Tufts Center for the Study of Drug Development, Boston, MA
The author reports no financial relationships.
J Clin Pathways. 2016;2(6):29-33. Received May 26, 2016; accepted July 13, 2016.
Joshua P Cohen
Tufts Center for the Study of Drug Development
75 Kneeland Street, Suite 1100
Boston, MA 02111
Abstract: As the cost of prescription drugs increases, payers and providers alike have attempted to determine the value of treatments for high-cost disease, including cancer. In this article, the authors discuss the most prominent value frameworks that have been recently developed and compare each of their methods for defining value. Taking into consideration the factors used by drug companies and payers to determine the prices of prescription drugs, the author addresses the question of whether these newly established frameworks to assess the value of cancer drugs are likely to have an impact on pricing and reimbursement, in terms of both aligning the prices of cancer drugs with their value and improving patient access to high-value treatments. Finally, the proposed changes to the Medicare Part B program are discussed as likely having a greater immediate impact on pricing and reimbursement.
Key words: value framework, oncology, drug pricing, patient access
Citation: Journal of Clinical Pathways. 2016;2(6):29-33.
Received May 26, 2016; accepted July 13, 2016.
At a current annual growth rate of approximately 8.5%, drug prices are contributing to increases in payer and employer costs, health insurance premiums, and patient cost-sharing.1,2 In their prescribing decisions, clinicians must take into account the burden of out-of-pocket costs on patients for whom they prescribe costly medications.
Colloquially, when we say an item is not “worth it,” its price and value diverge, at least in the perception of the person or entity doing the valuation. An item that an individual finds worthy, society may place less value on. In the case of cancer drugs, the incongruence between price and value may be particularly acute. The price of new cancer drugs often exceeds $100,000 per course of treatment, and price does not necessarily correspond to a drug’s value. Analysts have questioned whether, for instance, an additional month’s survival is worth over $100,000 for a cancer patient in light of the fact that society (taxpayers) is paying for it.3
A number of US-based medical professional societies and other organizations have developed and disseminated tools and frameworks for assessing the value of prescription drugs. However, it is unclear whether the implementation and adoption of such frameworks are purely an academic exercise or will have a real-world impact on the pricing and reimbursement of drugs.
To answer this question, we provide an overview of the ways in which drug companies and payers determine the prices of prescription drugs. We also discuss several prominent US-based value frameworks that have been recently developed, explore how they each go about defining value, and address the question of whether these newly established tools to assess the value of cancer drugs are likely to have an impact on drug pricing (ie, making it more value-based) or patient access (ie, improving patient access to cancer drugs that have high value while decreasing access to low-value drugs). Finally, we discuss how certain value-based reimbursement models, such as the proposed Medicare Part B program changes, are likely to have a greater immediate impact on pricing of cancer drugs.
HOW DRUGS ARE PRICED
The public is kept mostly in the dark regarding the pricing of drugs, both the process by which drugs are priced and the negotiated transaction prices. This lack of transparency does not, however, preclude researchers from gathering evidence (some anecdotal, some revealed in publicly available documents) on the general contours of pricing.4 It is known, for example, that, when deciding upon a drug’s list price, drug companies perform a pre-approval assessment prior to regulatory approval, positioning a drug relative to comparators in terms of price. This includes an evaluation of the anticipated price sensitivity of payers, patients, and health care providers.5
Furthermore, if a company believes that a new drug provides additional benefits compared with existing treatments, this will be incorporated in the price offered at launch. And, if companies believe there is a high willingness to pay threshold on the part of payers because of a certain property a drug has—eg, it targets an orphan disease, has a novel mechanism of action, or addresses an unmet medical need—that will be reflected in the list price.
Finally, when determining drug pricing, companies account for the marginal cost of production, or the cost of producing each additional unit, such as a pill or vial. The marginal cost of production is significantly higher for large-molecule biologics (which account for many new cancer medicines) than small-molecule pharmaceuticals, because the manufacturing process is more complex. Here, marginal cost of production is not to be confused with cost of drug development. The former is a function of production once a drug is approved, whereas cost of development refers to resources allocated to developing a new drug prior to its approval.
INCORPORATING VALUE IN DRUG PRICING
Once a drug manufacturer sets a price, payers express a willingness to pay at that price, or they do not. A negotiation will likely ensue, resulting in a transaction price lower than the list price. In this respect, the mutually agreed upon transaction prices can be considered “value-based” to the extent that they reflect how much purchasers are willing to pay for a drug.
In biopharmaceutical industry circles, some have justified high prices of branded drugs as a way of recouping investment in the inherently risky enterprise of drug development. This is a flawed argument, however. While a company’s revenue from its portfolio of marketed products will have to exceed its operating costs in order for it to remain a going concern, the level of investment in a product should bear little or no relation to its market price.6 Properly functioning markets do not work this way; purchasers are not supposed to pay for a product’s cost of research. Rather, they are paying for a product’s perceived value relative to other products or services.
Yet, in health care, several key assumptions underlying a properly functioning competitive market do not hold, which may cause the price and value of a drug to diverge. First, drugs are patented as single-source (branded) monopoly products for a limited period of time. It is during this period without generic competition that drug companies can charge a price that is higher than the marginal cost of production. Second, third-party health insurance shields end-users from the actual cost of prescription drugs, which may lead to inappropriate overuse in some instances. Third, the existence of asymmetries in information between suppliers and purchasers, as well as physicians and patients, leads to distortions in the market.
Absent a competitive market, the price and value of a drug may differ. This implies the need to establish gauges of a drug’s value that are not strictly market-based. Internationally, such efforts have been made by governmental organizations, such as the National Institute for Health and Care Excellence (NICE) in the United Kingdom and the Pharmaceutical Benefits Advisory Committee (PBAC) in Australia. These organizations determine the value of different medications, taking into consideration the effectiveness and cost, in order to make a recommendation as to which medical technologies should be reimbursed by their respective health care systems.
The United States does not have a similar national entity performing cost-effectiveness analyses. Several medical professional societies and other organizations with ties to the field of oncology have taken it upon themselves to develop and disseminate frameworks to assess the value of high-cost prescription drugs.
THE ROLE OF VALUE FRAMEWORKS FOR CANCER DRUGS
Four value frameworks have recently been released by the American Society of Clinical Oncology (ASCO), Memorial Sloan Kettering Cancer Center (MSKCC), the National Comprehensive Cancer Network (NCCN), and the Institute for Clinical and Economic Review (ICER) (Table 1).
These four value frameworks are each designed with the intent to incorporate measures of drug benefits into pricing and reimbursement decisions. The organizations that have developed the frameworks define value conceptually as a measure of treatment benefits relative to cost. Nevertheless, each entity uses a different method for measuring value.
ASCO is a professional organization for physicians and oncology professionals caring for patients with cancer. In order to support its members in determining how to factor cost considerations into treatment decisions, ASCO established a Value in Cancer Care Task Force, which first released the ASCO Conceptual Value Framework in June 2015.7 The goal of the framework was to assess the value of new cancer therapies. According to ASCO, value is primarily determined based on clinical benefit, side effects, and improvements in patient symptoms or quality of life. While cost is also a consideration, ASCO describes the role of cost in the value framework as providing a “context” in which the other factors are considered.7
Similarly, NCCN, the leading developer of clinical practice guidelines in oncology, aimed to provide health care providers and patients with more information about recommended treatments in order to enable them to make more informed treatment decisions. In order to do this, they developed NCCN Evidence Blocks to accompany their NCCN Clinical Practice Guidelines in Oncology for several different cancer types.8 The Evidence Blocks provide graphical representations of how different therapy options score on five measures: efficacy, safety, quality and quantity of evidence, consistency of evidence, and affordability. This enables users to compare the “value” of different treatments based on these measures.
MSKCC’s Drug Abacus tool is very different from the ASCO Value Framework and the NCCN Evidence Blocks. Rather than ranking or scoring different treatments based on their value, it assigns a “value-based price” to each treatment. In addition, it allows the user to determine how each value measure—eg, efficacy, toxicity, novelty—should be weighted when determining the value-based price.9,10
ICER is a nonprofit organization that conducts analyses on treatment effectiveness and costs. It then develops reports using methods that make it easier to translate evidence into decisions. Whereas the above three organizations specifically focus on measuring the value of cancer drugs, the fourth—ICER—has a broader purview, which includes drugs used in many different treatment areas.11
When evaluating cancer drugs, all four above-mentioned frameworks:
- Identify the health outcomes of interest, including overall or progression-free survival and safety;
- Consider the quality of evidence to measure health outcomes of interest;
- Combine the health outcomes into a single composite measure of health benefit; and
- Calculate the cost of health care relative to benefit.
However, beyond these four “building blocks,” consensus breaks down. In other words, the devil of what constitutes value is in the details.12 ASCO is the only one to evaluate treatment-free intervals, while MSKCC is unique in that it includes a drug’s novelty, rarity, and cost of development in its assessment. NCCN relies much more on expert opinion to select health outcomes of interest than the other organizations. ICER is the only entity that explicitly considers cost effectiveness.
Implications for Drug Pricing
All of the frameworks suffer from varying degrees of arbitrariness, namely, subjectively determined end-points and arbitrary ways of combining scores from multiple dimensions to arrive at a composite health outcome measure. Owing to this arbitrariness, it is unknown the degree to which these frameworks capture value accurately.
For example, ICER employs a cost-effectiveness threshold of between $100,000 and $150,000 per quality-adjusted life-year, below which drugs are considered cost effective, and above which they are not. This threshold is not empirically derived, however.
Taking a closer look at MSKCC’s unique approach, the Drug Abacus price is determined by: (1) dollars per life-year; (2) toxicity; (3) novelty; (4) cost of drug development; (5) rarity of disease; and (6) burden of disease.10 As such, the Drug Abacus purportedly reflects a value-based price, with value taking into account these 6 factors. Aside from issues regarding whether a drug’s price should reflect its novelty, cost of development, the rarity of the indication targeted, or the burden of the disease, the dollars-per-life-year figure constitutes an especially arbitrary number that decision-makers assign to the monetary value of a year of additional life. Its range, from $12,000 to $300,000, is considerable. Selection of a number on this scale is subjective. To illustrate, the more one values life, the higher the dollars-per-life-year number. In this respect, an arbitrary choice of the dollar value of a life-year can make a drug look either cost effective or not.
It should be noted that these frameworks are still relatively new and, thus, are likely to be refined over time. ASCO updated its Value Framework in June 2016 in order to address some of the comments it received regarding the first version of the framework.13 Similarly, ICER recently announced that it has invited suggestions on how to improve its value assessment framework, with comments being received through September 12, 2016.14 Until the relatively high degree of arbitrariness is removed and more consensus exists across frameworks, the impact on pricing of cancer drugs will be limited and remain an academic exercise.
Implications for Patient Access
Without widespread buy-in from payers and others that make pricing and reimbursement decisions, value frameworks are also likely to have little immediate impact on the pricing of and patient access to cancer drugs. Drug reimbursement policies encompass decisions by a health plan, a pharmacy benefit manager (PBM), or government program, all of which define the terms under which a drug is covered, negotiate the amount to be paid for the drug, and determine patient cost-sharing parameters. All of these factors determine not only the cost of the drug but also whether patients with cancer will have access to the drugs that they need.
Payers have responded to the increasing costs of drugs by resorting to traditional methods of formulary management, such as prior authorization, off-label use restrictions, patient cost-sharing, and step therapy. The mechanism of granting rebates to PBMs that increase a drug’s market share continues to dominate as a tool to stem the growth rate of the cost of prescription drugs. Rebates, however, are often not derived from clinical or cost-effectiveness data, which serve as a proxy for value. Rather, rebates are based on leverage and negotiating skills between drug manufacturers and PBMs and payers.
Payers have begun experimenting with a number of value-based approaches to formulary management, including value-based insurance design, which involves reducing co-payments for higher value drugs and increasing co-payments for lower value drugs. One approach taken by private, commercial insurers has been the development of clinical pathways programs. Similar to formularies, these pathways encourage the use of what the insurers deem to be high-value treatments through the use of financial incentives.
However, most reimbursement policies in the commercial market are not value-based. To illustrate, based on a recent study of the use of PBM exclusion lists, it appears PBMs are not necessarily making value-based reimbursement decisions to determine which drugs to cover.15
AN ALTERNATIVE APPROACH TO IMPROVING THE VALUE OF CANCER DRUGS
Recently, the Centers for Medicare & Medicaid Services (CMS) proposed a nationwide, mandatory project to test new models for Medicare’s Part B program, which pays for drugs administered to Medicare beneficiaries in a physician’s office or outpatient clinic.16 Many Part B drugs are anti-neoplastics; thus, the proposal has major implications for the pricing of and access to cancer drugs.17
CMS has proposed implementing the new models in two phases. The first phase constitutes a change in fee structure for Part B drugs; namely, establishing a lower reimbursement rate for Part B drugs. Medicare would pay an average sales price (ASP) with a 2.5% mark-up instead of a 6% mark-up, plus a flat fee of $16.80 per infusion. The second phase introduces several value-based purchasing experiments, including:
- Use of reference pricing in therapeutic classes with more than one drug—Medicare covers the cost of a benchmark drug in a class; patients who desire a higher-priced drug in the same class pay the difference between the higher-priced and the benchmark drug;
- Indication-specific pricing of drugs—Medicare pays a different price per the indication for which a drug is being used;
- Risk-sharing arrangements between drug makers and Medicare, in which drugs are paid in accordance with their performance; and
- Episode-based pricing—Medicare pays for all the care a patient receives in the course of treatment for a specific illness rather than discrete components that make up care.
Both phases of the demonstration project would randomize physicians and hospitals into either the new reimbursement formula and one or more of the value-based purchasing arrangements, or a control group that would continue with the status quo payment methods.
At this time, it is uncertain whether the proposals will be adopted, as CMS has been facing vociferous opposition from the biopharmaceutical industry as well as from oncology health care professionals. However, if enacted, the proposed models are likely to have a direct impact on pricing of and patient access to cancer drugs.
There are historic parallels where CMS has paved the way for system-wide changes in the methods used for payment of drugs, diagnostics, and physician and hospital services. Indeed, regarding health care payment, it is said that where CMS leads, health plans tend to follow suit. Thus, even in a predominantly private health care system, government-instituted policies could have particular clout when it comes to systematic implementation of value-based policies.
The value-based frameworks discussed above serve an important purpose as a driver of the discussion surrounding price and value. Ultimately, however, some entity has to pick up the mantle and be committed to making structured changes within the system. While the commercial market does implement value-based purchasing arrangements on an ad hoc basis, CMS, as the largest health care system administrator in the country and responsible for over 100 million beneficiaries, tends to enact more systematic changes. Such changes can have an immediate, nationwide impact on pricing of and patient access to cancer drugs.
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