Drug Price Increases-Undue Pricing Power or Supported by Competitive Marketplace?

By Daniel Brog

Putting it mildly, there has been a lot of controversy around drug prices in the media and public domain.

Beyond criticism of high prices for breakthrough cures like Sovaldi or Kalydeco, much of the discussion has focused on price increases for drugs that have been on the market for several years. While the spotlight was initially on Turing and Valeant’s heavily maligned exorbitant price increases of generic drugs, the conversation has turned to standard 15 – 20% annual list price growth of branded products, such as this article from the Wall Street Journal this past October.

Despite these regular increases in list price, the growth of net prices, taking into account payer rebates and other discounts, has not been as substantial. An analysis by Credit Suisse estimates that annual net price growth has ranged from ~-3% to 11% in the past ten years. Including rebates, Express Scripts reported a total drug trend increase of 3.2% in 2015 despite an average 16% increase in branded drug list prices.

Even acknowledging that average drug prices have not truly grown at 15+% a year, the crux of industry critics’ argument is essentially that any price increases beyond inflation are the result of an egregious use of pharma manufacturer pricing power – regular price increases are not supported by competitive market forces and are therefore unjustified. After all, manufacturers’ COGS have not increased at a similar rate. Furthermore, these products do not change from year to year, and surely the same therapeutic does not offer greater value over time. Or does it? Are there factors that enable a therapeutic to offer greater value the longer it is on market, supporting an increased price?

Classic Asset Derisking

At a fundamental level, therapeutics are valued based on their benefits, their efficacy at treating a certain condition, balanced with their harms, the risk of adverse events. That is, drugs that work more effectively or have fewer side effects command a higher price than competitors.  These characteristics are initially assessed during a drug’s clinical development, in which it may be tested in a few hundred to a few thousand patients.  While these programs are heavily monitored, initial clinical development tends to focus on shorter term outcomes and may not catch all potential complications.

On launch of a new drug, there may be a significant risk of unforeseen adverse events. Once on market, drugs are used in a far larger number, sometimes millions, of patients. While each patient is not evaluated as closely as in a clinical trial, patterns in real-world use allow for greater observation of detrimental effects – or lack thereof.  Indeed, the FDA maintains an active post-marketing surveillance program of adverse events and therapeutic inequivalence.  As drugs are on market for a greater number of years and used in more and more patients, the risk of adverse events is assessed far more thoroughly than in the product’s initial clinical development.  This risk analysis rids drugs of much the uncertainty that an unanticipated and perhaps deadly adverse event could occur.

Beyond market data, industry frequently sponsors additional, and very costly, clinical trials post product launch. These often assess long-term health outcomes that were not evaluated in initial clinical trials, shedding light on potentially substantial benefits. In addition to providing insight on improved efficacy, they more and more frequently examine overall system economic effects, linking efficacy with real cost savings.  These studies help paint a far clearer picture of the true value a drug may provide, both to the patient and to the health system.

As for other assets, derisking therapeutics can lead to increased value. Real world experience and further clinical research give stakeholders more confidence in a drug’s ability to help patients while causing minimal harm.  Similar to other investments, reducing uncertainty here may provide substantial value for patients and for health systems.  While hard to quantify, this factor could justify a certain level of market supported drug price growth.

Clinical Experience Drives Value Growth

An interesting phenomenon with new drugs entering the market is their multi-year market adoption ramp, taking around 8 years to reach full adoption on average. Even in cases where a new drug shows markedly better efficacy or fewer side effects, physicians may only slowly begin to switch over to using the new treatment in place of the prior standard of care.  These products still take ~4 years to reach peak utilization.

When therapeutics are tested in clinical studies for market approval, trials are overseen by leaders in the field and patients are generally managed by experienced academic physicians. Drug dosing and patient compliance are heavily monitored to ensure proper utilization, and patients are carefully evaluated for incidence or any side effects or drug-drug interactions. This heavily regulated model simply does not match real world use.  General community physicians cannot match this level of oversight.

Without this level of rigorous patient management, doctors take time adapting to and getting comfortable with a new drug. Over time, they can not only learn more about a particular drug, but based on their own patients’ experience, learn the nuances of when a certain therapeutic should be used vs other options and how best to manage it.  Various facets of this learned knowledge are often published in medical journals and clinical guidelines to spread awareness and improve therapeutic decision making.  Doctors become more familiar with potential drug-drug and food-drug interactions, allowing them to better warn patients and minimize this risk.  Physicians may also gain insight into factors that contribute to particular side effects, giving them the ability to avoid drug use in patients likely to be more prone to certain adverse events as well as better manage and reduce these harms when they occur.

Patient compliance is another substantial factor that can strongly impact efficacy and adverse event rates. Adherence can be notoriously challenging with complex dosing regimens or certain routes of administration. While doctors gain experience using a particular drug, they get a better idea of what compliance issues commonly arise and how best to address them.  This raises their ability to oversee patient use and improve adherence.

As doctors gain clinical experience with a drug, these factors can all lead to a more efficacious, better tolerated therapy. The value added from these benefits could influence market dynamics, supporting rising prices for novel branded products as physicians gain experience in their use.  Although it is debatable whether drug manufacturers should reap these benefits, as they are not directly impacting patient experience, it’s worth mentioning they must also bear the costs of slow market adoption during a limited period of market exclusivity.

Reduced Buyer Power – Less Value Driven Rationale

Payers – as pharma companies are quick to point out – have substantial negotiating power and use it to garner large rebates in exchange for tiered formulary placement, and coverage at all.

Arguably, this power is greater when determining initial coverage for a drug about to launch than for negotiating prices after a therapeutic has been on market for a number of years, especially for chronic treatments. Simply put, payers have a far easier time restricting access to a new drug than halting coverage for a therapy a patient is already on.  In the former case, payers can fall back on general arguments that a new therapy does not provide appropriate cost/benefit vs current therapeutics or that they are simply not convinced by efficacy data.  While patients and advocacy groups may protest, they are driven by potential, rather than guaranteed, benefits of a new therapy that are being withheld.  However, when patients have been on a drug that successfully manages a chronic condition, they may get a strong sense that their therapeutic regimen works and grow confident in their treatment.  Cutting off coverage and forcing them to switch to something else may be, in the patients’ eyes, a major risk.  Even with similar average levels of efficacy and side effect profiles, individual responses can be highly variable.  A different drug may be less tolerable or simply not work as well.  After all, ‘if it ain’t broke, don’t fix it.’  Formulary changes that force such patients to switch may lead to more severe backlash than limiting coverage of a treatment patients have not started to use.  This added pressure on payers may reduce their negotiating power by limiting their ability to use coverage decisions to drive price concessions.  While they may be able to constrain price increases to levels below increases in list price, this factor may force payers to accept a certain level of price growth.

In contrast to the factors above, price increases resulting from a reduction in payer bargaining power would not be justified by any increases in actual value provided by a therapeutic. Payers’ ability to negotiate prices has no direct relation to health outcomes or overall system economics.  Price growth due to this reason, therefore, may not be truly supportive of an efficient health marketplace.

Price Increases – A New Guideline

Although some factors that support manufacturers’ ability to raise prices may not support an efficient market, there can be value-driven justification for sustainable price growth.

As has been discussed for drug prices generally, the rationale behind drug price increases is clouded in an opaque process. Drug companies often seem to steadily increase list prices every year without rhyme or reason, making it difficult to link price growth to specific factors.  While increases in net prices can be far more variable, the public is not privy to the discussions between manufacturers and payers, making a clear discussion around the factors behind price growth a hard one to have.

A more transparent process around drug price changes could go a long way. Instead of regular and large list price increases, manufacturers could instead use lower, market adoption-based, price changes and release statements describing this rationale.  Firms could apply larger price increases when an analysis of patient data showing few unforeseen adverse events becomes available or a new clinical study with strong results is published, linking the increase to reduced uncertainty and demonstrated patient and health system benefits.  This type of approach would not only link price growth to value supported data, but also encourage manufacturers to invest in following patients to provide regular evaluations of real-world patient data and clinical studies examining long-term patient outcomes and health economics.  This type of research could support improved overall patient health and a greater focus on health system cost savings.  Pharma companies might not be the only ones with a lot to gain from such an approach.

Daniel Brog is an analyst at Health Advances.

Opinions expressed here are solely those of the authors and do not reflect the views of Health Advances LLC, its management, or affiliates

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