing returns to a firm's overall experience (across all therapeutic categories) for the larger and more complex late-stage trials that focus on a drug's efficacy. There is some evidence that a drug is more likely to complete phase 3 if developed by firms whose experience is focused rather than broad (diseconomies of scope). There is evidence of positive knowledge spillovers across firms for phase 1. However, for phase 2 and phase 3 the estimated effects of industry-wide experience are negative, which may reflect either higher Food and Drug Administration (FDA) approval standards in crowded therapeutic categories or that firms in such categories must pursue more difficult targets. Products developed in an alliance tend to have a higher probability of success, at least for the more complex phase 2 and phase 3 trials, and particularly if the licensee is a large firm.

Alternative strategies for Medicare payment of outpatient prescription drugs--Part B and beyond.

Reimbursement options for pharmaceuticals reimbursed under Medicare Part B (physician-dispensed drugs) are changing and the new comprehensive Part D Medicare outpatient drug benefit brings further changes. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) replaces traditional policy, of reimbursing Part B drugs at 95% of average wholesale price (AWP, a list price), with a percentage markup over the manufacturer's average selling price; in 2005 an indirect competitive procurement option will be introduced. In our view, although AWP-based reimbursement has been fraught with problems in the past, these could be fixed by constraining growth in AWP and periodically adjusting the discount off AWP. With these revisions, an AWP-based rule would preserve incentives for competitive discounting and deliver savings to Medicare. By contrast, basing Medicare reimbursement on a manufacturer's average selling price undermines incentives for discounting and, like any cost-based reimbursement rule, may result in higher prices to both public and private purchasers. Indirect competitive procurement for drugs alone, using specialty pharmacies, pharmacy benefit managers, or prescription drug plans, is unlikely to constrain costs to acceptable levels unless contractors retain flexibility to use standard benefit management tools. Folding Part B and Part D into comprehensive contracting with health plans for full health services is likely to offer the most efficient approach to managing the drug benefit.

Closing the doughnut hole: no easy answers.

The price differentials reported by Gerard Anderson and colleagues are not fully representative and are probably biased upward. If Congress does seek to reduce drug prices, there are no simple, effective, and efficient strategies. The most likely is drug importation, which would be ineffective at lowering U.S. drug costs and would pose sizable safety risks, yet it would reduce research and development (R&D) costs and access for foreign consumers. Careful cost-effectiveness analysis would be more appropriate than trying to import other countries' price controls. Income-related subsidies are a better strategy for dealing with excessive cost sharing for low-income seniors.

Prices and availability of pharmaceuticals: evidence from nine countries.

This study compares average price levels for pharmaceuticals in eight countries--Canada, Chile, France, Germany, Italy, Japan, Mexico, and the United Kingdom--relative to the United States. Our most comprehensive indexes, adjusted for U.S. manufacturer discounts, show Japan's prices to be higher than U.S. prices, and other countries' prices ranging from 6 percent to 33 percent lower than U.S. prices. The decline of the Canadian dollar and rise of the U.K. pound contribute to the finding of lower Canadian prices and higher U.K. prices in 1999 than in 1992. Our findings suggest that U.S.-foreign price differentials are roughly in line with income and smaller for drugs than for other medical services.

Effects of regulation on drug launch and pricing in interdependent markets.

PURPOSE: This study examines the effect of price regulation and competition on launch timing and pricing of new drugs. METHODS: Our data cover launch experience in 15 countries from 1992 to 2003 for drugs in 12 major therapeutic classes. We estimate a two-equation model of launch hazard and launch price of new drugs. FINDINGS: We find that launch timing and prices of new drugs are related to a country's average prices of established products in a class. Thus to the extent that price regulation reduces price levels, such regulation directly contributes to launch delay in the regulating country. Regulation by external referencing, whereby high-price countries reference low-price countries, also has indirect or spillover effects, contributing to launch delay and higher launch prices in low-price referenced countries. IMPLICATIONS: Referencing policies adopted in high-price countries indirectly impose welfare loss on low-price countries. These findings have implications for US proposals to constrain pharmaceutical prices through external referencing and drug importation.

Setting cost-effectiveness thresholds as a means to achieve appropriate drug prices in rich and poor countries.

Finding better mechanisms to enable differential pricing that reflects different degrees of willingness to pay across countries with different income levels is an important challenge for drug manufacturers and policy makers. Drug prices must be high enough to meet manufacturers' needs--covering costs and ensuring adequate investment in research and development, as well as producing a profit--but low enough to allow consumers access to medicines that they need. Examining drug pricing, we found that in rich countries, insurance coverage can make consumers insensitive to price, which means that manufacturers' prices are largely unrestrained unless payers intervene. In middle- and low-income countries, where most consumers pay for drugs out of pocket, we found that the poorest countries face the highest prices, relative to their mean per capita income. We recommend that countries and payers set their own cost-effectiveness thresholds to reflect how much they are willing to pay for "health gain"--in other words, for a measured improvement in the health of a person or a population. Adopting this approach broadly should lead to appropriate price differences across and within countries, benefiting consumers and manufacturers alike.