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Indication-Specific Pricing Still a Long Way Off

Gina Battaglia, PhD
Published: Monday, Dec 14, 2015
Peter B. Bach, MD

Peter B. Bach, MD

Pricing a drug based on its efficacy, although a reality in Europe, is still a long way from happening in the United States. Those in the oncology business say that it’s high time for value-based pricing to be introduced here.

“We would benefit from a system in the United States that seeks to fix what is broken in the pricing market, and that involves finding a way to pay for the value of drugs based on transparent parameters,” said Peter B. Bach, MD, director of the Center for Health Policy and Outcomes at Memorial Sloan Kettering Cancer Center and also a developer of the DrugAbacus tool for estimating true drug value.

Table 1. Example of Indication-Specific Pricing Based on Gain in Survival

aThis is a speculative price.
bNon–small cell lung cancer. Source: Bach PB. Indication-specific pricing for cancer drugs. JAMA. 2014;312(16):1629-1630. doi: 10.1001/jama.2014.13235.

Cancer drugs in the United States have increased 5- to 10-fold since 2000,1 but several analyses indicate that this increase in cost does not match improvements in health and overall survival. The results of one 2015 analysis recently published in Health Affairs show that the cost of established first-line therapies for multiple myeloma increased without a corresponding gain in benefits.2 In addition, the results of another cost-benefit analysis show no correlation between cancer drug price and objective patient benefits, such as survival or improved quality of life.3

To make prices better reflect drug performance, insurers and prescription benefit managers would like to set prices based on more concrete indicators of a drug’s success, such as survival, drug toxicity, and novelty. Most oncology drugs are approved for more than one type of cancer, and the cost is the same for each indication regardless of variations in efficacy. For example, even though erlotinib (Tarceva) yields a median survival gain of about 3 months for metastatic non–small cell lung cancer (NSCLC) and about 2 weeks for pancreatic cancer,4 the per-unit cost is the same for both indications.

Gauging the Value of Cancer Drugs

Calculating a price that accurately reflects the value of a given drug requires consideration of multiple factors, including overall survival, drug novelty, safety, disease rarity, development cost, and population burden of the disease (assessed by the number of life years lost due to that cancer). Furthermore, how to translate the relative weight of each component into an overall price still remains to be determined. How much is a year of life worth? How much higher should the price be if the drug treats a rare disease? Should the price be lower if the drug has serious side effects?

Recently developed pricing models in European countries factor treatment benefits into the costs of drugs. Beginning in 2005, the UK National Institute for Health Care and Excellence (NICE) mandated that the National Health Service fund drugs and other treatments according to the NICE technology appraisals. These appraisals compare the clinical and cost-effectiveness of new drugs with existing treatments to determine whether a drug qualifies for inclusion in the formulary, with the goal of focusing healthcare spending on treatments that improve quality and/or length of a patient’s life without substantial side effects.5 In Germany, The Act for the Restructuring of the Pharmaceutical Market took effect in 2011 and allows drug companies to set their own price for a new drug during its first 12 months on the market. During this time, the company needs to prove the drug has an added clinical benefit—which may include reduced disease duration, increased survival, reduced side effects, or improved quality of life—over comparable reference drugs.6 If the drug has no added clinical benefit, it is assigned to a particular drug class and priced accordingly. Drug companies may negotiate with health insurers over pricing (or an arbitration board if they are unable to agree on a price). Whether this new legislation will better coordinate a drug’s patient-centered value with its price remains to be determined. An early benefit assessment in Germany shows that pharmaceutical companies, the Institute for Quality and Efficiency in Health Care, and the Federal Joint Committee differ greatly on whether individual drugs have additional benefits that may warrant higher prices.7 Furthermore, some experts state that the new legislation could lead to pharmaceutical companies inflating their prices during the initial year.8


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