Welcome to “From the Archives,” a Health Affairs Blog series, where we take a timely topic and delve into the literature and history, from a Health Affairs angle, of course.
Harvoni, Sovaldi, Repatha, Daraprim. Four drugs that have made news for how much they cost patients and insurers. But in the scheme of pharmaceutical pricing—a nearly $400 billion dollar industry in the US that comprises 10 percent of health spending—they are just the tip of the iceberg.
This topic is so prominent that at Health Affairs we have devoted two issues to it over the past year: Specialty Pharmaceuticals and Biomedical Innovation, along with health policy briefs on specialty pharmaceuticals and biosimilars in 2013 and the 340B program in 2014.
Innovations in pharmaceuticals, including some of the drugs mentioned above, are providing cures for Hepatitis C, offering specialized treatments for cancers, and lowering cholesterol. But often these new innovations target a very specific set of conditions and a very specific population. Many of these new innovations are specialty pharmaceuticals. By some estimates, specialty drugs could comprise half of pharmaceutical spending by 2019.
While definitions of specialty pharmaceutical drugs vary, our brief defined them as “drugs and biologics (medicines derived from living cells cultured in a laboratory) that are complex to manufacture, can be difficult to administer, [and] may require special patient monitoring.” Previously, the pharmaceutical market was dominated by “blockbuster” small molecule drugs — those synthesized chemically, manufactured through a well-defined process and administered orally. Think statins for cholesterol (small molecule) vs. Remicade for rheumatoid arthritis (specialty).
This is a complex issue and while we certainly won’t cover everything in one blog post (we couldn’t even cover it in one issue of the print journal) here are a few things we know about pharmaceutical pricing based on research published in our pages.
Innovation Is Costly
Bringing a drug to market involves large costs. With the increased complexity of specialty pharmaceuticals, time and monetary investments are on the rise. As of 2003, product development costs were over $1.2 billion for both small molecule drugs and biologics. Biotechnology drugs had around a 25-30 percent success rate of approval once they entered clinical trials. Small molecule drugs have just over a 10 percent success rate. Clinical development time on average was 7.5 years throughout the 2000s, higher than the 6.5 years of the 1990s and three times higher than the 2.5 years in the 1980s.
Complexity of clinical trials has increased as well. By the early 2000s, clinical trials took 780 days to complete compared to 460 days in the 1990s. The number of biotechnology molecules (biologics) studied in clinical research skyrocketed from 80 in 1989 to 350 in 1998. Research and development costs also increased throughout the 1990’s, from $5 billion to $14 billion.
Exclusivity Encourages Innovation And Higher Prices
This trend towards specialty pharmaceuticals not only has an impact on what the drugs cost upon release but also impacts opportunities to develop similar drugs once the period of exclusivity has expired.
Pharmaceutical research and development in the US is complex and varies for small molecule drugs and biologics. Earlier this year we published a thorough review of the process and its incentives. The authors describe a patent system that provides protection for companies that invest large amounts of money in research, development and testing and thus encourages innovation. This same system also creates a monopolistic pricing structure.
Small molecule drugs receive up to five years of marketing exclusivity and up to 14 years of patent protection under the 1984 Hatch-Waxman Act. Biologics receive up to 12 years of marketing exclusivity and similar patent rights under the Biologic Price Competition and Innovation Act in the ACA. The average market exclusivity period is around 13 years.
The Hatch-Waxman Act allows generic equivalents of small molecule drugs to be approved under an accelerated review process. The generic must be “bioequivalent” to the brand name drug. The law also includes incentives for patent challenges, including 180 days of market exclusivity. Biosimilars are the “generic” versions of biologics. The process for developing these products is much more difficult.
While molecule drugs are chemical compounds, with easily determined formulas, biologics are much more complex. To receive biosimilar designation, the manufacturer will have to submit extensive studies of laboratory analysis. Additional clinical studies may be needed. There are also no comparable benefits of market exclusivity for biosimilars. To date, only one has been approved in the US, although more have been approved in Europe. As the market moves towards increased prevalence of biologics, a more onerous pathway for biosimilars may keep prices higher and reduce competition once exclusivity ends.
Returns On Innovation Are Declining
Pharmaceutical companies expect that their investment will provide enough financial returns to recoup their expenditures. However, recent Health Affairs research indicates these returns are declining. Returns on drug development peaked in the 1990s and 2000s and have declined since, due to decreased demand and increased development costs.
While biologics produce more net revenue than small molecule drugs, overall economic profits are close to zero. The authors also note a decrease in venture capital and private equity investment in pharmaceuticals and biotechnology. High development costs along with volatility in sales raises question about the sustainability of innovation.
Drug Prices Don’t Depend on Efficacy (Yet)
Specialty drugs, on average, can cost up to 10 times more than traditional drugs, but do provide value. A review of drugs approved by the FDA from 1999-2011 found that specialty drugs do provide more health gains than traditional drugs.
With the long development periods, increased research costs and high failure rates, prices for successful drugs are high. James C. Robinson provided an in-depth look at the pricing environment in our Biomedical Innovation issue. Pharmaceutical companies rely on pricing of current drugs to finance their future innovation. So-called “breakthrough” drugs, like Sovaldi, command high prices because insurers have no viable reason to deny coverage.
Medicare, the source of coverage for 50 million Americans, is prohibited from using cost effectiveness data to determine its coverage policies. As the clamor for clinical and cost effectiveness grows louder in the face of increasing health costs, drugs will need to prove their “premium performance” to maintain high prices. Incremental innovations will need to offer more competitive pricing to remain sustainable.
We’ve published blog posts on ways to price drugs based on their value, one calling for value-based reimbursement to reward novel drug development, and another calling for value pricing to improve patient access. As more high-priced drugs are brought to market, expect the discussion about value to continue.
New, Expensive Drugs Pressure Insurance Coverage
Without a clear drug pricing system or reimbursement based on value, insurers and other payers are left to negotiate with drug companies how much they will pay and what drugs will be covered. There are a number of complex factors involved.
Insurers may demand cost and clinical data from insurers to determine its impact.
With one breakthrough drug, insurers have little leverage to refuse coverage. But continued innovation produces therapeutically equivalent drugs, allowing insurers to cover one or two and requiring step-therapy for nonpreferred drugs. Insurers can also negotiate lower prices for better formulary placement. Absent a standardized process, a consumer’s access to drugs relies on the decisions of their insurer. There are some proposals for how to distribute these drugs more effectively than our current system.
There’s also the interplay between these new specialty drugs and the topic we previously covered in this series: deductibles and out-of-pocket costs. As consumers’ out-of-pocket share of drug costs increases, there are major implications to adherence and health. Especially for new drugs that cost hundreds of thousands of dollars per year.
New Drugs Impact Overall Health Spending
Increasing pharmaceutical prices aren’t just driving up costs to consumers, they are contributing to rising health care costs overall. The period 2007-2013 saw a number of small molecule drugs go off patent, leading to a decrease in pharmaceutical spending. However, with the release of new Hepatitis C drugs at the end of 2013 and in 2014, this trend has begun to shift. In 2013, prescription drug spending grew 2.5 percent, in large part due to growth in specialty drug prices. Stay tuned for the growth rate for 2014, the National Health Expenditure figures will be published in the December issue of Health Affairs.
The conflict between prices and innovation is unlikely to resolve quickly. As consumers shoulder more of the costs of their prescription medications, there will be more pressure on insurance companies to negotiate lower prices. We’ll certainly keep following it here at Health Affairs.
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