Reducing Drug Costs and Creating a Golden Age of Diagnostics

The Trump administration recently released a 100-day progress report on its drug pricing initiative. The plan is impressive, offering reforms on everything from international price controls to list price inflation.

Yet it omits one important market-based reform that could drive down drug costs and drive up overall health care system efficiency: overhauling the sclerotic reimbursement system for diagnostic tests.

With the mapping of the human genome, diagnostics industry stock prices should be surging on the development of new, genomic tests that personalize therapy selection, diagnose disease earlier and predict response. Yet, while investors are betting billions on new drugs, investment advisers warn against diagnostic company stocks because the reimbursement model is so broken.

While attempts have been made to link diagnostic test prices to commercial value, Medicare and private payers still use a formula that largely reimburses a test based on the cost of running it, not the risk involved in developing it or its value in the marketplace. Were this same reimbursement model applied to pharmaceuticals, the government would set prices for drugs based upon the cost to manufacture them.

What incentive would there be to find a cure for a dreaded disease if the drug’s price were tied to its manufacturing cost, not its value in the marketplace? Yet few seem to recognize the toxic effects such a policy has on innovation in the diagnostics industry.

Consider that every drug developed is rationally designed to hit a biologic target in a given disease. Because people are genomically diverse, the majority of patients in a given disease group do not have the same genomic makeup. Therefore, the most commercially successful drugs only have response rates of approximately 35 percent in a non-stratified population.

Without diagnostics, patient selection of drugs is akin to bringing your car to a mechanic who doesn’t have the diagnostic computer system available in most repair shops. Since your mechanic has little idea why your warning light is on, he might say: “It could be the battery. If that doesn’t work, come back, we’ll try the carburetor. If it’s not that, we can always replace the catalytic converter.” You wouldn’t stay with that mechanic, so why do we put up with trial-and-error medicine?

Disincentives to innovation come just as new diagnostic technologies are needed to help sort the many expensive new therapies emerging from drug company laboratories. Last year, half of new drug approvals were for “orphan” or rare diseases, therapies that carry a higher cost.

Any insurance company medical director worth his or her salt will tell you that the cost and risk profile of orphan drugs is an urgent challenge, particularly when compounded by annual price increases. The challenge is just as acute for patients who find themselves on expensive therapies and in insurance plans with high out-of-pocket costs.

Last year, 3.4 million prescriptions were written to patients with out-of-pocket costs of more than $500, with an average prescription cost of $1,502. A robust diagnostics industry could help individuals, their employers and payers with their drug cost challenges.

In 2016, Humira, the largest-selling drug in the world, had sales of $16 billion, and it’s forecast to sell $21 billion by 2020.  Humira is an anti-tumor necrosis factor inhibitor that can mitigate the symptoms of a number of conditions, most importantly rheumatoid arthritis.

According to a recent study, nearly 89 percent of patients are prescribed an anti-TNF as first-line biologic therapy when they exhibit symptoms of rheumatoid arthritis, despite evidence that other Food and Drug Administration-approved therapies are equally effective. And anti-TNF therapy only works for a third of patients, generally requiring nine to 18 months of treatment before a patient is switched to another therapy class. Payers and patients could literally save billions from a simple diagnostic test that would tell them in advance whether their joint pains were driven by tumor necrosis factor.

The same applies to the treatment of cancer patients. With response rates to standard-of-care therapies well below 55 percent for most cancers, patients endure expensive and toxic treatments without achieving complete response. Predictive diagnostic tests provide actionable information for physicians to target the appropriate treatment modality, thereby impacting outcomes and reducing costs — such as with the use of ALK in lung cancer or HER2 in breast cancer, but these are outliers in cancer treatment. The benefit of diagnostic tests would considerably impact the $88 billion spent annually on treating cancer in the United States.

Diagnostic companies currently have no assurance that the price of tests would be related to the enormous value they bring to payers and patients. Who would want to invest in developing a product with a price that did not reflect its value?

The solution is obvious: Let the marketplace price the product. Patients need to be aware that diagnostic technology exists and press their physicians about what their options are.

Payers need to have a uniform process to provide input on their market needs, benchmarks for clinical validity and utility, while diagnostic developers work with physician groups on establishment and inclusion in clinical guidelines. But once these requirements are met, companies should be permitted to price the product according to its value.

Genomics and precision medicine not only bring patients hope, they promise to deploy costly medicines more efficiently.  Reforming the reimbursement model for diagnostics represents an essential step in a health care revolution that is poised to reduce cost and improve outcomes.


Hannah Mamuszka is CEO of ALVA10, a Cambridge-based health care consulting firm.  

Pamela Layton is president and COO of Bioarray Genetics and a board member at Pioneer Institute in Boston.

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