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February 26, 2015

Drug Price Policy: New Transparency Bill Would Require Drug Companies To Report Costs For High Cost Drugs; Will Annuities Be The Future Payment Model For Expensive Medicine?


An interesting claim against the pharmaceutical industry (though usually made by only industry's most hardened critics) is that companies don’t want to find a cure—they’d prefer lifelong patients. Recently, Gilead Sciences indeed found a cure for hepatitis C--one that both gets rid of the hepatitis C virus in a patient’s body and does so without many of the terrible side effects that plagued previous therapies. Rather than embracing the medical breakthrough, however, many articles focused on the $84,000 price tag for the full round of treatment. Few mentioned the long-term cost savings now that newly cured patients could lead productive lives without frequent, expensive hospital visits, or would avoid a liver transplant down the road, which might cost a quarter of a million dollars.

California Bill: "Pharmaceutical Cost Transparency Act of 2015"

Highlighting the focus on cost, California lawmakers have just introduced a bill that would require each manufacturer of a prescription drug that costs "$10,000 or more annually or per course of treatment" to file a yearly report outlining the costs for every such drug. 

The report would have to include the following costs paid by the manufacturer and, separately, the costs paid by "any predecessor in the development of the drug": 

  • Total costs for the production of the drug, including the total R&D costs
  • Total costs of clinical trials and other regulatory costs
  • Total costs for materials, manufacturing, and administration attributable to the drug
  • Total costs paid by any entity other than the manufacturer or predecessor for research and development, including any amount from federal, state, or other governmental programs, or any form of subsidies, grants, or other support. 
  • Any other costs to acquire the drug, including costs for the purchase of patents, licensing, or acquisition of any corporate entity owning any rights to the drug while in development.
  • The total marketing and advertising costs for the promotion of the drug directly to consumers, including, but not limited to, costs associated with direct to consumer coupons and amount redeemed, total marketing and advertising costs for promotion of the drug directly or indirectly to prescribers, and any other advertising for the drug

Manufacturers of, as the bill says, "ultra-high-priced pharmaceuticals" would also have to report an annual history of average wholesale price (AWP) and wholesale acquisition cost (WAC) increases for the drug, including the months each increase took effect, as well as the total profit attributable to the drug, in total dollars and a percentage of total company profits. 

California Assembly member David Chiu (D- San Francisco), who introduced the bill, released a Press Release on the proposal. He also provided the following quote to Wall Street Journal: “What we’ve heard for years,” says Chiu, “is that drug pricing is commensurate with costs and that very may well be the case. But we’ve had no transparency about the cost between R&D and the prices charged. Hopefully, this will reduce prices in the long run. But just having the conversation is important. But if your costs are related to your prices, provide the information to help us understand that.”

New Staggered Payment Model

An interesting Forbes article entitled "How Obamacare Pits Insurers Against the Medical Industry," highlights how drug prices will increasingly become a "political event." The writer, Scott Gottlieb, also notes that despite insurance company "surprise" by drug prices, such as Gilead's hep C treatment, Sovaldi, payers knew the likely price up to two years beforehand. 

A fundamental issue with insurance company's (and the public's) knee-jerk reaction to a high-cost cure is that they are in essence ignoring that a product's lifetime savings could be far greater than the one-time payment. A recent Reuters article, written by Deena Beasley, outlines an innovative payment model that would help change this dynamic and reward drugmakers for the long-term performance of the medications. 

Under the potential model, the cost of an expensive therapy would be amortized over time and contingent on proof of the medication's safety and efficacy. Partial payment at the start of treatment would alleviate what would be a very high cost burden, in favor of spreading out the cost. 

The article focuses on firms that are developing gene therapies, which Beasley explains “aim to cure inherited diseases like hemophilia by ‘fixing’ the single faulty gene responsible for the disorder.” Companies in this space include BioMarin Pharmaceutical Inc. in San Rafael, California, and Sangamo BioSciences Inc. in Richmond, California, she notes.

“If these new hemophilia drugs and others like them succeed, a one-time infusion could replace the need for frequent, life-long injections of blood clotting proteins that can cost up to $300,000 a year for a single patient,” Beasley states. Existing hemophilia treatments, “including Pfizer Inc's Xyntha and Baxter International's Advate, are expected to command annual sales of more than $11 billion by 2016.”

The need for a payment model for gene therapies is a ways off stateside, though. "No gene therapies have been approved in the United States, but Europe approved its first gene therapy last year," notes the article. "Glybera treats a rare disorder that clogs the blood with fat and has been cleared for reimbursement in Germany at a price of 850,000 euros, or around $1 million."  Joern Aldag, CEO at Dutch biotech firm UniQure NV, which developed Glybera states that Glybera "will be sold for a one-time payment because it is too difficult to measure how well it works."

Uncertainty regarding a treatment's efficacy is one potential issue standing in the way of this new payment model, although the article notes that "[t]he annuity-like payments would be stopped if medical testing, such as the level of clotting protein measured in a patient's blood sample, showed that the therapy was not working."

Beasley also states another consideration in implementing such a model: "Since Americans often switch health insurers, contracts - or even legislation - would be needed to require payers to pick up the ongoing tab for patients who change their coverage." 

Despite some clear barriers, Beasley notes that "the interest in new payment models reflects the healthcare industry's intention to find new ways to bolster profits as insurers push back against drug prices." Furthermore, "[s]ome backers of the new model say the payment streams could eventually be packaged and sold to investors, as happens now with securities backed by financial assets like credit card receivables."


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