Lately it seems as if specialty drugs are everywhere. While it used to be that only a small number of patients were treated using these expensive drugs, manufacturers are increasingly developing specialty products to treat conditions that affect much larger populations over a longer period of time.
One example is PCSK9 inhibitors, a new type of cholesterol-lowering drug that cost more than $14,000 per year. Although this product is currently indicated for those with familial hypercholesterolemia and certain patients with heart disease, the patient population is expected to eventually expand to as many 15 million people. PCSK9 inhibitors are also used on a chronic basis, meaning patients and payers will feel the costs associated with these products-estimated to be as much as $150 billion annually-for years.
These high cost projections have understandably raised alarms. However, it's not the first time that a debate has erupted over a drug with an extraordinarily high price. In fact, it's one of several in the last year. Unfortunately, there is no indication that we can expect a market correction soon.
The time has come to stop viewing drug products with remarkably high prices as isolated incidents. Instead, we should acknowledge that we are moving into a troubling “new normal” of dramatic and persistent escalations in prescription drug prices and spending - and we should consider what we can do about it.
The Rise Of Specialty Drugs
One of the primary drivers of this “new normal” is specialty drugs. Because of their extremely high costs, specialty drugs account for a disproportionate share of overall drug spending and have a corresponding effect on spending growth. In fact, spending on specialty medicines was responsible for 73 percent of overall medicine spending growth over the past five years.
The prices of specialty drugs are also growing dramatically. For example, the Memorial Sloan Kettering Cancer Center reported that the median launch price of new cancer agents has doubled in the last decade, from $4,500 per month to more than $10,000 per month. Similarly, the launch prices of new multiple sclerosis drugs have increased from $8,000 to $12,000 per year in the 1990s to $50,000–$65,000 per year today.
Launch prices are just the beginning. Specialty drugs often experience substantial price growth every year they are on the market. For example, the AARP Public Policy Institute's latest Rx Price Watch report found that the retail prices of specialty drugs widely used by older Americans increased by almost 11 percent in 2013.
Such price increases raise the cost of therapy. The AARP report also found that the average annual cost of therapy for widely used specialty prescription drugs used on a chronic basis exceeds $53,000. This amount is higher than the median US household income and almost three and a half times higher than the average Social Security retirement benefit.
Lack of meaningful price competition for biologics
Another factor contributing to our “new normal” of high prescription drug prices and spending is the lack of meaningful competition for expensive biologic drugs. Congress gave the Food and Drug Administration (FDA) the authority to approve follow-on biologics, or biosimilars, as part of the Affordable Care Act. However, five years and only one biosimilar launch later, it is clear that price competition in the biosimilar market will not mirror what is seen in the traditional generic drug market any time soon. This discrepancy is due to a variety of factors.
One of the primary barriers to meaningful price competition for biologic drugs is how long they are able to remain on the market without any biosimilar competition. Every biologic drug benefits from at least 12 years of market exclusivity during which they are able to price their products based on “what the market will bear.” This monopoly period is much longer than the five-year market exclusivity period provided for most brand name drugs and-at least according to the Federal Trade Commission-completely unnecessary.
FDA has also been criticized for failing to issue biosimilar-related guidance. One outstanding issue is whether FDA will require a biosimilar manufacturer to complete expensive clinical testing for all of its reference product's indications or simply extrapolate based on data for one indication. FDA also has yet to finalize guidance related to biosimilars that meet the standard of “interchangeable,” which means that they produce the same clinical result as the reference product in any given patient. This designation is important because it will allow pharmacists to substitute biosimilars without intervention from a prescriber. Where the FDA ultimately comes down on these and other important issues will be critical to the development of price competition from biosimilar products.
Biosimilar competition is also being slowed at the state level. Even though FDA has yet to finalize much of its biosimilar-related guidance, state legislators are being encouraged to support legislation restricting biosimilar substitution. According to the National Conference of State Legislatures, at least 31 states have considered legislation that would establish standards for biosimilar substitution in the past two years. The bills' provisions vary from state to state, but typically require (1) patient consent for the substitution; (2) the pharmacist to notify the prescriber of the switch; and (3) the pharmacist and prescriber to maintain written records of the switch for several years. These requirements would likely be burdensome on patients and providers, leading FDA to raise concerns about their effects on access to biosimilars.
It remains unclear whether the US health care system is even ready for biosimilars. A QuanticaMD survey of nearly 300 primary care physicians and specialists found that, although they believe biosimilars will bring value to health care, they might be reluctant to prescribe them. Further, patient awareness of biosimilars remains low.
Both groups have also been exposed to messaging that raises safety concerns about biosimilars. Interestingly, many of these same concerns were raised about traditional generic drugs after the passage of the Hatch-Waxman Act in 1984. Decades later, these concerns have been proven without merit. Nevertheless, reluctance to use biosimilars will only reduce price competition.
The Research Pipeline Is Full Of Expensive Products
Another factor that will continue to drive a “new normal” of high prescription drug spending is drug manufacturers' increased focus on products that can command high prices. In 2010, specialty drug approvals exceeded traditional drug approvals for the first time and have continued to do so. In 2014, 27 of the 51 drugs approved by FDA were specialty drugs.
Orphan drugs-a subset of specialty drugs used to treat diseases that affect fewer than 200,000 people-seem to be particularly attractive to manufacturers. Such drugs typically come with high price tags due to their smaller patient populations, costing an average of $137,000 per year. Sixty-one orphan drugs were launched in the last five years, compared with 31 between 2005 and 2009. The population sizes for orphan drugs are also growing smaller, which will likely drive prices even higher. Of the 18 orphan drugs launched in 2014, half were for diseases afflicting fewer than 10,000 patients.
Manufacturers have also demonstrated a strong interest in developing targeted cancer therapies. Much like orphan drugs, targeted therapies treat relatively small patient populations and have correspondingly higher prices, sometimes reaching tens of thousands of dollars per month. Targeted therapies represented over half of the $43 billion spent on cancer medications in 2014. Spending on these products is also growing rapidly, increasing by almost $4 billion between 2013 and 2014.
Breakthrough drugs have also been receiving increased attention from drug manufacturers. Congress recently gave the FDA authority to establish the breakthrough therapy designation to speed development and review of certain drugs to treat serious or life-threatening conditions. In 2014, nine of the 51 therapies approved by the FDA were designated breakthrough therapies. The innovative products that receive this designation will likely command high prices, as evidenced by the breakthrough hepatitis C drug Sovaldi®, which entered the market with an $84,000 price tag. One study found that just 10 of these breakthrough drugs will cost Medicare, Medicaid, and the health insurance exchanges nearly $50 billion over a 10-year period.
The increased focus on expensive specialty medications shows no signs of slowing. Currently, 42 percent of drugs in the late stage of the FDA approval process are specialty drugs, with serious implications for health care spending. Researchers project that specialty drug spending will increase by 16 percent every year between 2015 and 2018 and will comprise more than 50 percent of total drug spending by 2018.
Getting Away From 'What the Market Will Bear'
Another factor pushing us towards a “new normal” of high prescription drug prices and spending is the appetite (or lack thereof) for change. For example, there is broad consensus that prescription drug prices should be linked to their value. However, there is much less agreement on how this idea should be implemented. For now, drug manufacturers are free to set prices based on “what the market will bear.”
There has been some progress. For example, the Institute for Clinical and Economic Review (ICER) developed a conceptual framework to guide value assessments for medical services, including prescription drugs. Using elements of this framework, ICER recently released a draft report that examined the value and effectiveness of PCSK9 inhibitors. This report concluded there was value in these therapies but also raised concerns about whether their effects will translate into lower rates of heart attack and stroke. Further, ICER concluded that a discount of 67 percent off the drugs' list price would better represent their overall benefit. ICER's assessment is still in draft form and it remains unclear whether the report will have any effect. Nevertheless, such work is a step in the right direction.
Other entities are developing alternative methods to evaluate prescription drugs. The American Society for Clinical Oncology has sought comment on its proposed value framework, which includes factors such as clinical benefit, costs, toxicity, and palliative relief. Similarly, the National Comprehensive Cancer Network is updating its Clinical Practice Guidelines in Oncology by incorporating drug cost as a measure of the overall value of a therapy.
Some insurers and pharmaceutical benefit managers are also exploring pay-for-performance deals. For example, Harvard Pilgrim recently announced it would provide exclusive formulary access to one of the PCSK9 inhibitors approved by FDA in exchange for a price discount as well as additional rebates if the drug is unable to achieve certain performance targets (e.g., the drug does not reduce cholesterol to specific target levels). While new to the US system, other countries have been entering into pay-for-performance agreements for several years.
Broader change will be elusive until the United States has access to prescription drug-related comparative effectiveness research (CER), a baseline requirement for assessing value. The federal government has historically funded a relatively small amount of CER, primarily through the National Institutes of Health and the Agency for Healthcare Research and Quality. In 2010, the Affordable Care Act established the Patient-Centered Outcomes Research Institute (PCORI) to improve the quality and relevance of CER. Nevertheless, the United States continues to lack a consistent and comprehensive source for prescription drug-related CER. Until such research becomes readily and widely available, it will be difficult to define and reward value.
Where do we go from here?
Unfortunately, we can no longer rely on less expensive generic drugs to moderate prescription drug spending. The substantial savings from a large number of recent patent expirations for popular traditional drugs-also known as the patent cliff-peaked in 2012 and is slowly subsiding. Further, with generic dispensing rates reaching 90 percent, the health care system may be close to maximizing the savings associated with generic drugs.
Spending increases driven by high and growing drug prices will eventually affect all Americans in some way. Higher prescription drug spending is usually passed along to everyone with health coverage in the form of increased health care premiums, deductibles, and other forms of cost sharing. Prescription drug spending growth also increases costs for taxpayer-funded health programs like Medicare and Medicaid; this translates to higher taxes, cuts to public programs, or both.
More importantly, an increasing number of Americans will be unable to afford the prescription drugs that they need to stay healthy, which will lead to poorer health outcomes and higher health care costs in the future.
A number of steps can help address these trends. These include:
Increase Transparency
Before FDA approval, manufacturers should be required to disclose information on the estimated pricing for their product and a corresponding rationale for that price. This will help reduce uncertainty and vulnerability for the government, employers, and insurers, which often do not learn a new drug's price until it comes on the market. In addition, manufacturers should be required to report on subsequent price increases over a specific threshold, or when a drug's price increases multiple times during a year.
Increase Competition
An important first step toward increasing competition would be to decrease the market exclusivity period for biologics from 12 years to no more than seven years. In addition, policymakers should ensure that only truly innovative products receive additional market exclusivity.
Too often, manufacturers extend the monopoly protections for their products by introducing a “new” version that is essentially the same as the original drug. Extended release formulations or combination therapies are common examples. Policymakers should take steps to limit such tactics, commonly known as “evergreening,” and reward only true innovation with additional exclusivity protections.
Increase Information on Treatment Value
Patients, providers, and payers want usable information about the safety and effectiveness of prescription drugs. This requires much larger investments in research, particularly as more treatments enter the market with price tags in the tens of thousands of dollars. At least part of this research could come from existing sources.
For example, drug manufacturers could be required to conduct comparisons of their products with existing treatment regimens much like they do for other countries. Once such information is more widely available, it will become easier to develop payment arrangements that encourage the use of high value treatments in the public sector and the private sector.
The United States is entering a “new normal” in which high prescription drug spending is the rule, not the exception. It is up to policymakers and voters to decide whether this shift-and the inevitable trade-offs that will accompany it-is worth the price.
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