High-Priced Drug Treatments – Worth the Cost?

Published October 1, 2014

Drug manufacturer Merck won approval in September from the Food and Drug Administration for its new “game-changing” treatment, Keytruda, for late-stage melanoma, a deadly skin cancer. Keytruda offers “unprecedented response rates” for patients with late stage melanoma who otherwise face a death sentence, according to a September 8 analysis by Colin White, lead analyst for oncology at Datamonitor Healthcare.

Though the treatment is a potential lifesaver, the cost—$12,500 per month over an average of six months—is likely to ruffle some feathers.

Similarly high-cost treatments for hepatitis c and a rare form of leukemia have generated anger from insurance industry trade groups, patients, and doctors. But focusing only on the cost of these drugs without considering their benefits may be misleading.

Tomas Phillipson, a public policy professor and health economist at the University of Chicago, says critics of these high drug prices are missing the point. Discussing Gilead Pharmaceutical’s Sovaldi, which costs $84,000 for a full treatment and has been praised as being nearly a cure for hepatitis c, Phillipson said “$84,000 upfront is expensive, but not for living without hepatitis C.”

Clamping Down on Expensive Medicines

Although the benefits to patients of high-priced medicines may seem obvious, not everyone is happy to see them. Insurance companies in particular have voiced concerns about the costs, as have state Medicaid programs.

One state, Illinois, developed a set of 25 criteria to determine in what cases the state’s Medicaid program would pay for the drug. In an interview with The Wall Street Journal, Dr. Arvind Goyal, medical director of Illinois’ Department of Health Care and Family Services, defended the decision, saying, “On one hand, I recognize that everybody should be able to get reasonable medical [care],… [but] if we decide that the cost doesn’t matter,… then we’ve become irresponsible and irrational.”

According to Columbia Business School professor Frank Lichtenberg, “demonstrating benefits requires good data and careful analysis.” So although the value of new treatments may be significant—Lichtenberg argues in a forthcoming paper pharmaceutical innovation has resulted in savings “three times as large as the cost of new drugs consumed”—the prices are upfront and more visible.

Little Appetite for Price Controls

Despite the concerns about high drug prices, few are willing to suggest price controls on prescription drugs.

“I don’t think our country is ready to stomach drug negotiations and drug regulations to that extent,” drug industry consultant Lauren Barnes, senior vice president of Avalere Health, said in the same CNBC article in which Express Scripts’ Dr. Miller made his comments.

Instead, payers in the insurance and benefits industries are trying to use their market power to force the drug companies to lower prices. Such tactics include plans to switch patients to lower-cost options expected to be approved by the FDA in the coming months and years.

Innovative Financing Options

Another possible way to address the high cost of drugs may be through the development of innovative financial products.

In a July 2014 Forbes op-ed, former FDA Commissioner Dr. Andrew von Eschenbach and University of Chicago health economist Phillipson make the case credit markets can help defer some of these large costs over time.

Although there already are some credit instruments for health care, the interest rates can often be very high. Better financing mechanisms, which might even include government guarantees, could help make the interest rates less burdensome the writers say.

“Just as there would be fewer homes purchased if the full value of a house had to be paid up front without mortgages,” personal financing of drug costs can be a huge burden, Von Eschenbach and Phillipson note. “Public and personal health will suffer needlessly unless we develop better credit mechanisms for patients and payers in health care.”

Yevgeniy Feyman ([email protected]) is a fellow at the Manhattan Institute