Will Specialty Drug Pricing Be The Straw?

Published 5/27/15 in Employee Benefit News

ALP_H_BK_0010Over the next few years, drug manufacturers will release a host of new drugs that are more complex and, in many cases, more effective than we’ve had access to in the past. There will be better solutions for common problems, and new solutions for uncommon ones. Specialty drugs, many of them “precision therapies,” will offer tremendous promise for better health outcomes across the breadth of human health and treatment.

Not surprisingly, most of these drugs will have breathtaking price tags, often a high multiple of conventional drugs. Specialty drugs are an exploding growth industry, with spending rising almost 20 times as fast as conventional drugs. Unless something changes, in just another five years we’ll likely spend more on specialty than non-specialty drugs. Or, for that matter, on doctors.

The Hepatitis C drug, Sovaldi, made headlines last year when a course of treatment was pegged at $84,000. But with hundreds of specialty drugs in the pipeline, that was just an early example. Drug companies argue that these new products are harder to develop and manufacture, that they are more targeted than old-style drugs and worth the additional cost, and that they need to recover the costs of failed drug efforts. Some of this is indisputable.

But in most cases there is no evidence that drug pricing is connected to hard business costs or patient value. Prices often seem capricious, making it difficult for purchasers to understand the relationship between additional cost and new impact. For example, U.S. cost for a new cholesterol management drug, referred to at this point only as PCSK9, is expected to be $7,000-$12,000 per patient per year, compared with about $1,000 on average for conventional drug therapies. Is there a credible patient health benefit that justifies this level of cost increase?

The magnitude of the potential cumulative cost is staggering. Projections have estimated that the PCSK9 market alone could easily reach $100 billion/year, or about 1/33 of the U.S.’s current total health care expenditure. And, of course, like PCSK9, many of these are maintenance drugs, not cures, with annual costs that recur for life.

Then there is the dramatic difference – often 300% to 1,000% – between the pricing here and in other developed nations, where we can assume that drug sales also are profitable. Gilenya, a multiple sclerosis drug, can cost almost six times here what it does in Spain, according to the International Federation of Health Plans. There are many examples.

Despite widespread knowledge of health care excesses and premiums that have grown at a multiple of general inflation for more than a decade, business has doggedly continued to participate in health care coverage. It’s entirely reasonable, then, for drug companies to believe that organizational purchasers are too pre-occupied with other matters to mobilize around a problem like specialty drug costs. Nor do employers and unions want to take a hard line. After all, what benefits manager wants to tell an employee that the company won’t pay for a new medicine that could improve her child’s life?

Questions to ask

Purchasers might ask a couple questions. First, what additional measurable value does a new drug offer? This is hardly cynical. One recent study found that most cancer drugs approved by the Federal Drug Administration over the past decade do not increase length of life, and nearly all had dreadful side effects that wreak havoc on quality of life. Once FDA approval had been achieved, though, pricing averaged $10,000 per month, independent of the drugs’ performance.

Second, what is pricing tethered to? What cost components, exactly, are used to develop U.S. pricing, to make the drugs so much more expensive here than in other countries? Legislation requiring this kind of transparency is now pending in several states. Not surprisingly, drug companies oppose it.

The possibility of specialty drug pricing financially overwhelming business and union health plans is real. Purchasers will be alarmed to find that their drug costs are growing much faster than other, already exorbitant health care spending. CFOs and benefits managers will watch their specialty drug spending, and calculate. To their minds, excessive specialty drug costs could capsize their plans, making it untenable to maintain good health coverage without compromising some other important health plan benefit. Just as worrisome, these costs will substantially increase their already heavy health care burdens, eating into the bottom line.

Because most every business and union offering coverage will be affected, specialty drugs could become the issue that finally mobilizes organizational purchasers against the broader problem of health care profiteering. Businesses are coming together, collaborating with common purpose, trying to learn more, searching for ways to manage specialty drug costs, and finding themselves frustrated by their lack of meaningful options. That’s a prescription for a mobilized response.

In their zeal for even greater profits, specialty drug manufacturers could finally lay on the straw that breaks the tolerance of the nation’s health care purchasers for excessive health costs. If that happens, almost certainly, health care will finally change.

Brian Klepper is a health care analyst and commentator based in Atlantic Beach, Florida.


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