By Paul Howard
November 11, 2014 at 5:00 am ET
While a 60 Minutes segment on cancer drug pricing in October generated a media firestorm and an outpouring of predictable criticism of industry, drug costs shouldn’t be the primary focus of reform efforts. Ultimately, putting the question of overall value (including hospitals and physician services) front and center in cancer treatment decisions– as opposed to the price of any one technology – can help physicians, researchers, and drug companies focus on delivering better therapies for patients and the best value for the health care system.
Prescription drugs account for only about 10% of the U.S.’s $3 trillion health care tab. Also often overlooked is the fact that consumers’ share of costs for prescription drugs have been falling steadily for decades, and is expected to drop to 12% by 2023, from 17% last year, according to the Drug Channels Institute.
IMS Health reported in April that nearly 79% of prescriptions cost patients $10 or less. On the other hand, 30% of patient out-of-pocket costs come from just 2.3% of prescriptions. While drugs remain broadly accessible and affordable, a critical sliver of patients (including some cancer patients) are undoubtedly facing higher costs (typically through co-insurance) that may make effective therapies unaffordable.
Given the fee-for-service nature of much of America’s health care system, where we pay for drugs, hospitals, and physician services separately, no one is rewarded for using a more effective product or prevention strategy when it would negatively impact their bottom line – even if it lowered overall health care costs in the long term. And every player complains about someone else’s pricing.
Breaking up those silos and measuring the impact of any new technology across the entire continuum of a disease episode would provide a much more rational way of measuring the value of new drugs and medical devices – as well as providing competitive benchmarks for pricing products and services.
Rather than rail against prices per se, we should be emphasizing delivery system reforms that align incentives for plans, providers, and patients to embrace technologies that deliver the most value for every dollar spent.
A small but provocative study by UnitedHealthcare (UHC) suggests that bundled payments for cancer care could help drive physicians towards the most effective cancer treatments while also lowering total health care costs. In 2009, UHC launched a pilot program that switched 5 large oncology practices to episode-based payments for lung, breast, and colon cancer, rather than reimbursing physicians based on the cost of the medicines they used. UHC bundled payments for hospital and hospice care, and paid a flat fee to every practice for managing their chemotherapy patients.
Against expectation, UHC found that oncologists’ drug costs in the pilot increased by 179%, but overall treatment costs fell by 34% — $40,000 per chemotherapy patient.
These results suggest that realigning payment models to promote value can deliver outsized gains, especially if we also think carefully about how to combine delivery and payment system reforms with consumer-focused transparency efforts.
Focus on value. The relative unit of analysis should be the full regimen of care and the total cost of care for a patient with a given indication or stage of cancer. The most effective drugs should reduce the use of ancillary services like hospitalizations and/or deliver other benefits that patients value highly. Bundled payments should encourage providers to embrace technologies that deliver real value to patients that are at least commensurate with added costs, if any. Developing specific benchmarks for cost and quality for specific patient cohorts – based on disease stage, genetic status, or other variables – will be hard, but well worth the effort. Drug pricing agreements can also build in benchmarks for attaining specific patient outcomes.
Embrace competition across the board. Research suggests that oncology services (including drugs) delivered in hospital-owned facilities is much more expensive than similar services delivered by independent practices. Patients should be encouraged to seek treatment at the most efficient providers, based on transparent metrics for provider costs and outcomes. Provider payments should be based on quality, not just on the site where a treatment is delivered. The growing embrace of narrow networks and tiered network designs should give plans more ability to push back on hospital pricing – especially if consumers trust that narrow networks deliver high value, coordinated care to cancer patients.
Design smarter co-pay strategies. Co-pays and co-insurance can be effective utilization tools, but rather than basing them on a product’s price, they should reflect the underlying value of the product – including longevity gains, reduced toxicity, or other improvements to quality of life. “Big data” analysis of claims, costs, and outcomes data (together with better patient registries) should help plans right size co-pays for individuals – rewarding patients for seeking out the most effective therapies. Ideally, co-pays should be as individualized as possible, encouraging the use of more personalized therapies.
We also shouldn’t expect one-size-fits-all answers to the question of value. Premera Blue Cross, in Washington State, is offering self-insured employers the option of using a value-based formulary where co-pays for drug tiers are based on incremental gains in quality adjusted life years (QALYs). This formulary design yielded 11% lower costs than expected in a pilot program.
Other insurers will undoubtedly try other approaches, and growing private and public health insurance exchanges will provide ample opportunities for competition between plans based on network and formulary design. Value-based competition will in turn encourage drug companies to develop better pharmacoeconomic evidence on their products – and to focus new drug development on populations who get the least benefit from current therapies.
Ideally, 60 Minutes’ story on drug costs will galvanize a much wider conversation about delivery and payment system reforms for cancer care. Focusing on drug prices in a vacuum may serve up some convenient villains, but it won’t solve any of our larger health care challenges.
Paul Howard is the director of the Manhattan Institute’s Center for Medical Progress.