Decoding Health Care

Part 7b: The Pharmaceutical Industry (part two)

Whenever we talk about how broken the US Health Care System is, discussion invariably turns to how little we get for how much we pay. And almost always one of the prime examples cited is infant mortality. There is no doubt that the US does not do very well on this measure. But like almost everything in healthcare, this deserves some discussion. To start with, not every country reports infant mortality in the same way. Heck, not every country has the same definition of an infant. But even if we concede there is an issue (and there IS an issue), the causes of high infant mortality cannot be simply blamed on the health care system. In fact, one could argue that the US infant mortality problem is more an issue of poverty, lack of education, racial inequities and racism. Spending more on healthcare might improve infant mortality a little but it won’t fix any of those societal issues.

If we look at how well the US does in treating people with cancer, things look pretty good. In fact, the US has some of the best cancer outcomes in the world (depending of course on how you ask the question). So when it comes to cancer, are we getting what we pay for? I am not so sure. Every year the American Cancer Society issues a report on cancer survival in the US, and for the last several years things have steadily improved. Why? One possible explanation is improved performance on cancer screening since earlier diagnosis should lead to better outcomes. Another explanation is certainly that Americans have stopped smoking. This is likely the primary explanation. But the pharmaceutical firms are very quick to point out that because of therapeutic advances they deserve a lot of credit. And although there have been dramatic advances in the therapeutic armamentarium for cancer care, I don’t know how much we can attribute to new drugs. As far as I know, almost every patient with advanced lung cancer, or advanced breast cancer, or advanced colon cancer still dies of cancer. They certainly live longer and likely live better (although that data is harder to find than you might think). If you measure 3 or 5 year survival it is certainly better. But these folks are not cured of their cancer.  And these treatments are undeniably expensive. The real question is whether they are fairly priced.

When considering the high cost of pharmaceuticals, the cost of cancer drugs takes the discussion up a notch. According to IQVIA, the median annual cost of a new cancer drug is $260,000. Ten years ago, it was $63,534. That is a lot of money. How come?

The stock answer from the pharmaceutical industry is that it costs a lot of money to develop a new drug. The second stock answer is that the price reflects the value delivered to the patient. Let’s examine these two justifications for the high cost of cancer drugs. We will start with the cost of development.

There are many studies that attempt to arrive at the cost of developing a new drug. It is not surprising that there are many answers. In 2022, the World Health Organization placed the cost at between $43 million and $4.2 billion. That’s quite a range. The Tufts Center for the Study of Drug Development, which has published a lot on this subject says $2.6 billion. Dr Vinay Prasad, an oncologist and health care researcher at UCSF (and constant thorn in the side of pharma), puts the cost at $648 million. So who is right? Nobody knows. All the models consider the cost of doing clinical trials, the cost of ramping up manufacturing, and the cost of negotiating the regulatory gauntlet. But all of them also consider the cost of “failed drugs” and “opportunity costs”, the cost of not investing in another product. As you might imagine, there isn’t a lot of transparency. But there are three undeniable facts.

The first is that almost all of the basic research is done by academic investigators funded by the federal government (both the US as well as other countries). The pharmaceutical firms contribute little to nothing to this basic science phase. And when a promising drug is identified, the investigator (and almost invariably the academic institution where they work) file a patent and sell the “asset” to a company. If that drug gets approved, there is no return on investment for the funding agency, say the National Cancer Institute. And of course you know that the National Cancer Institute is funded by your tax dollar. So you pay on the front end and you pay on the back end.

The second fact is that the entire drug development cycle has been altered by the practice of big pharmaceutical companies swallowing up small ones. This occurs when the small one has done enough groundwork to signal a reasonable likelihood that their drug will make it to market. Sometimes this happens really early, even before early clinical trials. Sometimes it happens really late, even after FDA approval. The price tag goes up the closer you are to the finish line. And that price tag is invariably in the billions. As far as I know, none of the published cost of drug development models consider this short cut approach, but I assure you that given how often this happens the pharmaceutical companies have the math down cold.

The third fact is that almost all of this cost is up front. Nonetheless, these expensive drugs generally have annual price increases, historically in the range of 10-15% (until recently, discussed below). Let’s take Imatinib as an example. Imatinib is the definition of a transformational drug. Based on many years of basic scientific research on the pathophysiology of chronic myelogenous leukemia (CML), Dr Brian Druker identified a drug that specifically blocked the growth promoting mutation in this form of leukemia. That drug was imatinib. Imatinib was incredible. It worked almost all the time and had very few side effects. And the benefit was durable. Prior to imatinib, the treatment choices for CML were really lousy. In 2001, when first introduced to the market , a month of imatinib cost $2,200. That may seem like a lot, but it is a real bargain. By the time it went generic in 2016, it cost almost $12,000 a month. Really. This price increase was not because a lot of new research was being done. The price went up because it could. Parenthetically, since going generic the imatinib story has continued to fascinate: first the manufacturers tried to control generic entries to the market, then the PBM’s got involved. CostPlus offers a month of imatinib for $440 a month. Thanks Mark Cuban.

Before I leave the topic of drug development, there is one other important area to address. How much does it actually cost to make the drugs? The cost includes both the cost of raw materials as well as whatever manufacturing and regulatory costs exist. But this is a topic you will almost never hear about from the pharmaceutical companies, because the cost of goods is negligible compared to the sticker price. There is one important exception: cell and gene therapy. But that is a topic for another day.

So does pricing reflect the value of these drugs? Again, there is no simple answer. Many have attempted to objectively define the value (clinical benefit) to justify the price. Oncology organizations like the American Society of Clinical Oncology (ASCO) and the European Society of Medical Oncology (ESMO) have published value frameworks that have attempted to quantify how much value systemic cancer treatments provide (though they do not precisely define the “right price”). Peter Bach, when he was at Sloan Kettering, approached price more directly using the Drug Abacus which basically attempted to define a “defensible” price based on objective published evidence. These good faith efforts have proven to be of academic interest only. In other words, nobody really paid attention.

But this idea of somehow linking price to benefit based on evidence is certainly not new, and is routinely done in every high income country except the US. It’s called HTA, Health Technology Assessment. In other countries (that have national health insurance), a government agency is tasked with looking at the clinical evidence and the price tag and making a decision whether or not that country will provide access to that drug at that price. Sometimes they will negotiate a discount or agree to an “introductory” price pending further evidence. Sometimes they will just say no. In the United Kingdom, that agency is the National Institute for Health and Care Excellence (NICE). As far as I am aware, not many people like NICE. In fact, the National Health Service has developed several workarounds to bypass NICE’s recommendations. Nobody likes no.

We do not have NICE in the US. In the US, NICE is a four letter word. Whenever you mention HTA pharma gets apoplectic and they call their congressman. Remember, pharmaceutical companies are number one when it comes to lobbying dollars. But even so, the cost of drugs has become such a hot button political issue that HTA is on the table again (even if we don’t call it that).

ICER is the other four letter word for pharma. ICER is the Institute for Clinical and Economic Review.  ICER was founded in 2006 at Massachusetts General Hospital/Harvard Medical School; since 2013  it has been a free standing not for profit based in Boston. ICER performs reviews of evidence and costs and issues reports that draw conclusions about whether the treatment works and the price is fair. Their review process is transparent. They empanel experts including patient advocates to contribute to their deliberations. Sounds like a good idea, no?

Pharma does not feel they get a fair shake from ICER. They feel their evidence is better than they get credit for. They don’t think they get adequate representation on ICER’s panels. And they strenuously object to the basic methodology that ICER uses, cost effectiveness research that uses the Quality Adjusted Life Year (QALY) to determine whether pricing is fair. QALYs are in fact the same way NICE makes its decisions. And lots of people hate QALYs, not just pharma. The major criticism of QALYs is that the dollar figure that is used to determine cost effectiveness is totally arbitrary. Who has the right to say that one quality year should be valued between $50 K and $150K? Are all “years” to be considered equally; for example if it is the last year of life that is extended isn’t that worth more? And what about people who might be judged to have a baseline compromised quality of life? Does extending their years mean as much as extending “healthy” years? To address this criticism, ICER recently introduced the equal value of life years gained, or evLYG.

I am not interested in defending QALYs. I am interested in defending the effort to quantify in real, objective terms how much value is being provided by whatever therapy we recommend to patients. The most vocal critics of QALYs rarely offer an alternative solution. Rather, they fear that the government (Medicare) or commercial health plans will start saying no, and that they will use QALYs to justify denials based on the perceived imbalance between price and benefit. In fact, there are laws that preclude the use of QALYs in government decision making. And although there is a lot of sword rattling about how commercial health plans will use this to determine coverage policy, there just aren’t a lot of examples that this has happened. In fact, it seems the only two ways that health plans are using these reports are to determine the intensity of utilization management (prior authorization) and to negotiate a discount. As you know from my last post, it’s not that I trust the health plans to behave themselves. But as it stands, Medicare covers almost every drug that is FDA approved. And at least in the cancer arena, so do virtually all commercial health plans. No just doesn’t exist. And as it stands pharma names the price.

But because this topic has gained the attention of the public (and by extension the politicians), there is some movement. In 2022, Congress passed and President Biden signed the Inflation Reduction Act (IRA). Forget about the name; this has nothing to do with inflation. This has to do with drug prices. There are four main pieces. The first is limiting out of pocket expenses for insulin to $35 per person per month. The second is reforming Medicare Part D. The third is limiting price increases. And the fourth is Medicare price “negotiation”.

The Part D reform is really good for patients, not so good for health plans and pharma. Previously, how much out of pocket people had to pay was really complicated. There was the deductible, the donut hole, the catastrophic phase and the low-income subsidy. Rather than go into details, the important point is that for cancer patients (excluding the very poor, who benefited from a low-income subsidy) being treated with an expensive oral drug there was NO maximum out of pocket in any given year. For these patients, spending $10K or even $20K out of pocket was not uncommon. The IRA caps out of pocket at $2000. Good deal. And anything over that is paid for primarily by the health plan and by pharma (CMS pays a small part). As you can see this is really good for patients. But given the financial exposure of the health plans, we can expect them to really tighten up utilization management.

As we discussed previously, price increases of approved drugs are the rule not the exception. The IRA takes an aggressive stance on how much price can be increased. Specifically, the IRA indexes price increases to inflation. If the increase exceeds inflation, that amount is rebated to CMS. Pow.

The most contentious part of the IRA is Medicare drug negotiations. Drugs subject to negotiation include both oral (Part D) and injectable drugs given in doctor’s office or hospital outpatient department (like chemotherapy, paid under Part B). Drugs eligible for negotiation have been on the market for a while (nine years for “small molecules” and thirteen years for biologics) and do not have a generic or biosimilar available. Medicare will compile a list of the drugs the program spends the most on. Starting in 2026 for Part D and 2028 for Part B, Medicare will dictate the price for initially 10 and then subsequently 15-20 of the most expensive drugs each year. Notice I said dictate. This is NOT a negotiation. Medicare is naming their price. If the manufacturer does not agree and attempts to walk away, they are severely penalized. So how will Medicare determine the price? Nobody knows for sure, but it will likely be a price arrived at through HTA. A discount of 25-35% is likely.

The way to think about this is as follows: the government is introducing a “pre-generic” discount, a step down in price before the generic price takes effect. To say pharma does not like this is an understatement. There are now numerous lawsuits that will ultimately determine whether this ever really happens. But we already have the first list and some of my personal favorites are on it like Januvia and Jardiance. By the way, only one cancer drug is on the first list, Imbruvica. When Part B drugs are included in 2028, many of the negotiated drugs will be the cancer blockbusters like Keytruda. At this point it is anyone’s guess whether the government will prevail.

The IRA does NOT in any way impact the price of drugs when they first enter the market. Those of us who are cynics believe that should the IRA pass legal muster, the price of the drugs at market entry will go up substantially. The pharmaceutical companies will just try to hit target financial goals on a shortened timeline. There are other ideas to address the problem of drug cost at the time of market entry, like outcomes based contracts or conditional pricing at the time of accelerated FDA approval pending completion of confirmatory trials, but I will save those for my post on the FDA.

Our discussion about determining the right price of drugs has been complicated. The risk of getting it wrong is losing a degree of innovation in the life science space which we have become accustomed to, and which we as Americans are rightly proud of. But being a successful pharmaceutical company is very lucrative. Of the Forbes top 100 companies in 2022, seven are pharmaceutical companies (Johnson and Johnson leads the pack). Now I do not personally believe for a minute that pharmaceutical firms will stop developing new drugs and will walk away from the US market because of the IRA, but they will probably change a few things. So let’s talk about low hanging fruit.

Pharmaceutical companies do not like to talk about how much of their budgets they spend on advertising and marketing. In 2022, they spent $8 billion on advertising. Several studies suggest they spend more on marketing than on research and development. There are two primary targets of this marketing. I have never met a physician who liked direct to consumer (DTC) advertising, and I certainly do not. Presumably it works. A very large percentage of the marketing budgets in pharma goes to DTC advertising. Do patients or doctors actually get educated by these ads? Do these ads improve care? If you have tardive dyskinesia (which I haven’t seen since my med school rotation in psych) or thyroid eye disease or Peyronie’s disease, wouldn’t your doctor know about the treatments available? Or if you had these relatively uncommon medical conditions and you weren’t getting better, wouldn’t you try to seek out an expert, someone who could help you? Is there an oncologist in America who doesn’t know that Keytruda is used to treat lung cancer? There are only two countries that allow DTC marketing of pharmaceuticals, the US and New Zealand. I have an idea. Let’s outlaw DTC marketing and apply the savings to the cost of the drugs.

Pharmaceutical companies also love to market to doctors. If you are interested in this subject, I refer you Patrick Radden Keefe’s book “Empire of Pain’, an excellent history of the Sackler family and the origin of the opioid epidemic. As it turns out, the Sacklers also helped establish marketing to physicians in the guise of medical education. Pharma likes to bring a speaker (an “expert”) to a nice restaurant and provide an expensive dinner.  Or they “sponsor” meetings, like the annual American Society of Clinical Oncology meeting in Chicago. They rent space in a big exhibit hall where they hawk their wares and the doctors get a cup of coffee. If regular people were to wander into these exhibit halls they would be gob-smacked. And we, as physicians, should be embarrassed. Now lest I be called a hypocrite, I have indulged. But like St. Paul on the road to Damascus, I have been converted. These efforts are pure and unadulterated influence peddling in the guise of medical education. Things used to be worse. Everyone has heard the old jokes about the cardiologist who had a swimming pool in the shape of a pacemaker. Things improved partially because of the Physician Payments Sunshine Act which was part of the Affordable Care Act. This law required manufacturers of health care products that are billed to Medicare or Medicaid to report any payments to physicians to a publicly accessible database. This significantly reduced the outrageous behavior, but there is still too much. Here is another idea. Take all of that money and reduce the price of the drugs. I am confident the American Society of Clinical Oncology can find a way to balance their books. And most doctors don’t need that free lunch.

Where does that leave us? Drugs are just too expensive. Honestly, the government has done a few good things and in my opinion the IRA is one of them. But they can do more and I expect they will. The unbridled greed for optimizing profits has tainted the incredible achievements of the pharmaceutical companies in improving health care. The easiest solution is to link the price to the real benefit. And as we work through that, let’s eliminate all that marketing. We did that for tobacco and that worked out pretty well.

Physicians hate talking about how much money they make. But that is our next topic, how doctors get paid.