Why Are Drug Costs So High in the United States?

Roxanne Nelson

November 19, 2014

The United States has the dubious honor of paying the highest costs for drugs in the world, even compared with other wealthy nations, such as Canada, Germany, and Japan. The difference in price can often be substantial, especially among the newer and very costly agents that have recently come on the market.

In this indepth feature, Medscape Medical News examines the reasons for this. The story starts at a "watershed" moment 2 years ago.

In a David versus Goliath move, oncologists at Memorial Sloan Kettering Cancer Center (MSKCC) made a deliberate and measured decision to exclude a drug because of its exorbitant cost, and went public about it. The drug they were objecting to — aflibercept (Zaltrap, Sanofi) — was no more effective in the treatment of colorectal cancer than bevacizumab (Avastin, Genentech), but was more than double the cost, explains an op-ed published in the New York Times. "Ignoring the cost of care is no longer tenable," the piece asserts. "Soaring spending has presented the medical community with a new obligation. When choosing treatments for patients, we have to consider the financial strains they may cause alongside the benefits they may deliver."

Sanofi argued, but ultimately backed down and offered discounts of 50%, according to an MSKCC news release. However, the official price was not being reduced.

Although the MSKCC oncologists were satisfied with Sanofi's response, many are viewing this decision as a pivotal event in cancer care. As Lee Newcomer, MD, senior vice president for oncology at United Healthcare, said, "It was the first time physicians have stood up and said, 'Enough is enough.' And I think that was a watershed moment."

Although that might be true, it only begins to scratch the surface of a deep underlying labyrinth — the cost of drugs in the United States.

Prices Have Doubled in a Decade

An even more pressing issue is the continuously rising cost of new drugs rolling off the assembly line — not only for cancer, but for other serious conditions as well. It is sobering to note that of the 12 drugs approved by the US Food and Drug Administration (FDA) for different cancer indications in 2012, 11 cost more than $100,000 per year. As highlighted last year (Blood. 2013;121:4439-4442), the prices for oncology agents have nearly doubled in the past decade, from an average of $5000 per month to more than $10,000 per month.

In addition to new drugs arriving with hefty price tags, the cost of pharmaceutical agents that are already commercially available keeps rising — and in some cases, quite significantly. One of the more dramatic price hikes has been for imatinib (Gleevec, Novartis), which was developed to treat chronic myelogenous leukemia (CML) and initially offered, in 2001, for about $30,000 per year. Imatinib has now tripled in price, retailing for about $90,000. In the meantime, however, it has become the bestselling drug for Novartis, generating revenue of $4.7 billion in 2012.

Why are drug prices so high, and why do they continue their upward spiral with no end in sight? And why is the United States shouldering the lion's share of the cost?

"For the longest time drug companies had a dual mission," said Hagop M. Kantarjian, MD, professor and chair of the Department of Leukemia at the University of Texas M.D. Anderson Cancer Center in Houston, who was involved with the study published in Blood. "They wanted to help patients and at the same time make a reasonable profit."

Dr Kantarjian pointed to George Merck, son of the founder of the pharmaceutical company, who highlighted this concept when he said that "medicine is for the people. It is not for the profits."

"Until about 2000, this practice has been followed; they were in synergy with investigators, they were helping patients, and they were making reasonable profits," Dr Kantarjian told Medscape Medical News. "But now I think they have lost their moral compass."

Going Up, Up, and Up

In 1989, the New York Times published a scathing editorial that chided a drug manufacturer for the high cost of a life-saving drug. The ire was directed at AZT, the only drug available at that time for patients with HIV. It came with the "extraordinary cost" of $8000 a year and was said to be the most expensive prescription drug in history.

Burroughs Wellcome, the manufacturer, justified this "astoundingly high price" by noting that there were a limited number of patients and that rival drugs would soon be on the market. However, the rival drugs were slow in coming, and about a third of HIV patients either lacked health insurance or had policies that did not pay for drugs. To add salt to the wound, the development of AZT had been heavily funded by the government.

A month after the Times published its editorial, the AIDS Coalition to Unleash Power (ACT UP) protested at the New York Stock Exchange and succeeded in halting trading. Within 4 days, Burroughs Wellcome lowered the price of AZT by 20%, to $6400 per year, which was still out of reach for many patients.

These days, $6400 might pay for a month of cancer therapy if the patient is fortunate enough to be prescribed one of the lower-cost agents. But what is really extraordinary about this event is not so much the price of the drug, but the outrage that it triggered and action that ensued.

AZT set a precedent in drug pricing that had not been seen before, and perhaps foreshadowed things to come, pricewise.

A report issued by the Institute of Medicine, Ensuring Patient Access to Affordable Cancer Drugs: Workshop Summary, notes that in the 50-year period from 1965 to 2013, the monthly cost of cancer drug therapy has increased from $100 to $10,000. Total Medicare spending on drugs increased from $400 million in 1992 to $7 billion in 1999, by another $1 billion in 2000, and then an additional 26% from 2001 to 2002. The growth in spending was attributed to the increased volume of new and more expensive medications that were being substituted for older therapies.

The targeted cancer therapies have garnered the most attention for their high costs. Many of them are priced between $6000 to 12,000 per month, or approximately $70,000 to $115,000, annually. Brentuximab (Adcetris, Seattle Genetics/Millennium-Takeda Oncology), which was recently approved in the United States for Hodgkin's lymphoma and systemic anaplastic large cell lymphoma, costs about $5000 per vial. Patients typically need 3 vials per dose, and usually 7 to 9 doses per course of treatment; the resulting cost could reach $135,000 or more.

Ipilimumab (Yervoy, Bristol-Meyers Squibb), used to treat melanoma, costs $30,000 per injection, which translates to $120,000 for a course of therapy, based on the approved dosing regimen of 3 mg/kg every 3 weeks for 4 doses.

In addition to targeted therapies, novel or reformulated chemotherapy drugs are also expensive. These include pralatrexate (Folotyn, Allos Therapeutics), at $120,000 per course; omacetaxine (Synribo, Teva Pharmaceuticals), at $28,000 for induction and $14,000 for monthly treatments; and pegylated asparaginase (Oncaspar, Sigma-Tau Pharmaceuticals), at $22,000 (J Clin Oncol. 2013;31:3600-3604).

But cancer hasn't cornered the market on expensive pharmaceuticals. Pricey drugs are also being developed and approved for other medical conditions. One such agent is ivacaftor (Kalydeco, Vertex Pharmaceuticals), which is the first drug that targets the underlying molecular defect in cystic fibrosis. It is designed to treat the disease in a small subpopulation of patients who carry a specific genetic mutation, G551D, and costs $311,000 a year — making it one of the most expensive drugs currently on the market. In a commentary published last year, a group of physicians decried the cost of this drug, especially since the National Institutes of Health and Cystic Fibrosis Foundation helped support its development (JAMA. 2013;310:1343-1344).

Another drug that has attracted attention is sofosbuvir (Sovaldi, Gilead), which grabbed headlines for its $1000-per-pill price tag, or $84,000 for 12 weeks of treatment. The drug has been shown to be highly effective for treating hepatitis C, which afflicts more than 3 million people in the United States. Because sofosbuvir needs to be taken in combination with other drugs, full treatment can cost upward of $100,000, because some patients require retreatment.

Gilead has just rolled out an even more expensive drug for hepatitis C. Ledipasvir/sofosbuvir (Harvoni) is a combination drug that is the first treatment that does not require administration with interferon and ribavirin. The current price for the agent is set at $1125 per pill, which translates to $63,000 for 8 weeks of treatment, $94,500 for 12 weeks, and $189,000 for 24 weeks. But these costs might be lower than for sofosbuvir, because it is taken without companion medications and because many patients will only require 8 weeks of therapy.

Multiple sclerosis seems to be set on rivaling cancer therapy, and treatment is generally lifelong. The newest player, peginterferon β-1a (Plegridy, Biogen), was approved in August, and is listed at $62,036 for a year's treatment, according to a report published in the Boston Globe.

The cost of dimethyl fumarate (Tecfidera), also developed by Biogen and approved last year for relapsing-remitting multiple sclerosis, is almost the same — at $60,121 a year.

The Long Road to Development

Drug prices in the United States are basically a confluence of the complex and lengthy drug development and approval process, and an equally complicated healthcare system.

"The drug companies and others believe that these drugs represent such a significant value to patients and society that the cost is warranted," said J. Leonard Lichtenfeld, MD, Deputy Chief Medical Officer for the American Cancer Society. "They say that if we don't allow the drugs to be priced properly, we will stifle innovation on a number of fronts, especially when it comes to new 'druggable' targets, where we have only scratched the surface."

"I think it's fair to say that some of these drugs, especially the new immunotherapies, are really going to be game changers," he added. "It may take decades to see the full impact, and we always have great hopes. It was the same for the tyrosine kinase inhibitors; the outcomes are good, but some of them have not been sustained. We are hoping that the outcomes that we are seeing now in immunotherapy will be long lasting."

There is the argument that there are now treatments for diseases where there were none before, so that is high value to patients, Dr Lichtenfeld explained. "Another argument is that there is value to society, in that new drugs can help a patient avoid additional medical expenses, which may have occurred if the drug wasn't available. Whether that's a valid argument is subject to opinion, but those are some of the points that are raised."

Critics of pharmaceutical companies point out that only a small portion of the drug companies' expenditures are used for research and development (R&D); the majority of their money is spent in marketing and administration.

But Robert Zirkelbach, senior vice president of communications at PhRMA, the trade association of the pharmaceutical industry, disputes that.

Prescription drug expenditure is projected to grow at the same rate as overall healthcare spending, he explained. "At this time, 10% of every healthcare dollar goes for prescription drugs, and that's the same percentage it was in 1960, and that's what they project 10 years from now," he said. "Not only is that number consistent, but we are also bringing a lot of new medicines to the marketplace."

Currently, drug development is a long, rather inefficient, and expensive undertaking, and is full of failures and successes. It takes 10 to 15 years to develop a new drug, at an often cited cost of about $1.3 billion, which is based on analysis by the Tufts Center for the Study of Drug Development. That investment is reflected in final list price of the drug.

"When research and development is discussed, most people are talking about the drugs that make it to the marketplace," explained Zirkelbach. "Unfortunately, most drugs that go through the clinical trial process fail. That is part of the nature of science and drug discovery."

PhRMA recently issued a report that looked at oncology from 1998 to 2014. "There were 96 potential treatments for melanoma, but only seven made it to the marketplace," he pointed out. "There were 75 for brain cancer, but only three made it to the marketplace. There were 167 potential treatments for lung cancer, but only 10 made it to the marketplace."

Zirkelbach emphasized that bringing a new medicine to the market "takes an incredibly long time, it is incredibly costly, and more fail than succeed. When you look at what it takes to bring a medicine to the marketplace, you have to look at what didn't succeed. That's a point that is almost always left out of these discussions."

According to an analysis in Forbes last year, manufacturers hoping to get a single agent on the market can expect to spend about $350 million before it hits the marketplace. But because of the high rate of drug failure, large pharmaceutical companies that are developing a number of products at one time actually end up spending about $5 billion per each new drug.

"We have a system here that is encouraging, incentivizing, and rewarding for drug development," said Zirkelbach, adding that the problem in other countries is that they could be thwarting innovation by having too many restrictions and price controls.

It is imperative to look at the big picture, he added. "Take Alzheimer's disease, which is going to put a huge burden on our economy in the coming years. We need effective medicines to treat it."

Dr Kantarjian disputes the $1.3 billion figure, saying that it might be as low as 10% of that. In the report on drug costs he was involved in, the authors argue that this number is roughly calculated by dividing total expenditures on R&D by the number of agents that receive FDA approval (J Clin Oncol. 2013;31:3600-3604).

"The figure may be inflated, because it includes ancillary expenses, salaries, bonuses, and other indirect costs not related to research or development, as well as an 11% compounded discount rate over 10 years based on stock market returns on capital investment," they write. "Other independent estimates of cost of drug development put the figure as low as 4% to 25% of this estimate."

Another analysis, for example, estimates that the cost of R&D to bring a new drug to market is $60 million and $90 million (BMJ. 2012;345:e4348).

But at least for some new drugs, R&D amounts to purchasing a smaller company that already developed the product. An example is sofosbuvir, which has borne the brunt of intense scrutiny, including an ongoing Senate investigation. Gilead did not develop the product, but instead purchased a small company —Pharmasset, Inc. — for $11.2 billion in 2012. Pharmasset actually did the R&D and reported that the related costs for the drug totaled $62 million, and that it had $177 million in R&D costs company-wide over the 3 years that the drug was being developed. The company expected to profitably sell sofosbuvir for $36,000 a year — less than half of what Gilead is currently charging for it.

A similar situation is the case of pirfenidone (Esbriet), which just received FDA approval for the treatment of idiopathic pulmonary fibrosis. The drug was developed by InterMune, which pharmaceutical giant Roche recently purchased for about $8 billion. When the drug was approved, Roche announced that it would sell for $94,000 a year. Peter Bach, MD, one of the renegade physicians from MSKCC who pushed back on the price of aflibercept, notes in a report published in Forbes that if full market penetration is achieved, Roche could make back their full investment in 1 year.

"Once again, the potential to affix this huge price tag to Esbriet didn't spur the innovation, it spurred Roche to pay up for the company," writes Dr Bach. "Today's shareholders are super happy (and I'm glad for them), but how many of them were even around and invested in the company back when the high-risk decision to develop Esbriet was made?"

Premium Prices in the United States

But any way that development expenditures are evaluated, the cost of drugs is unevenly shared globally, with the United States far outspending other nations on prescription drugs. In 2012, the United States was projected to spend $883 per person on prescription drugs, which was nearly twice as high as the amount spent in other wealthy nations. For example, Canada spends about $0.70 for each dollar spent in the United States per person, the United Kingdom spends just under $0.40, and Denmark spends only $0.35, according to a report from the Center for Economic and Policy Research.

An analysis in Health Affairs found that from 2000 to 2011, the average price of 29 cancer drugs in Europe was 10% lower than the average wholesale price in the United States (Health Aff. 2013;32:762-770). It was also about 8% lower than the average sales price in the United States, including the Medicare Part D price.

Overall, cancer drug prices are 20% to 40% lower in European countries than in the United States, according to IMS Health, a data and consulting firm.

Imatinib will cost Canadians and New Zealanders less than $1000 a dose. In the Netherlands, Spain, and Switzerland, it runs about $3500. In the United States, the price jumps to more than $6000.

Prices for patented brand-name drugs are also about 18% lower in Japan. Nivolumab (Opdivo, Ono Pharmaceutical), the first immunotherapy to act on the programmed death pathway, was approved in Japan for metastatic melanoma. The annual cost for the drug will be about $143,000. Bristol-Meyers Squibb, which will be distributing the drug in the United States when it is approved, has declined to say how much it will cost when it arrives on the American market, but the price tag could be substantially higher, given the usually lower rates in Japan.

"The US makes most of the discoveries, the taxpayer funds 85% of the basic research, and yet at the end of the day when a drug is FDA-approved — for cancer as well as for other indications — we as Americans are paying at least twice the price as those outside the US," said Dr Kantarjian. "In the setting of most cancer drugs, you can find them at half the price in Canada. For the hepatitis C drug [sofosbuvir], in the United States we pay $80,000 to $160,000 for a 3- to 6-month course, but in Egypt and India, the drug company has an agreement to give the total course of treatment to an individual patient for $900."

Even at that cut rate, they still make a large profit, he emphasized. "That's because the total cost of treatment is only $138. In the US, we are in a very awkward situation because we fund most of the research as taxpayers and we get zero in return," he explained.

"In fact," he said, "it is double jeopardy because we pay more than anyone outside the United States."

No Negotiation, the Price Is Set

The major reason for the disparity in pricing is that the United States lacks any sort of central or universal healthcare system or agency that regulates across the board cost. In contrast, negotiations of drug prices between governments and pharmaceutical companies are routine in Canada, most European nations, and most countries in the Middle East and Far East. They have centralized authorities to negotiate more favorable prices with manufacturers, and some also have drug formularies and advisory boards that put restrictions on the use of new and expensive medications.

"In the US, we are covered under a fragmented system, where there really aren't enough numbers to negotiate effectively," said Leigh Purvis, director of health research at the Public Policy Institute at AARP (formerly known as the American Association for Retired Persons), a large membership organization for people 50 years and older. "We have different health insurers and they don't represent enough people to actively and successfully negotiate prices in the same way that other countries do."

"Countries like the UK and Germany are also willing to take a much harder line on the drugs and compare them with what is already on the market," she said. "In the US, once it's approved, that's pretty much it."

Price negotiations take place on an individual level in the United States, with each private insurance company negotiating with each drug company for the price of each product. Pharmacy benefits managers, a third-party administrator of prescription drug programs primarily responsible for processing and paying prescription drug claims, will also take part in developing and maintaining the formulary, contracting with pharmacies, and negotiating discounts and rebates with drug manufacturers. Dozens of plans are available in every state, and insurance costs and plans can vary significantly from state to state. They charge different premiums and copayments, and formularies may favor different drugs, which leads to variations in pricing and out-of-pocket costs to patients.

The Centers for Medicare and Medicaid Services (CMS) is the single largest payer for healthcare in the United States, covering nearly 90 million Americans through Medicare, Medicaid, and the State Children's Health Insurance Program, which is more than a quarter of the entire American population. However, by law, the federal government cannot negotiate for Medicare drug prices or obtain any sort of volume discounts. The 2003 Medicare Modernization Act explicitly prohibits the federal government from negotiating drug prices or establishing a list of preferred drugs.

The rationale for this move was that the market would lower prices and that each of the private prescription drug plans, in competition to attract more Medicare beneficiaries, would negotiate with prescription manufacturers to reduce costs. Whether or not that has come to pass is open to debate. Currently, Part D drug prices are determined through a negotiation between the private drug plan that administers the benefit and the drug manufacturer.

"We weren't supportive of that part of the legislation when it was enacted, but AARP did support the overall Medicare Modernization Act, which established the Part D benefit," said K.J. Hertz, senior legislative representative for government affairs at AARP. "We decided that the greater good was getting a prescription drug program under the Medicare program. What we've tried to do now is to get the message out there that we need to improve on that."

The organization has strongly advocated for giving the secretary of the Department of Health and Human Services (HHS) the ability to "negotiate on behalf of Medicare's 50 million plus beneficiaries and use that for potential leverage in getting prices for the drugs that seniors take in this country," Hertz told Medscape Medical News. "There has been resistance to that in Congress ever since the Part D program was initiated but, nonetheless, we keep fighting to get that message out there."

However, Medicaid, the program for low-income people that is administered by the CMS and the Department of Veterans Affairs (VA), is able to negotiate with drug companies for lower prices. In fact, under federal law, drug makers must provide a discount or rebate equal to at least 15% of the average manufacturer price for most brand-name drugs covered by Medicaid. Federal law also guarantees discounts for the Department of Veterans Affairs, which can negotiate with drug makers to secure discounts on top of those guaranteed by law. Generally, they are able to negotiate prices that are 25% to 50% lower than Medicare.

In fact, many critics of the non-negotiation clause in Medicare point to the VA prices to show that direct negotiation by the federal government and price control statutes can result in lower prices and greater savings. A report by Families USA, which compared VA prices with those in Part D of Medicare, found a median price difference of 58%, suggesting that market forces are not bringing prices down, as was hoped.

Making Tradeoffs

"The US is different from other countries because they negotiate drug prices and we don't," said Dr Lichtenfeld. "But the rest of the world also makes tradeoffs."

Making tradeoffs means that even though drug prices are lower in other countries, some drugs will simply not be paid for by national healthcare systems. Thus, they will be unavailable to patients except those who choose to pay out of pocket.

However, he pointed out, in some cases, there is only one drug available for a certain indication, so there is no competition. "I'm not sure how one negotiates a noncompetitive drug," he said.

The analysis of approval and reimbursement decisions in the United States and four European countries for the 29 cancer drugs (for publicly covered patients only and, in the United States, for Medicare beneficiaries) pointed to some differences in approval rates (Health Aff. 2013;32:762-770). Only one of the 29 drugs was not approved by Medicare. In Germany, 97% of the drugs were approved, and in the Netherlands, 86% of them were covered. The lowest number of approved drugs was in England and Wales, at 44%.

Last year, the National Institute for Health and Care Excellence (NICE) in the United Kingdom decided not to recommend National Health Service coverage of crizotinib (Xalkori, Pfizer) for lung cancer. Crizotinib has been hailed as a major therapeutic breakthrough for the small subgroup of patients with non-small cell lung cancer (NSCLC) whose tumors test positive for ALK gene rearrangement, but Canadian researchers have also questioned its place in their health system because of its high price and the limited number of patients who would benefit.

More recently, NICE rebuffed the breast cancer agent ado-trastuzumab emtansine (Kadcyla, Roche), stating that it was not effective enough to justify the cost of £90,831 (US$152,800).

"If we did that here in the US there would be significant complaints about restricting access," said Dr Lichtenfeld. "I don't know if those populations accept it or not, but they have government structures in place that limit treatment options."

Another tradeoff is that Americans generally have to pay a portion of the cost, which varies according to the individual insurance plan. In some cases it can be significant. For the 29 cancer drugs examined in the comparison study, Medicare beneficiaries paid 20% coinsurance for physician-administered drugs and a median rate of 33% coinsurance for self-administered drugs. In many cases, these out-of-pocket costs translated into thousands of dollars.

In contrast, Germany and the United Kingdom have minimal cost-sharing, and France and the Netherlands have no cost-sharing at all.

Chicken or Egg?

Who is most to blame: insurers or drug companies?

"The pharmaceutical industry says that insurance copays are too high for patients to afford, while the payers say that the drugs are too expensive and that's why patients are paying more," said Richard L. Schilsky, MD, FASCO, chief medical officer at the American Society of Clinical Oncology (ASCO).

Private health insurance has been under fire for quite a while, and insurance reform was a primary focus of the Affordable Care Act (ACA). But for all the complexity and endless battles over coverage and cost-sharing, when it comes to expensive drugs, insurers are shouldering a significant share of the expense.

Insurance plans generally have some type of cost-sharing program in place, depending on formularies and drug tiers. Most benefit designs have 3-tier plans, for example, with the highest tier requiring the largest cost-sharing. But plans with 4 or more tiers are becoming increasingly common, and products on the top tier tend to be specialty drugs, with the highest copayment or coinsurance amounts.

One provision of the ACA is a maximum limit on out-of-pocket spending and cost-sharing reductions, although there are a variety of coverage options. Some policies offer lower deductibles and cost-sharing, but the tradeoff is higher monthly premiums. As an example, an individual who is enrolled in a standard "silver plan" would be responsible for no more than 6.8% of the total cost of a drug. For a drug costing $100,000, that would be almost $7000, but the health plan would be paying for more than 93% of the remaining cost, according to America's Health Insurance Plans (AHIP), the trade association for insurers. Still, that can be a significant amount for many patients.

In fact, consumers might be seeing their employers passing along a larger share of insurance costs. An annual report released by the National Business Group on Health found that large employers estimate that their health-benefit costs will rise by an average of 6.5% in 2015. However, they will try to hold increases to 5% by making changes to their coverage, such as shifting more medical costs to workers and expanding the use of high-deductible policies. Employers cited high-cost patients, specific diseases, and an uptick in spending for specialty drugs as the main drivers of rising costs.

"There's no question that insurers are requiring patients to pay an increasingly large share of the cost of medicine, and far larger shares than for hospitalization or for a physician office visit," Zirkelbach explained. "That is penny wise and pound foolish. Approving adherence by making sure that patients can afford their medicine helps to avoid other more costly services, but these are trends we are seeing."

Not only is there exorbitant cost-sharing, but there is a lack of transparency when patients are shopping for coverage, he continued. "All too often, patients don't find out if their medicine is covered before they purchase their policy."

Some patients go through complicated processes, like "fail this one first," before they can access their medicine, Zirkelbach noted. "Or their out-of-pocket costs are more than they can afford. Access to the medicine needs to be part of any discussion when evaluating the cost and value of a drug."

Insurance companies, however, point to the pharmaceutical industry as the main culprit. "In nearly all sectors of the economy, innovation not only provides advancement, but also lowers costs for consumers," according to AHIP. "Unfortunately, drug companies seem to believe that pharmaceutical innovation simply allows them to price their products higher and higher."

Karen Ignagni, president and CEO of AHIP, challenged the sustainability of six-figure drug treatments during the Future of Medicine meeting held earlier this year. She said that in the insurance industry, administrative costs and profits are capped, and "we have to be very transparent about what they are. I think the promise of innovation is a bucket that actually prevents conversation about exactly how much is going into R&D."

Ignagni also questioned the lack of transparency in defining and separating R&D, marketing, separating out profits. "When we are talking about all the other industries in healthcare, there's not that kind of transparent ability to look," she said. "If you do start looking, you really see now that manufacturers are charging whatever they can get away with. We can't have a system that operates that way. We can't sustain it."

Clare Krusing, director of communications at AHIP, told Medscape Medical News that "as for the solution, we hope there is one. That's why we have been asking drug makers to come to the table — so that there can be an opportunity to forge a private sector solution without the government having to step in."

Problems Specific to Oncology

Another reason for the increasing cost of cancer drugs has nothing at all to do with the prices set by the pharmaceutical industry; rather, it is related to how oncology medicine is evolving in the United States.

Hospital systems have been increasingly buying up the practices of independent oncologists and then charging more for the same treatment. A 2013 Milliman survey revealed that when chemotherapy was administered in hospital outpatient settings rather than a physician's office, costs ran as much as 53% higher.

Even if the treatment is still delivered in the physician office, once the practice has been purchased and is no longer independent, prices go up. One reported example is for a breast cancer patient who had been receiving trastuzumab (Herceptin, Roche/Genentch). The initial charge was approximately $5100 per month for the drug; this suddenly jumped to $16,000, even though it was being delivered by the same oncology practice in the same office. The reason for the abrupt change was that the practice was no longer independent and was deemed to be a "hospital outpatient center." The price increased to account for "overhead", even though nothing had physically changed in the set up.

Another reason often cited for high drug costs is that physicians have a monetary incentive to use a more expensive drug. Private practice oncologists buy drugs wholesale from pharmaceutical companies, and sell them retail to their patients. Before the Medicare Modernization Act (MMA) of 2003, oncologists paid around 66% to 88% of the average wholesale price of the drug, but when they filed claims for the treatment, Medicare reimbursed 95% of that price.

This differential resulted in oncologists being overpaid by $1.6 billion annually, according to one analysis. After the passage of the MMA, reimbursement was set at the average sales price plus a 6% mark-up to cover practice costs. In some cases, such as with carboplatin, this 6% mark-up does not even cover the cost of administering the drug. The drug has fallen in price from $125.00 to $3.50, which makes the 6% payment exceedingly low. To make up for this, some oncologists have switched to using higher-margin brand-name drugs. Instead of using generic paclitaxel and earning 6% of $312, for example, they use Abraxane, a branded protein-bound version of paclitaxel, and earn 6% of $5824.

This so-called "buy and bill" practice can create a very substantial incentive to use more expensive drugs. As Peter Ubel, MD, professor of business, public policy and medicine at Duke University in Durham, North Carolina, pointed out in a blog post, a $6 mark-up on a $100 treatment is very low, but a $600 mark-up on a $10,000 treatment is quite another story. This situation can present a real conflict of interest.

Push Back Time

Six-figure drug prices are becoming increasingly common, but so is push back. Although there has been no take over of the New York Stock Exchange since the AZT protest, there have been many expressions of concern about high costs.

"There has been no forceful coalition that has come together to basically confront the drug companies about the cost," said Dr Lichtenfeld. "There is a lot of concern but no resolution. But it's fair to say that these things take time. I think a lot of the pressure really has to come from the patients."

The HIV experience is a prime example of patient advocacy, he noted, where people really came together. Not only did they get a reduction in cost, their activism helped spearhead the FDA Accelerated Approval Program, which can bring life-saving drugs to market sooner.

But push back can emerge in many different forms. Breaking patents, for example, is one step that several low- and middle-income countries have taken. Even with discounts offered by the manufacturer, drug costs are often too steep for their limited healthcare resources. Brazil, for example, supplies treatment for all patients with HIV/AIDS free of charge, and by 2001, Brazil was manufacturing eight of the 12 drugs commonly used in the drug cocktails.

Then in 2007, Brazil issued a "compulsory license" that overrode the patent on the anti-HIV drug efavirenz (Sustiva, Merck). A compulsory license is an authorization granted by a government without the permission of the patent holder. Most countries have some sort of provision for issuing compulsory licenses, either under their patent laws or, as in the United States, through antitrust legislation. Currently, a year's supply of brand-name efavirenz for one patient costs Brazil $580, whereas the generic version costs only $166.

Thailand has also issued compulsory licenses for efavirenz and other drugs.

More recently, India denied a patent claim for a slightly altered version of imatinib (the original version was not patented under Indian law), after a 6-year legal battle with Novartis. India has already issued compulsory licenses for a number of other cancer drugs, including sorafenib (Nexavar, Bayer), erlotinib (Tarceva, Roche), and sunitinib (Sutent, Pfizer).

Needless to say, their generic versions are dramatically cheaper than the branded products. For example, Natco Pharma was granted the license to reproduce sorafenib in India in 2012, which it did at a cost per patient of $177 per year. That is 97% less than the approximate $69,000 price of the patented version.

The primary patent on trastuzumab expired in Europe this year, but will remain in force in the United States until 2019. A biosimilar has already launched in India (by Biocon and Mylan), after Roche gave up a patent fight. However, its status is on shaky ground because Roche is currently embroiled in a legal battle with both companies and the regulatory body, saying the approval violates guidelines in India.

In 2007, the Indian company launched a generic version of another Roche drug, rituximab (Rituxan), which sold at approximately 36% of brand-name product's price.

In the United States, the pushback has been mostly talk, so far.

The high cost of drugs, especially cancer drugs, has been increasingly highlighted in the mainstream news. It reached a climax when it was recently discussed on the popular news show 60 Minutes.

In the opening segment of the show, correspondent Lesley Stahl notes that "more than one out of three Americans will be diagnosed with some form of it in their lifetime. And as anyone who's been through it knows, the shock and anxiety of the diagnosis is followed by a second jolt: the high price of cancer drugs."

Government regulators are also stepping in. Medicaid beneficiaries have limited access to the hepatitis C drug sofosbuvir in 35 states because it is restricted to those dealing with liver failure. All but three states require some type of prior authorization, and the remaining states are not offering coverage until they put standards in place. Most states will likely limit the ledipasvir and sofosbuvir combination in the same manner, and there could be even more restrictions, such as banning patients dealing with drug and alcohol addiction from getting it, and limiting who can prescribe it. Since the combination works best for hepatitis C genotype 1, Washington State has announced that coverage will only be for those with that genotype.

Gilead has offered to discount the price of Solvadi by 6% to Medicaid state directors (from $1000 a pill to $940), with the stipulation that access to the drug be open with no restrictions. So far, they have yet to find a taker.

Sofosbuvir has attracted a substantial amount of attention and inquiry, probably because of the sheer number of people infected by hepatitis C, including many receiving government assistance and incarcerated individuals. During the first half of 2014, the product generated sales of more than $5.75 billion, and now makes up nearly 50% of Gilead's total revenue. The Senate Finance Committee, however, has launched an investigation into Gilead Sciences. It is a bipartisan effort, spearheaded by committee chair Sen Ron Wyden, a Democrat from Oregon, and Sen Charles Grassley, the committee's senior Republican, from Iowa.

In their letter to Gilead the CEO and chair of Gilead, the senators made 20 separate requests for documentation, including costs of research. They also point out that Gilead is selling sofosbuvir in Egypt for $900, which is 99% lower than the price in the United States, and that according to the FDA, many patients will need 24 weeks of treatment, which brings the cost to $168,000.

Advocates and politicians are also taking aim at changing the Medicare law to allow the CMS to negotiate prices. During the 113th Congress (2013/14), legislation was introduced that would allow the HHS Secretary to negotiate lower Medicare drug prices or require discounts for low-income Medicare beneficiaries. These bills include the Medicare Prescription Drug Price Negotiation Act of 2013 (S. 117, H.R. 1102); the Medicare Prescription Drug Savings and Choice Act of 2013 (S. 408, H.R. 928); and the Medicare Drug Savings Act (S. 740, H.R. 1588).

According to the office of Sen Jay Rockefeller, one of the sponsors of S. 117, the bill would save $141.2 billion, help to responsibly reduce the deficit, and avoid reckless proposals to cut Medicare benefits. The Medicare Drug Savings Act would eliminate a special deal for brand-name drug manufacturers that allows them to charge Medicare higher prices for prescription drugs for individuals and for people with disabilities.

It would also require drug companies to provide rebates to the federal government on drugs used by dual eligibles — people eligible for both Medicare and Medicaid (predominantly low-income older adults and people with disabilities) — as was done for dual eligibles on Medicaid before Medicare Part D was created in 2006.

AARP supports this legislation. "It would extend the Medicaid level rebate to Part D to low-income dual eligibles, and that is a measure we have advocated for this Congress," said Hertz. "It would save quite a substantial amount of money — more than $140 billion over 10 years."

Advocates of the bill have tried to generate momentum, but it's been tough going, he concedes. "Congress hasn't been able to focus on that, and there haven't been any major healthcare bills to attach it to."

"We're hoping that with the sustainable growth rate patch set to expire at the end of March, Congress will have to figure out what they will do. This may be an opportunity for the bill to be considered again," Hertz said. "Certainly, that is something that AARP is going to be strongly advocating for."

Value and Evidence

Another means of curbing costs is focusing on value, rather than just cutting the price tag. ASCO has a major initiative to promote value in cancer care, and the society has been trying to shift the discussion on cost to a discussion on value, Dr Schilsky explained.

There are a number of expensive treatments out there, and some have far better outcomes than others, he noted. But the value of these treatments needs to be assessed, so that higher-value treatments will cost more, and less-effective treatments will cost less.

Dr Schilsky believes that value begins with clinical trials, which need to be designed with more relevant outcomes for the patient. "That is really the starting point. We would all like therapies to deliver the greatest efficacy to the patient," he explained, "Let's no longer accept clinical trials designed for drugs that deliver 4 or 6 weeks of improvement for important end points like survival. Let's get greater incremental efficacy out of our trials."

That, by itself, will help deliver more effective and higher-value treatments. "Then we have to couple those treatments with biomarkers that will identify patients most likely to benefit," Dr Schilsky said, "and hopefully limit the use of those drugs and reimbursement for populations likely to benefit."

As part of the ASCO Choosing Wisely campaign, one recommendation to oncologists is that they match a therapy to a biomarker test. "If a treatment requires a biomarker test, then the treatment should not be administered in the absence of those tests," he said.

A number of activities regarding drug pricing and value are ongoing, one of which is an ASCO task force that is developing a framework on the incremental value of a new treatment. "We have been engaging in conversation with both drug companies and payors. Maybe we need a new approach to price setting and reimbursement," Dr Schilsky said.

"The current strategy of value pricing follows the notion that if you have a drug that is approved in a number of different settings, it may not be as efficacious in all of them, so why should it be the same price across the board?" he pointed out. "Maybe the cost should be higher in the more efficacious settings and lower in the other ones."

Value-based insurance follows the same philosophy, and Dr Schilsky believes that if there is really an effective and life-saving treatment, all patients should have access without any barriers. As an example, there are no patients with CML who should not have access to imatinib, he said.

But the situation is different for "other therapies on the market, such as erlotinib for pancreatic cancer," he said. "It was FDA approved for that indication, but the incremental benefit of survival in clinical trials was just a few weeks. Maybe that could be reimbursed by insurance but with higher copay."

Dr Kantarjian echoed that sentiment. "We can have a drug like imatinib, which prolongs life for many years, and then have another drug that prolongs survival by 2 months, and they are priced the same," he said. "You don't see that in any other industry."

Professional societies, investigators, and physicians need to demand better results and stop the practice of reveling over marginal outcomes. "We need to raise the bar for new drugs, and not hype minor benefits of new and more expensive drugs over the older and cheaper ones," he said.

In their report on the cost of cancer drugs (J Clin Oncol. 2013;31:3600-3604), Dr Kantarjian and his colleagues also point to value as a means of gauging drug cost. Tumor regression and prolongation of life are the often treatment goals. The amount of time that life is prolonged could be used as a simple measure of efficacy and guide drug pricing, the team writes.

"A realistic range might consider a new drug that prolongs survival by more than 6 months or by more than one-third of the life expectancy (e.g., 12 months becomes ≥16 months, or 30 months is increased to ≥40 months) as extremely effective, with pricing at a range of $50,000 to $60,000," they explain. "Similarly, an agent that improves long-term survival or progression-free survival by 10% or more would fall into that category."

Conversely, agents that show statistically significant survival benefits of 2 months or prolong life by less than 15% would be considered to be minimally effective, and would cost much less, such as $30,000 per year. Those with intermediate effectiveness would be priced in between these two ranges, they suggest.

The idea of value is catching on, even with insurers. WellPoint, along with AIM Specialty Health, has developed the Cancer Care Quality Program in collaboration with oncologists working in both academia and in independent practice. The program essentially identifies certain cancer treatment pathways that are based on current medical evidence, peer-reviewed published literature, consensus guidelines, and WellPoint's clinical policies, and helps oncologists determine which cancer treatment therapies are clinically effective and provide greater value.

"We found that there are large variations in cost, but sometimes the more expensive treatments are not any more effective than older therapies that are cheaper," said Jennifer Malin, MD, PhD, oncology medical director at WellPoint.

This difference is especially dramatic for NSCLC, she pointed out. As a first-line treatment for patients who do not have mutations such as EGFR and ALK, treatment with carboplatin and paclitaxel runs about $452 for 4 cycles, with an estimated patient survival of 13 months.

Add bevacizumab to that combination and cost is boosted to $39,770, but survival edges up to only 13.4 months, and serious toxicity is increased. Almost double that cost ($64,988) is a regimen of carboplatin, pemetrexed, and bevacizumab, which actually decreases survival by a few notches (12.6 months).

The Wellpoint program began this summer and is currently active in California, Colorado, Georgia, Kentucky, Indiana, Missouri, Nevada, Ohio, and Wisconsin, It is expected to expand to other states in 2015.

A monetary incentive is offered when the pathways are followed. Oncologists will receive a $350 one-time fee at the onset of treatment planning and care coordination, explained Dr Malin. This incentive will help offset the difference in what the practice makes from administering more costly drugs.

"The program is new, so we don't have any real data on it yet," said Dr Malin. "But so far most feedback has been positive."

The US Oncology Network, a nationwide network of approximately 1000 oncologists, has also developed its own clinical pathways. They have partnered with insurers to use preferred treatment pathways for adjuvant and metastatic regimens in breast, lung, and colorectal cancers.

A study presented at the 2013 ASCO annual meeting showed that using an oncology pathways program could save about 15% on cancer-related costs and reduce hospital admissions by about 7%.

"There is no question that drug prices are too high, and many are not well justified," Dr Schilsky summarized. "Clearly, many therapies are complicated to develop and manufacture, and there are many failures; we recognize all that. We need innovation and drugs companies to be profitable to continue R&D, and we accept all of that."

But none of that provides the clear rational for the current pricing schemata, he noted, because even drugs that are easy to develop, quick to manufacture, and receive support from foundations, government, and other sources, still come out with a very high price.

"Nowhere is anyone saying that if we can control these costs, we can come out with a lower-priced drug, but if we can't, then the price needs to be high," he added. "No matter what the development costs are, the price just seems to go up."


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