Price vs. Value: The Story and the Rest of the Story

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  • 07/27/2015

As John Adams quipped, "Facts are pesky things."

First the story – and then the rest of the story.


Insurer Uses Clout to Negotiate Drug Prices; Critics Challenge Medicare Brand name Pricing

Jul. 27, 2015, Drug Industry Daily

UnitedHealth Group plans to use its market strength to negotiate prices to help consumers purchase expensive specialty drugs, adding to a growing press from doctors, patient advocates and lawmakers to rein in costs.

According to UnitedHealth, the acquisition of rival Catamaran by its Optum-Rx pharmacy-benefits business will give the insurer a new competitive edge in seeking payments or refunds based on whether drugs help patients.

The announcement — which underscores payers’ growing use of patient outcomes to determine drug pricing — comes on the heels of a report claiming Medicare pays 73 percent more than Medicaid and 80 percent more than the Veterans Administration for brand name drugs.

The report, by Public Citizen and Carleton University, claims $69.3 billion was spent on prescription drugs through Medicare Part D in 2013. The report points to research from Avalere Health showing roughly 58 percent of Part D spending in 2011 went to brand name manufacturers.

The report urges Congress to pass legislation allowing Medicare to reduce brand name drug prices to at least the level of Medicaid or the Veterans Health Administration and to introduce mandatory generic substitution for all plans under Part D. Currently, the federal government is prohibited from leveraging its Part D purchasing power even though private plans obtain substantial rebates from drug makers and pharmacies.

Critics of high drug costs have singled out the price of Gilead Sciences’ hepatitis C drug Sovaldi (sofosbuvir) as being particularly egregious. At $1,000 a day, the Veterans Administration has already exceeded the more than $400 million budgeted for hep C treatment in fiscal 2015, according to Sen. Bernie Sanders (I-Vt.), who recently called for wartime powers to break the patents on the drug (DID, May 15).

But it’s unclear whether the anger over drug prices is sufficient to fuel real change in the form of legislation.

Peter Pitts, president of the Center for Medicine in the Public Interest, says it’s artificial to compare drug prices with what the VA pays, since the agency gets the lowest possible prices by law. He also points to a 2014 Congressional Budget Office study that showed drug prices would be higher if the government negotiated Part D pricing.

Separately, more than 100 oncology doctors called for cutting the prices of cancer drugs. All new cancer drugs approved by the FDA in 2014 were priced above $120,000 per year of use, according to their article in Thursday’s Mayo Clinic Proceedings.

PhRMA was quick to respond to both reports, saying proposals to fundamentally alter the structure of the Medicare Part D program would hurt taxpayers and beneficiaries.

Read the Public Citizen, Carleton University report here — Jonathon Shacat


Let’s start with Sovaldi. The Public Citizen and Carleton University do not mention in their report that one pre-Sovaldi “best practice” treatment for Hepatitis C, the drug Pegasys, requires one injection a week for 48 weeks — and very few patients see the treatment through to completion, so much of that treatment, both physician time and drug cost, is wasted. Nor is it that much cheaper: At about $7,000/month, the full course of treatment is over $70,000 — barely less than cost of the three months needed for Sovaldi to work a cure. And the price of not using Sovaldi is very high. One in three patients with the Hepatitis C virus eventually develops liver cirrhosis, and managing these patients is costly. A “routine” liver transplant (where the liver is from a cadaver) costs close to $300,000; a “living donor” transplant is even more expensive. But why let the facts get in the way.

Data recently published by the PwC Health Research Institute suggests the reverse. The study shows that the use of Sovaldi will actually drive down overall spending within a decade.

Also, is anyone really paying “$1000 per pill?” Certainly nobody with insurance. And for those without coverage there are generous programs supplied by the manufacturer. What rates have large payers negotiated?  They won’t say. Hm.

Let’s tackle the VA next. The Veterans Administration’s national formulary covers 59 percent of the 200 most popular drugs in the country. (Medicare covers 85 percent of those drugs.) And a study from Columbia University found that just 19 percent of all new drugs approved since 2000 were covered by the VA and just 38 percent since 1990. Media reporting missed these facts too.

Per “negotiating prices” for Medicare Part D, allowing the Federal government to negotiate drug prices would result in prices going up and patient choice going down. That’s why the Non-Interference Clause, the legislation that prohibits Federal price negotiation was created in the first place. It’s interesting and important to note that the legislative language was drafted by Senators Ted Kennedy and Tom Daschle.

The Congressional Budget Office found that between 2004 and 2013, Part D cost an extraordinary 45 percent less than what was initially estimated and premiums for the program are roughly half of the government’s original projections. These unprecedented results are largely due to Part D’s market-based structure. Beneficiaries are free to choose from a slate of private drug coverage plans, forcing insurers to compete to offer the best options to American seniors. It’s hardly surprising that the program has led to low prices and satisfied customers. Through their own negotiations with drug makers, private insurance plans that operate under Part D have already had great success in keeping pharmaceutical prices down. In fact, the CBO has observed that Part D plans have “secured rebates somewhat larger than the average rebates observed in commercial health plans.” What’s more, the CBO has said that doing away with the non-interference clause “would have a negligible effect on federal spending.” In a report from 2009, they reiterated this view, explaining that such a reform would “have little, if any, effect on [drug] prices.” In fact, allowing the feds to negotiate drug prices under Part D would likely have a negative effect on the program. The CBO predicts that when HHS forces pharmaceutical firms to lower the cost of a particular drug, this tactic brings with it “the threat of not allowing that drug to be prescribed.”

And as far as Senator Sanders’ call for “wartime powers to break patents,” there is no such thing as a free lunch – let alone “free” innovation. While opaque and seemingly arbitrary drug pricing deserves immediate attention, the value of innovation must not be ignored. Innovation is hard. Today it takes about 10,000 new molecules to produce one FDA-approved medicine. This observation itself is disconcerting, but, further, only 3 out of 10 new medicines earn back their R&D costs. Moreover, unlike other R&D-intensive industries, biopharmaceutical investments generally must be sustained for over two decades before the few that make it can generate any profit. Innovation is slow. As any medical scientist will tell you, there are few “Eureka!” moments in health research. Progress comes step by step, one incremental innovation at a time.

As Abraham Lincoln said, “Patents add the fuel of interest to the passion of genius.”

But don’t all these wonderful innovations come from government-funded research? Nope. A study in Health Affairs by Bhaven N. Sampat and Frank R. Lichtenberg (What Are The Respective Roles Of The Public And Private Sectors In Pharmaceutical Innovation?) puts the issue in a data-driven perspective that gives the NIH its due – but in the proper frame of reference.

For example, according to Sampat and Lichtenberg, fewer than 10 percent of drugs had a public sector patent, and drugs with public-sector patents accounted for 2.5 percent of sales, but that the indirect impact was higher for drugs granted priority review by the FDA. (Priority review is “given to drugs that offer major advances in treatment, or provide a treatment where no adequate therapy exists.)

478 drugs in our sample were associated with $132.7 billion in prescription drug sales in 2006. Drugs with public-sector patents accounted for 2.5 percent of these sales, while drugs whose applications cited federally funded research and development or government publications accounted for 27 percent.

As Harvard University health economist David Cutler has noted, “Virtually every study of medical innovation suggests that changes in the nature of medical care over time are clearly worth the cost." When it comes to drug pricing it's important to look at the whole picture.


Center for Medicine in the Public Interest is a nonprofit, non-partisan organization promoting innovative solutions that advance medical progress, reduce health disparities, extend life and make health care more affordable, preventive and patient-centered. CMPI also provides the public, policymakers and the media a reliable source of independent scientific analysis on issues ranging from personalized medicine, food and drug safety, health care reform and comparative effectiveness.

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