The Fight Grows Around Specialty Drug Pricing

A March 2014 letter from Democrats on the House Energy & Commerce Committee questioning the cost of its Hepatitis C medicine, Sovaldi, signaled that the intense controversy over pricing of specialty drugs had jumped from the board rooms of insurance companies to Capitol Hill. The debate over Sovaldi crystallizes questions that have been simmering under the surface for several years: what is the value of breakthrough curative therapies, what returns are necessary to reward and incentive continued biomedical innovation, and can the healthcare system sustain the rapid increase in specialty drug spending?

Sovaldi pricing did not break new ground: a 12-week standard course costs $84,000 in the United States, and the total cost almost doubles when Sovaldi is prescribed in combination with other drugs. While a $1,000-per-pill (once daily) price tag is unusually high, Gilead points out that the product exhibits tremendous efficacy and has dramatically changed the treatment prospects for those suffering from Hepatitis C.

The controversy about Sovaldi is related not to the price but rather to the cost to society, which is a function of both price and market size. By producing an effective, safe and tolerable cure, Gilead dramatically expanded the market for Hepatitis C.

About 3.2 M Americans live with Hepatitis C today. Many of them are the nation’s most vulnerable, with some on Medicaid, others in prison and almost all with co-morbidities. For each oneof these patients, Hep C has suddenly turned from a chronic illness to a curable one.

So far, payors are covering the new Hepatitis C virus (“HCV”) drugs (Johnson and Johnson’s Olysio carries a $66,000 price tag), and the manufacturers have offered very little in pricing discounts. A new HCV drug from AbbVie is expected in early 2015, and until the clinical data are seen, it is too early to tell whether this new product will price at a discount, on par, or even at a premium to the existing drugs.

Some context is important here. HCV has not historically been a blockbuster therapeutic category for pharmaceutical companies and Sovaldi is far from being the highest price drug in the U.S. However, headlines about the cost of quickly covering millions of patients has seized attentionon Capitol Hill and beyond. State Medicaid agencies have begun to place pressure on formularies by creating step therapy and prior authorization to ensure that only the sickest receive the pricey treatment.

Insurers, employer groups, pharmaceutical benefit managers (PBMs) and others are criticizing the pricing strategies, claiming that one pill is blowing up their budgets. A recent analysis found that, because Sovaldi is so expensive, California could potentially spend more on administering the 12-week drug for a Californian on Medicaid than it does to provide a California student with a full K-12 and college education.

Because of the noise level, biopharmaceutical companies are in the beginning stages of having to prove the value of specialty medicines in terms that will fly both with lawmakers and with the public. The argument that prices are justified because they are necessary to “recoup R&D” will only get them so far.

Adding fuel to the PR fire for specialty phama is the growing emphasis on healthcare cost transparency, brought into the national conversation by the now famous “Bitter Pill” article written by Stephen Brill for Time magazine.  The Medicare program has now released data on what it pays hospitals for certain procedures and — more recently — a trove of billing and administrative data about individual physicians who treat Medicare patients. Some believe that releasing prescription drug data will be next.

While the headlines over Sovaldi pricing are unlikely to lead to direct Congressional action in 2014, the din over specialty pharmaceuticals will only continue in D.C. Not surprisingly, Republicans and Democrats have very different approaches to dealing with these drugs. On the one hand, Republicans are working on an initiative to speed the approval of breakthrough drugs, which some worry could lead to high drug prices. On the other hand, Democrats believe in requiring drug makers to provide rebates as a condition of participation in the Medicare prescription drug program.

The conversation in Washington around specialty pharmaceutical pricing could expand in 2015. With the drug user fee reauthorization bill in the works, it’s entirely possible that legislative language addressing specialty drug pricing could be attached to this must-pass vehicle.

Attention will soon focus on the ACA’s health insurance exchanges and the access to specialty drugs in the marketplace health plans.  With high co-pays and deductibles across many qualified health plans, consumers’ ability to pay for these drugs is a real question.

Two bodies created by the Affordable Care Act — PCORI and IPAB — are unlikely to address the pricing issue. The Patient-Centered Outcomes Research Institute (“PCORI”) could be a source of funding for research on the effectiveness of specialty pharmaceuticals, but such studies are often costly and difficult to carry out. The Independent Payment Advisory Board (“IPAB”) has the potential to authorize changes in the Medicare program to reduce payments for specialty medicines. However, as of today, the law has not triggered IPAB’s authority to act.

For their part, private health insurers are concerned about specialty pharmaceutical pricing. Insurers would like to see a medical loss ratio (“MLR”) instituted for prescription drugs, which would cap profits for drug makers and reduce coverage costs for insurers.  An MLR for drug makers may be unlikely, but something may have to give.

Finding the right balance between cost containment and patient access will be key. Ultimately, specialty drug makers may be able to impact how these debates take shape in Washington and elsewhere. They’ll have to come up with explanations for pricing that are accepted by patients and politicians as fair. If they succeed, the controversy will shift from whether drug companies are making excessive profits at the public’s expense to how society can increase the flow of breakthroughs. If they fail, the industry will be forced to restructure.


Ipsita Smolinski is Managing Director for Capitol Street, a healthcare research and consulting firm in Washington, DC. 

Morning Consult