Understanding the Value of Pharmaceuticals

Understanding the Value of Pharmaceuticals

The rising cost of developing innovative pharmaceuticals

The consumer cost of branded pharmaceuticals has been rising at a dramatic rate over the past two decades, although the rate of increase has declined in since 1999 (Kaiser, 2011). It has been estimated that it takes in excess of $802 million US dollars just to bring one product to the US healthcare market (Adams & Brantner, 2010). Much of this cost is driven by the rising cost of pharmaceutical research and development, and the rate of development failure that must be compensated by marketed products (DiMasi, 2001). There is also the additional cost of the extensive federal regulation on pharmaceutical market related to product development (e.g., clinical trials), manufacturing, (e.g., Good Manufacturing Processes, and GXP) and marketing (e.g., DDMAC requirements). The rising litigation costs in the pharmaceutical industry have also contributed to the rising cost to bring drugs to the market in the United States. For many companies, they rely on a blockbuster brand strategy, and unless a product shows potential to bring in >$1 billion, it may not be considered viable in the US market.

Determining the price of pharmaceuticals

Manufacturer drug pricing is very complicated, and encompasses market considerations that go far beyond the cost of developing and manufacturing the ‘chemical’ which is the medication. In today’s market, drugs are priced according to the overall treatment value they are anticipated to bring to the healthcare system and patient, not just the cost of the associated manufacturing process. The value of a pharmaceutical treatment may be determined by direct cost-shifting from other healthcare services (e.g., more costly inpatient or surgical procedures), an extention of productive life expectancy, or a reduction in risk of of long-term complications caused by disease progression as treated by other means. Measures of indirect cost may also be explored during pricing schemes, however payers are less likely to accept prciing that is only supported by indirect-cost arguments.

In the current US environment, the pharmaceutical companies have autonomy in setting prices for their medications. In many other places in the world, the government sets the price for pharmaceuticals . Manufacturers must demonstrate any additional benefit provided by their products in order to achieve price increases above the base treatment pricing provided by the government. While government pricing was a big part of the recent healthcare reform debate, the PPACA did not mandate government pricing in this round of healthcare reform. Instead, the US continues to allow market pressures to be the main mechanism of control on pharmaceutical pricing.

The cost of *not* developing all compound leads into medications

Given the changing economic market in the United States and rising scrutiny of the consumer costs of pharmaceuticals, there has been an increased uncertainty in the drug development market. While there may be a great societal need to development a treatment, if there is negative economic incentive for a for-profit pharmaceutical company to develop a compound, the compound will be shelved and not developed into a medication (Chen & Beckman, 2009; Lesko, Rowland, Peck, & Blaschke, 2000,).

Innovative pharmaceutical products (branded drugs) are protected by patents, which can be quite complicated. The type and length of patents can contribute to the consideration of the price of the pharmaceutical (Grabowski, 2001). If a company cannot determine protection of its investments through the security of patents, a lead compound may not be developed into a drug—no matter how potentially valuable that drug may be to providing a cure.

The role of non-profits and government in drug development

At the current time, there is no ‘charitable’ way to provide a non-patented compound to the US market without the expensive cost of full development. There are no governmental agencies which can bear the cost burden of independently developing a compound into an approved marketed medication, given all of the US-regulated costs associated with drug development and market approval. In other words, the only avenue for complete drug development is through for-profit commercial interests. While there are numerous not-for-profit entities doing certain aspects of early drug discovery and development, they are limited in scope and cannot bear the burden of the phase III clinical (human trial) aspect of drug development (Frye, 2011).

During the recent downturn in the pharmaceutical market, so many pharmaceutical companies have withdrawn their drug development programs that Francis Collins, the director of the National Institute of Health, has called the lack of new drug development a ‘pending public health crisis’. If there are no commercial entities developing new products, the American public will suffer a crisis in the next ten years which may be potentially insurmountable to the entire world, since the majority of global medications are developed in the United States In response to these issues, the NIH Scientific Management Review Board (SMRB) has supported the creation of a new institute at NIH which will focus on translational medicine, the National Center for Advancing Translational Sciences (NCATS).

The NCATS will serve as a consolidated source for public-private partnerships specifically designed to support innovative drug development. NCATS will house the Clinical and Translational Science Awards (CTSA) program, along with the Cures Acceleration Network (CAN), Molecular Libraries Program (MLP), Therapeutics for Rare and Neglected Diseases (TRND) and Rapid Access to Interventional Development (RAID), as well as the new NIH-FDA partnership activities. It is anticipated to be chartered and implemented by 2012. The goal of the new center will not be full drug development, but to create partnerships that will accelerate compounds early in development, and streamline identification of more lead compounds. With the early development cost absorbed, key identified compounds may be more attractive to commercial pharmaceutical companies to re-invest in the Phase III clinical testing, which is the highest expense of the drug development process. Partnership with the government may also bridge some of the risk and concerns about governmental approval and post marketing regulatory authorities.

Coverage of pharmaceuticals in the United States: What matters to payers, a managed care perspective

In the United States, the primary system for financing and delivering healthcare services is through Managed Care Organizations (MCOs) (Neuman, 2004). Those that offer both pharmacy and medical benefits to individuals are known as Health Plans and those that offer pharmacy benefits separately are known as Pharmacy Benefits Managers (PBMs). An individual enrolled in a MCO can obtain pharmaceutical coverage for drugs if they are included on the MCOs preferred list of drugs, or formulary. Each MCO has a Pharmacy and Therapeutics (P&T) Committee that determines the formulary status of each drug (Neuman, 2004). Prior to 2001, the process of formulary development lacked transparency and the quality of information available to P&T Committees was not sufficient to make informed decisions on the coverage of pharmaceuticals (Neuman, 2004).

AMCP Format for Formulary Submissions Version 3.0

The Academy of Managed Care Pharmacy (AMCP) is a professional association of pharmacists and healthcare professionals who use managed care principles to improve healthcare for all beneficiaries covered by a managed care pharmacy benefit in the United States (Academy of Managed Care Pharmacy, 2011). The AMCP Format for Formulary Submissions Version 3.0 is the industry standard format used by managed care organizations to evaluate the value of new and existing drug products for formulary coverage status (FMCP Format Executive Committee, 2009).

The Format is designed to achieve two goals:

1. improve the timeliness and quality of information provided to P&T Committees; and
2. to streamline the process of data acquisition and review of drug products by MCOs (Sullivan, Lyles, Luce and Grigar, 2001).

The Format includes both clinical and economic evidence on the health outcomes of individuals to support the product’s value statement. Specific sections include a formulary submission checklist outlining the impact of the drug product on cost and clinical outcomes, a description of the drug product and disease it treats, a summary of all studies assessing the drug, and a description of necessary information to include in the economic model (FMCP Format Executive Committee, 2009). Finally, the Format recommends including a transparent, interactive budget impact model that the MCO can use to input their plan specific information to see the financial impact of including the drug on formulary (FMCP Format Executive Committee, 2009). This feature allows MCOs to understand and translate clinical and economic information to determine the affordability of adding a drug product to the formulary given their specific plan population and budgetary constraints.

Healthcare reform… what can be expected in the future?

There is little comparative data on prescription drugs’ effectiveness, safety and price that is accessible and easily understandable for consumers. Currently, Consumer Reports Health Best Buy Drugs™ is one resource for such information.(Consumer Reports, 2011). The Drug Effectiveness Review Project (DERP), a multi-state effort to determine the effectiveness and safety of various prescription drugs, conducts the Best Buy Drugs™ reviews (Drug Effectiveness Review Project, 2011).

The Patient Protection and Affordable Care Act (PPACA) may advance consumers’ understanding of the value of pharmaceuticals through the creation of the Patient-Centered Outcomes Research Institute (PCORI), “an independent organization created to help patients, clinicians, purchasers and policy makers make better informed health decisions” (PCORI, 2011). PCORI will commission research on how effective, beneficial and harmful various drugs, procedures and devices are; however, PCORI cannot use quality-adjusted life-years or other measures to determine whether a therapy is cost-effective (Patient Protection and Affordable Care Act, 2010). In spite of that limitation, some researchers argue that PCORI research results could help others calculate the cost-effectiveness of drugs and other interventions (Garber & Sox, 2010). In addition, an increasing number of physicians are using electronic medical records (EMRs) in place of paper patient records; data from EMRs could show physicians and researchers how well therapies are working in “the real world” as opposed to clinical trials. This information could help physicians, consumers and others in comparing the relative value of different drugs (Avorn & Fischer, 2010; Etheredge, 2010; Epstein & Teagarden, 2010).

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