The Coming Debate Over Specialty Drugs

Screen Shot 2014-06-24 at 6.09.38 AMThe debate over the price of specialty drugs is intensifying and could well be the next major healthcare issue to dominate the national, even international, agenda. In a nutshell, how will society pay for breakthrough scientific innovation?

Specialty drugs, complex therapies used to treat severe illnesses such as cancer, multiple sclerosis and Hepatitis C, are coming in with price tags that have purchasers sounding alarm bells. At $1,000 per pill, the newest Hep C medication runs about $86,000 for a course of treatment.  Two major insurers have publicly cited the price of this single new drug as contributing to next year’s rise in premiums.

In fact, analysis by our team at PwC’s Health Research Institute shows that this one new therapy will impact overall U.S. health costs by .5% this year and .2% next year. Considering the nation’s total healthcare budget is $2.8 trillion, that is a remarkable budgetary impact for one product.

But the story doesn’t end there. Drug costs represent just 15% of total health spending, compared to nearly one-third spent on inpatient care. Short-term budget spikes could become long-term savers from both a cost and health standpoint. For the most severe patients, the price of Hep C medication – that is nearly 90% effective – is three to six times less than treating a lifetime of cirrhosis ($270,000) or providing a liver transplant ($580,000.) Patients essentially “cured” of Hepatitis C can go on to have productive, long lives.

Yet not every case is so severe that it would incur the highest medical bills. And as people switch jobs and health plans, the insurer or employer that pays for the expensive medication today may not be the one that reaps the long-term savings.

The issues surrounding how we pay for breakthrough treatments are complex and merit a thoughtful national conversation. What are the ethical implications to determining who gets what treatment when? Why can’t insurance company actuaries factor new products into their risk calculations? How do drug companies determine prices for new products? And is there a better approach to financing medical innovation?

It would be tempting to hope the battle over the new Hep C medication will blow over. But with additional Hep C therapies expected on the market and 70% of the FDA drug approval pipeline now filled with specialty drugs, we will continue to grapple with this important issue.

Ceci Connolly is the Managing Director of PwC’s Health Research Institute, a research organization dedicated to objective analysis on the issues, policies and trends important to health organizations and policymakers. Ceci is a veteran journalist and co-authored Landmark: The Inside Story of America’s New Health Care Law and What It Means for Us All. 

17 replies »

  1. A Cochrane Review in 2011 (http://www.ncbi.nlm.nih.gov/pubmed/21901722) examined the effects of financial renumeration policies on primary care physician behaviors. This review found only 7 papers to summarize – a whopping jump of 3 papers over a similar review in 2000. The populations of physicians studied were small and non-generalizable; the exposure of amount and type of financial incentive varied, the methods were poor, and the outcome measures also varied leaving us unable to know how economic models affect care. Also, noteworthy, no study, yet, has addressed patient outcomes. Hints arose, however; FFS increased visits, specialty visits, diagnostic tests, and curative therapies, but quality was less, hospital referrals were more, and access to care was less. But, we really don’t know how to go about measuring the financial incentive-outcome piece, so, again, it is fun to talk about economics, but it may be a waste of our intellectual time.

    The debate of old/new is not the issue; nor that patients/citizens are the new market for the insight that medical care costs a lot. Our market economy will do what it does and faces risk/reward. We should not be too hard on those making drugs for profit. At JAMA we saw the stock-charts pre/post the HIV vaccine and it was not a pretty site for those working at the company. Our private enterprises thrive on early demand stripping need, as early gains level out over time or go asunder under the scrutiny of evidence. I have always said, Hype Sells – Evidence Quells. Keynesian economic ideas don’t require, necessarily, the government to intervene to balance the private sector furor, as the populace can also intervene.

    And the population will intervene on the costs of hepatitis C drugs, eventually. The publics slow uptake is partly due to us; practicing physicians. It is our job to quell the hype with evidence, but we are not equipped enough to know the evidence and, subsequently, inform, so, perhaps, we think that economic ideas will figure this all out. But, no economic principle – like any other intervention – is only beneficial. Harms are associated with playing around with financial incentives when we don’t know the goal. What we can do is be transparent with patients; let them see the data our ideas rest upon; let them know, and a useful money plan may follow. I repeat my harangue; medical care will not advance on the debates about the ideas of economics, but on the debates about the ideas of how to do more studies of what works better and what does not. Then, once we know, all we have to do is tell those who must decide.

  2. Vik, be careful that you don’t sound like one who is demonizing success and productivity. Gilead through hard work and luck hit it big with one of its drugs. Many companies like Gilead bit the dust and the investors lost all their money. No one is there to compensate the investors for their lost capital. Maybe they owned a bit of Gilead to soften the losses.

    Pharmaceuticals are not necessarily the best investment. Check out Merck. In fact check out Gilead during its first 10 years of existence whose record was better than many others that bit the dust. There were times there that you might have been tempted to draw out your money and invest it elsewhere.

    Merck hasn’t done well in recent years and is well below many market indices. Should we accuse them of price gouging as well? Why not? Some of their drug prices are high as well and they were, I believe, a major force that pushed government legislation to protect their profits.

    That is where the non producers win frequently at the expense of the productive producers. Government intervention and foolish government rules and regulations that protect the status quo pushing out the innovators.

  3. To those of you observing that “this is nothing new,” two observations: what’s old to careful observers may still be new to average citizens (and the worthy of discussion) and the approaching numbers (patients, therapies and dollars) do appear to be much larger. In 2013, a full 70%of FDA approvals were specialty drugs. That’s new! And big!

  4. The bigger waste is the $$$$ billions being spent on digitizing medicine, witout improved outcomes or reduced costs. Some say that mistakes are increased associated with EHR devices.

    At least with the expensive meds, they have been vetted and do work to mitigate disease.

    That can not be said for the $$$$ billions noted above.

  5. Mr. Hertz is completely correct. There is absolutely nothing “coming” about the debate over speciality drugs, which has been going on robustly within managed care for at least 20 years.

    From HIV cocktails to immunosupressants for transplant patients to cancer cocktails and adjuvant therapies, and now a Hep C product, this debate is old news. The fact that we are still talking about it as though it is a new problem does not bode well for our healthcare future.

    Drug companies and their legions of market sizing and reimbursement consultants are laughing all the way to the bank (along with, as Mr. Hertz correctly points out, many kinds of healthcare providers) while we’re still regurgitating platitudes about value. If that’s the best we can do, I’d say we’re the Titanic, and we are taking on water fast.

  6. We have had innovative drugs for years in America, and many lives have been improved.

    But none of these drugs has led to any overall savings in our health costs.


    Because if person X takes the Hep C drug and avoids a liver transplant, then hospitals will just charge more for heart transplants. If the need for heart transplants goes down, then hospitals will buy up medical practices and get extra money from thousands of ‘facility fees.’

    George Halvorson has described this phenomenon in his writing, especially in the 1996 class ‘Strong Medicine.’ We do not have a firm national budget for health care. Hospitals which are two thirds empty take years to close.
    Academic hospitals with enormous salaries are rarely forced to economize.

    As for the pricing of specialty drugs like Sovaldi for Hep C, my impression is that the manufacturer will recover all of its research costs in a year or two.
    The next 15 years on-patent are just about sheer profit.

    There may be some buried social good in all this price gouging. However, long term savings in our health costs is not one of the social goods..

  7. I would be inclined to require a a lot of macro economic (Keynesian) read on this.
    Ask not what the R&D prices ar. raise what percentage individuals are used as a results of the manufacture, lobbying and sales of the cure of HCV

  8. Interesting analysis, although I believe the 15% figure for drugs is from the PwC Medical Cost Trend report that looks at employer based coverage, not total US health spending where the figure is closer to 11%. Also, while the HepC treatment prices have drawn a lot of attention, for many reasons they are not a good precedent for the many new specialty biologics and pharmaceuticals in the R&D pipeline – as I’ve written about here: http://www.healthpolcom.com/blog/2014/06/16/sovaldi-and-curing-hep-c-myths-and-other-facts/

  9. I admit that I tuned out classes on economics after the professor, noted, and a blogger at times, said that he does not spend anytime trying to figure out the economics of our system of health care. He said, we have no measure of value, hence, we can’t study a system with no measures; we can describe what is happening in the market place, at times, but we have no way to assess cost/effect. I don’t know if he is correct, but if he could not figure it out, how could I. So, I am a poor judge of economic trends.

    This blog, however, jolts. I went to your site, Ceci, and liked what I saw except everything is a projection and hard to know if you are in ball-park or not. I wondered if you could relate your data to the evidence on the drug; some articles point out that there is little relationship between the absolute effect of the drugs/intervention, and the rhetoric about value and cost. I noted 16 randomized trials in PUBMED on one of the drugs you are addressing; the number of patients studied is really small in comparison to the people infected, the differences in the populations studied; the absolute percents of sustained response (SCR) vary in the studies. Also, noted article on resistance to the drug. (J Infect Dis. 2014 Mar 1;209(5):668-75. doi: 10.1093/infdis/jit562. Epub 2013 Oct 23). Last, I tried to figure out the clinical outcome of the SVR and, again, models suggest great variation.

    So, we don’t know what the outcome of using this agent will be. Should we not pay before we know for sure? Not sure that sort of stringency works in our system, but sure like your blog and the implications. Will trigger some debate for sure. Thank you for weighing in and keeping us thinking.

  10. I would be inclined to take a more macro economic (Keynesian) view on this.

    Ask not what the R&D costs are. Ask how many people have been employed as a result of the manufacture, lobbying and sales of the cure of HCV.

    I think it will make for a more pleasing conclusion.

    (PS: I’m not being facetious)

  11. We already have elaborate protocols for rationing kidneys and other organs because there aren’t enough to go around. Ultra high cost specialty drugs may be similarly rationed in the future if the society, through our political process, decides that we can’t afford to give them to everyone who could potentially benefit, even marginally. I suspect that the first group to be cut off will be the elderly who have already lived a normal lifespan and then some.

  12. This issue is being debated widely, even in other countries aside from US. The national governments of each countries should really focus in innovating and promoting health care and medications but also it should consider the financial aspect. Otherwise, great article Ceci! I will keep an eye on this issue too.

  13. Thanks for the posting.

    I don’t think we want to discourage drug companies from developing actrual cures, even if they ream us. (The reaming us part is really a purchaser issues — if the feds simply said that any drug over a certain price would require a most favored nations” price for government purchasers, that would help a lot.)

    Where we run into trouble is when drug companies develop dtugs that continue to control conditions instead of curing them, thus setting up a stream of income for themselves at our expense. Economically, the “worst” is when they develop drugs that control otherwise fatal conditions, though try telling that to the people whose lives are saved…

  14. Nice analysis, Ceci. This is making a lot of people sit up and take notice. What kind of impact on spending do you think we could potentially see? After Solvaldi, what other breakthrough treatments do you see on the horizon that could theoretically fit into the same pricing model?