What Happens If the Cost of Specialty Medicines Exceed Our Willingness to Pay?

---Terri Bernacchi, PharmD, MBA,  President, Cambria Health Advisory Professionals, and FOUNDER, SME Health Systems

In quoting the premise of the linked article below, “There appear to be no limits now on the prices drug companies can set and that insurers and patients must pay for new life-extending therapies,” I have mused that I may be a dinosaur for believing that there is a difference between “fiscal reality” and “fiscal fantasy”.

As long as some other party (besides the patient) assumes the majority of the cost of a drug, product, or treatment, the patient is buffered from the true cost of care.  This begs the question, “Is there a top limit beyond which the payer will no longer accept the coverage liability, regardless of the long-term beneficial outcomes?”   Certainly, without a third party to assume the payment, most patients will forego the benefit of costly product innovations. (See the link:   http://www.modernhealthcare.com/article/20150307/MAGAZINE/303079985/the-high-price-of-precision-medicine )

However, this question is being asked more than ever before and, as we head toward more personalized medicines and an over-drawn health care checkbook, it is also more relevant. 

Perhaps, if we can start with a few premises that virtually all would agree with, we will be able to isolate the “root causes” and solve these challenges more rationally. 

• Premise:  It is good to treat or prevent diseases that cause pain, suffering, or early death. 
• Premise:  The cost of treating (or preventing) diseases that cause pain, suffering, or early death needs to be affordable to both the individual and the health care system which pools resources on behalf of a population to pay for these needs
• Premise:  The development of medical and pharmaceutical innovations requires investment in Research and Development (R&D) by companies and shareholders that expect to be reasonably compensated for the investment.
• Premise:  There is probably a price limit beyond which patients or the system will not be willing or able to support.
• Premise:  If the cost of R&D exceeds the ability to generate a payback because either the price per unit that the market will bear is too low or the total number of potential patients is too small, the manufacturer will abandon the development of that product.
• Premise:  A period of patent protection that expires within a short time after the drug makes it to market may mean that the manufacturer cannot generate enough sales to cover the cost of R&D and a return attractive enough to interest investors.
• Premise:  Some innovative products that make it to market may be associated with a very high cost, but which provide only an incremental or marginal benefit for their cost that makes them unsuitable for first-line use.  

If we can agree, in principal, that the above Premises are true, then a sound solution would recognize the fundamental challenges relating to developing, marketing, paying for and using today’s new pharmaceutical and device products.  Only solutions that address the needs and incentives of the patient, payer (health plan or employer) and manufacturer will ultimately be successful.    

Fixing this may involve a change to regulations.  We should compute:

• The cost of R&D
• The time for a company to gain sales before loss of patent exclusivity and the introduction of lower cost generics (at which time, the brand manufacturer sees their sales plummet to near-zero levels).
• The number of potential patients
• The list price per treatment

Doing rough math in a crude example, if a company has spent (net present value) $2.5 Billion to get a drug through the regulatory process, and the necessary return must be at $3.0 Billion or even more in order to “break even” for the shareholders, then profits must be sufficient over the period of exclusivity (which may be very short (< 5 years) to return that $3 Billion.  For example, if they have only 3 years to get that payback, they will require a higher list price than if they have 6 years before loss of exclusivity. 

If there are 50,000,000 potential patients rather than only 1,000,000, they could go to market with a lower price.
 

If the “outcome” is of high impact, the price that the market will bear is higher than a product with a lower or marginal impact.  If the payer is able to recognize cost-offsets, for example, on the medical side, it may tolerate a higher priced drug treatment or device.

However, very often, the manufacturer may have invested that same $2.5 B in a product which has been recognized to have only a marginal benefit in a subset of patients.  In order to recoup the R&D investment, this means that even marginal product innovations will have a high price tag.  Because of their own cost containment needs, however, payers are likely to deny coverage or impose restrictions in order to manage costs.  
So What Can Be Done?  

With a couple of minor tweaks in the way that products are approved and afforded patent protection in the United States, the price per treatment could be reduced and the incremental, marginal benefits of new products be realized. 

1. One option:  allow the manufacturer to appeal to approval authorities (FDA, FTC, SEC) a means to drop the go-to-market price to a negotiated level, in exchange for additional time under patent protection to secure their return on investment.  Other competing brands in the therapeutic class could still come to market, but a generic drug would be delayed until the agreed upon patent expiry date comes to pass.
2. Another option:  allow manufacturers and payers to work on contracting initiatives without generating new concerns around “best price” to create “outcomes” assurances and allow new product adoption for even products with marginal innovation or clinical benefit.  These outcomes may include non-product cost mitigations (e.g., prevented surgeries or hospitalizations).
3. Last, allow payers and manufacturers (perhaps using formal partnerships between the payer, the patient, and banking or finance companies) to facilitate product use in year one and allowing the payer to amortize the cost over 3 to 5 years.  The financing may have to "follow the patient" if they change to another payer.  If the manufacturer is enabled under #2 above, to provide some measurable outcomes assurances in the out-years that would not hurt their own financial statements or create a new “best price”, this could reduce the payer’s one-year underwriting anxieties.

Long and short of it is this:  we need to invent a few new measures to contend with the “high price of precision medicine” or perhaps abandon the fruits of our innovation because they have simply become unaffordable.
 

I will be writing more on this topic at a future time and look forward to your dialogue.
 

   Terri is the Founder of SME Health Systems and Cambria Health Advisory Professionals.  She is a Senior Partner at Valiant Health, LLC.  The thoughts put forth on these postings are not necessarily reflective of the views of her employers, clients nor other colleagues. Terri has had a varied career in health related settings including: 9 years in a clinical hospital pharmacy setting, 3 years as a pharmaceutical sales rep serving government, wholesaler, managed markets and traditional physician sales, 3 years working for the executive team of an integrated health system working with physician practices, 4 years as the director of pharmacy for a large BCBS plan, 12 years of experience as founder and primary servant of a health technology company which was sold to IMS Health in late 2007.  She has both a BS and a PharmD in Pharmacy and an MBA.