[Ip-health] Economist: Costly Cures

Thiru Balasubramaniam thiru at keionline.org
Tue Jun 10 21:03:04 PDT 2014

Drug pricesCostly curesAn American fight over expensive new treatments has
global implications

Jun 7th 2014 | NEW YORK | From the print edition

DRUG-COMPANY executives, investment analysts, doctors and academics swarmed
into Chicago between May 30th and June 3rd for the year’s biggest meeting
on cancer. Treatments for cancer account for more than 30% of
pharmaceutical firms’ early-stage research and are being revolutionised.
This would seem good news. For Steve Miller, the meeting was also alarming.
“We are very concerned about a lot of the different products that were
presented this weekend,” he says.

His cause for concern is price. Dr Miller is the chief medical officer for
Express Scripts, America’s biggest pharmacy-benefit manager (PBM), hired by
insurers and employers to control the drugs costs for the patients they
cover. In America a melanoma drug from Bristol-Myers Squibb costs nearly
$120,000 for a course of treatment. And it is not just cancer treatments
that are worrying. An $84,000 drug for hepatitis C, sold by Gilead, another
American firm, has caused outrage among politicians and insurers. On May
28th the drug inspired a coalition ranging from doctors to trade unionists
to launch a campaign against “unsustainable and abusive” prices. For drug
companies this raises a ghastly spectre: that America might, at last, begin
to act like the rest of the world.

By comparison, America has been a drugmakers’ paradise. It has no
universal, nationalised health service. For the majority of Americans who
have private insurance, drug companies negotiate separately with various
PBMs and insurers. The government does pay for drugs for the elderly and
the poor, but even the suggestion that it might consider a treatment’s cost
prompts hysteria over rationing. Barack Obama’s health reforms created a
group to compare the benefits of drugs, but it is explicitly barred from
applying a standard of cost-effectiveness, as is done in Britain.European
countries have long scrutinised drug prices, a practice that has
intensified of late. Germany, for example, has a new way of judging the
costs and benefits of medicines. National health systems use their clout to
win big discounts. Cancer-drug prices are 20-40% lower in European
countries than in America, according to IMS Health, a data and consulting
firm. Emerging markets offer limited respite. Spending on drugs is growing
there, but many governments balk at companies’ prices. India has rejected
applications for drug patents or weakened them so that local firms can make
cheaper copies.

Given all this, as well as America’s size, it is little surprise that the
country is the drugmakers’ honeypot. Its spending of $328 billion in 2012
was more than one-third of global drug sales and more than twice the
spending of France, Germany, Italy, Spain and Britain combined (for a
population of roughly the same size). John Castellani of PhRMA, a giant
drugs lobby, argues that American prices subsidise innovation that benefits
patients elsewhere. Indeed Gilead is negotiating lower prices for its
hepatitis C drug, Sovaldi, in poor countries. In allowing those prices
Gilead assumes it will get higher ones in America.

Those paying the bill, however, are increasingly restless. Although drugs
for some ailments are going off-patent and thus getting cheaper, costly new
treatments for others will greatly increase the amount spent on those
diseases (see chart). Sovaldi is a “tipping-point”, says Dr Miller. To
date, most extremely expensive drugs have been for small groups of
patients, such as those with a rare genetic disease. In contrast, about
3.2m Americans are estimated to have hepatitis C. If each was given Sovaldi
at current prices, the cost would exceed $250 billion.

So valuable, Sovaldi

“To say that Sovaldi has low value is not very accurate,” huffs Gregg
Alton, a Gilead executive. After a 12-week course, he points out, patients
are essentially cured; they will avoid the suffering and costs of hepatitis
C, such as liver transplants. Brian Solow of OptumRx, a PBM owned by
UnitedHealth, America’s biggest insurer, counters that a new medicine for
Alzheimer’s would also transform treatment. But as about 5m Americans have
the disease, it is doubtful that insurers would be able to afford a high

The uproar over Sovaldi suggests that drugs will henceforth be held to a
higher standard: if insurers are reluctant to pay for highly effective
medicines they will probably reject mediocre ones, such as cancer drugs
that extend life by just a few weeks. Already, PBMs and insurers are
testing new ways to guide Americans to cheaper drugs. Express Scripts is
encouraging doctors and patients, “when clinically appropriate”, to wait a
year or so until rivals to Sovaldi come to market. UnitedHealth is paying
some doctors a capped price for cancer treatment, to discourage them from
prescribing drugs that bring little benefit. WellPoint, another insurer,
will shortly start paying bonuses to doctors who prescribe cancer drugs
recommended by the insurer.

Such moves are minor compared with the cost controls seen in Europe. But
America’s market is so crucial to drugmakers that even the hint of change
inspires panic. “You run the risk of stifling innovation,” warns PhRMA’s Mr
Castellani. It is hard to know if this is an empty threat—the link between
research spending and drug prices is as linear as a Gordian knot. However,
the status quo looks increasingly precarious. “If we don’t change the basic
pricing structure of pharmaceuticals,” argues Dr Miller, “this system will

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