Solving for Drug Prices Exacts A High Human Cost

  • by: Robert Goldberg |
  • 12/16/2016
Elaine Schattner, a courageous and compassionate cancer survivor, physician and advocate has written a blog for Forbes entitled: “We Need To Tame The Price Of New Cancer Drugs” In the post she reports  on a presentation by Peter Bach (who she calls a drug pricing theorist!) about the clear and present danger of cancer drug prices and how nothing short of government set prices will make medicines affordable.   (I disagree with him on pricing but Dr. Bach is smart, articulate and creative.  And he is a Red Sox fan.  No one’s perfect.)

 Dr. Schattner writes that: “U.S. healthcare costs will approximate $3.41 trillion. Drug prices are a big part of that, Bach emphasized.”
Not really.   Even though cancer drugs are a bigger part of spending on cancer care, cancer spending as a percent of total health care spending has remained about 4.6 percent since 1965. 
If drug prices are a big part of the rise in overall health care spending, why has the percent spent on cancer care remained the same over time?  Similarly, spending on drugs as a part of all health care spending spiked in 1990 to about 11 percent (15 percent if you add drugs used in hospitals and outpatient settings) and has remained the same since then (with another spike due to Hep C drug spending in 2013).  The retail spending amount in 2014 is about $429 billion according to IMS.  Rebates and other discounts from drug prices are about $130 billion.  Most of that does NOT go to patients. 
Back to Dr. Bach:
“Although prescriptions drugs account for only 10% of national health expenditures, their prices are rising disproportionately. Bach showed a graph of cancer drug prices at the time of FDA approval, from 1965 to the present, demonstrating a 100-fold increase. “The y-axis is exponential,” he reminded the audience. The same graph indicates that since 1990, price tags for newly approved cancer drugs have gone up 10-fold.”
Two points. 
First, Prices are NOT rising disproportionately.  Especially when you back out rebates.  The chart below shows how most of the increase in drug prices driving Bach batty is in the form of rebates and discounts that do NOT go to patients.

In a reply to a tweet I sent to her about this trend, Dr. Schattner asked if it really made a difference if the price was set by insurers or drug companies. 
It does.
Schattner writes: “Bach referred to data from the Kaiser Family Foundation on rising premiums and high deductibles that affect 150 million non-elderly Americans who get insurance through employment. Many can’t afford out-of-pocket cancer drug costs until they meet their insurance deductibles, so they don’t take their meds, skimp on doses or wait before filling prescriptions. Even then, when companies charge over $100,000 per year per drug, and insured patients with cost-sharing plans are expected to pay some fraction of that, steep prices limit use.”
But as the chart below shows, Insurers are not only pocketing rebates and using them for everything other than reducing patient out of pocket costs.  They are increasing what patients have to pay as a percent of the retail drug price! 

Second, Dr. Bach’s comparison of cancer drug prices in 1960 and today is out of context and made to make an impact vs. making a substantive point.
For instance, Harvard tuition has increased by 145 percent from 1970 until today.

Or more to the point, the cost per cancer hospital discharge has increased (in unadjusted dollars) from $1778 in 1970 to $73379 in 2014.   That’s a 445 percent increase.
Hospitalization is a bigger contributor to health care cost.  But the interest and moral outrage about inpatients costs is nil compared to the time and emotion devoted to drug prices.

The reason for that is we pay more of the retail price of a drug on a regular basis than we pay for hospitalization on a less routine basis. 
Ironically, the use of new drugs has reduced the hospitalization (along with mortality rates and lost productivity) due to cancer as the
charts below demonstrate:


Schattner observes that “Prices are problematic at the group level, too. They’re a burden for public insurers such as Medicare. “These are serious numbers,” Bach said. In recent years, Medicare has been paying an increasing fraction of prescription drug costs. In private insurance networks, high medication prices drive up premiums and tend to reduce coverage for all participants. “Health insurance, although it’s been extended in the U.S., has beenstripped down in terms of what it delivers.”

Not true.   The share of the decline in hospitalization is due to the shift to outpatient procedures and most of it comes from substituting medicines for surgery, a trend that is associated with an increase in cancer survival and life expectancy.  
So how much could cancer cost if we had the same hospitalization rates in 2014 that we had in 1970 and at current charges per cancer hospitalization?   (I use charges vs costs because Dr. Bach uses retail drug prices.)   About $1 trillion dollars vs $100 billion:

Over time Frank Lichtenberg and others have shown that new cancer medicines explain from 60 to 90 percent of the decline in cancer death rates and is the main reason hospitalization costs have decline.   If Dr. Schattner or anyone can provide evidence of another reason, I’d be happy to see it.
Finally, the increase in cancer costs matched the overall increase in medical expenditures during the last 20 years.   The Bureau of Economic Analysis concluded that new medicines for cancer reduced the cost of treatment between 1990-2010.  One can only imagine what insurance premiums would be if we were spending $1 trillion on cancer hospitalizations alone.   So add profitability and lower insurance costs to the benefits new medicines generate.
Given what Bach presented, Dr. Schattner favors governments deciding what to pay for drugs based on a robust measure of value.  Well, it turns out that when the value parameters she believes Dr. Bach’s estimate of drug value (as well as ICER’s) are counted it would increase the cost per QALY threshold to about $250-300K.   That would make most, if not all cancer drugs a bargain, especially when rebates and discounts go to patients.  
I haven’t done all the math, but I also estimate that the rebates and discounts on the $18 billion or so spent on the kind of targeted drugs Bach believes will drive us into bankruptcy are about $2.4 billion.   Estimates derived from a recent Millman study of the drivers of cancer costs done for the Community Oncology Alliance suggest about 1.25 million people with cancer undergo active treatment each year.  I assume that half of these patients are likely to get targeted or immunotherapy and that $2 billion of the rebates are generated from such products.   That’s about $3800 per patient, enough to eliminate all but a few hundred dollars of out of pocket costs for those not protected from such a burden.
Yet, my guess is people still would want to solve for price by having the government negotiate prices. They support government price control (the euphemism is negotiation) of drug companies in the same of economic justice and are impelled by the feeling the industry as a whole generates excessive or windfall profits it doesn’t deserve.  As I pointed out in my last blog, price competition does not lead to lower prices in the long run since innovation – which requires more investment and higher costs – is the kind of competition that matters.
In any event, it should be noted that at present the government already negotiates drug prices through the VA, Medicare, Medicaid, the Public health service and the Defense Department.    (Average discount: 60 percent) And it should also be noted that such negotiations are always paired with limits on access (as they are in Europe) and that such limits on access such as cost sharing, step therapy and outright caps increase death and morbidity. 
If Dr. Schattner wants a kinder, gentler version of the cancer Abacus, she should bear in mind that there is no value framework in the world that does NOT limit access to reduce prices and does not reduce the pace of innovation.   Indeed, in the past Bach has argued against using higher priced drugs because they do not add more average survival to patients than older, less expensive drugs developed decades ago.
As the last chart shows, the impact of solving for price would be hundreds of thousands of additional cancer patients dying that are alive today.  Note that the steep decline in life years lost began as targeted medicines were introduced compared to what would have happened without new drugs.

 Source: The Impact of Pharmaceutical Innovation on Premature Cancer Mortality in Canada, 2000-2011
Solving for price exacts a high cost on society. 

Center for Medicine in the Public Interest is a nonprofit, non-partisan organization promoting innovative solutions that advance medical progress, reduce health disparities, extend life and make health care more affordable, preventive and patient-centered. CMPI also provides the public, policymakers and the media a reliable source of independent scientific analysis on issues ranging from personalized medicine, food and drug safety, health care reform and comparative effectiveness.

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