Pharmaceutical Dollar Rationing by Results

by: Michael Steinberg

Bloomberg’s “Lilly Erbitux Cancer Drug Not Worth Price, U.S. Scientists Say” and The Wall Street Journal’s “Cost-Effectiveness of Cancer Drugs Is Questioned” report on a study published by NIH oncologist Tito Fojo and NIH bioethicist Christine Grady questioning the cost effectiveness of high cost cancer drugs. Most of the cancer drugs approved in the last 4 years cost over $20,000 without consistently extending survival.

It looks like the controversial British National Health Service (NHS) methodology for determining the value of pharmaceuticals might be crossing the Atlantic. The UK National Institute for Clinical Excellence (NICE) advises the NHS on the cost-benefit of drugs. In general, Britain has valued a “quality-adjusted life year” at £30,000.

The study’s authors cite an average survival increase of 1.2 months for Eli Lilly (NYSE:LLY) and Bristol-Myers Squibb’s (NYSE:BMY) Erbitux, costing $80,000 for a course of treatment. Similar results were found for Roche’s (OTCQX:RHHBY) Avastin and Nexavar, costing $34,000. Nexavar is co-marketed with Bayer and Onyx (NASDAQ:ONXX). Given that each treatment targets cancer differently, an effective cocktail is beyond the affordability of any health insurance plan – public or private.

Like most healthcare dilemmas, there are multiple sides to this controversy. Despite rhetoric to the contrary all sides involve rationing. The British ration on the payment side; only paying for the drugs that produced quantifiable results on a patient by patient basis. The pharmaceutical companies capitulated rather than be excluded from reimbursements. The NHS must be rebated when an expensive cancer drug does not produce results for an individual patient.

The British system is particularly effective when a high cost drug can produce extraordinary results in a small subset of patients. Given that the cost of manufacturing pharmaceuticals is a very small fraction of their selling prices; this model can very be effective for the companies as well. But the wide operating margins are not enough to convince the companies to change their business model in the US.

The US private insurance companies ration high cost drugs through co-pays and coverage caps. Biological and other high cost drug are often classified as “level 4” with little or no reimbursements. The result is that doctors must limit patient access to one high cost drug at a time without knowing if the one they picked would be effective.

This drug lottery serves no one. The patient would be better served by giving the doctor the freedom to experiment with multiple drugs either separately or in combination. The likelihood of putting the cancer in remission certainly would be greater, and more companies would have access to selling their drugs to each patient. The drug companies would have to agree to share the revenue allocated to the cocktail for each patient.

The drug companies are vigorously defending the status quo in the US. Instead of adapting their business models to “pay for performance” or shared revenue for a course of treatment, they have embarked on an elaborate public relations scheme. The companies claim that most patients don’t pay the “benchmark or average wholesale price” and besides if the patient cannot afford their medicines, the companies will help. Many patients have gone bankrupt with this kind of help. And even if the patients do not pay full price, it is often because the rest of the insurance pool chips in through high premiums.

The American method of rationing high cost drugs leads to Russian Roulette for the patients. Until sufficient genetic or diagnostic testing is available, why not make all cancer drugs available to all patients and reimburse drug companies for results? Just like one private insurer cannot give guaranteed issue policies without adverse selection, the pharmaceutical industry must act in concert to support revenue sharing.

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