The increasing cost of specialty drugs in the US is an issue too big to ignore. A number of stakeholders, including the actuarial community, are trying to do something about it. For example, in November the American Academy of Actuaries' Medicaid Work Group approached the Centers for Medicare and Medicaid Services with options for mitigating future expenses on breakthrough therapy designation medications.
For starters, per capita expenditures for prescription drugs are high compared to other countries, most notably other G7-nations. This, among other things, results from the lack of a universal nationalized health care system which forces relatively small pharmacy benefit managers (PBM) and insurers to negotiate with large drug companies. Couple high prices with high demand, and spending on specialty medicines is expected to quadruple by 2020, reaching more than $400 billion a year in US sales. By comparison, prescription drug sales in the US reached a total of $328 billion in 2012.
There are two main reasons for the unprecedented growth in spending on specialty medicines:
1) they are expensive and 2) the market potential or number of people diagnosed with conditions they treat is considerable.
Specialty drugs are complex and costly to manufacture, they often need to be injected or administered by a physician and may require special handling or shipping. Some require patient monitoring and even have FDA-mandated guidelines to control and monitor their usage.
Possibly the most hotly-debated specialty drug is Gilead's Hepatitis C blockbuster drug Sovaldi, the company's key growth driver launched in late 2013. Sovaldi became the only drug that reached $10 billion in sales in the first 12 months on the market. It costs about $130 to manufacture one pill yet a 12-week treatment in the US costs $84,000—at $1,000 a pill. By comparison, the same treatment costs $67,000 in Germany, $55,000 in Canada and the UK and is discounted to about one percent of the US price in Egypt and India.
Hepatitis C is widespread globally but especially prevalent in the US. The uninsured and the Baby Boomer generation represent by far the largest infected cohorts. The latter will gradually age into Medicare eligibility at a time when the ACA mandates treatment and care for more patients under Medicaid. According to a study by Milliman about 3.2 million US residents are infected with the Hepatitis C virus, which assigns Sovaldi a theoretical market potential of more than $250 billion over the next years, unbelievable two-thirds of the total US pharmaceutical market.
This expanding market potential for Sovaldi, successor products, and other specialty drugs is one of the main reasons behind the cost pressure on the US healthcare system and payers. Governments and employers, PBMs and insurers are looking for ways to control or at least mitigate the costs of these specialty drugs. The spectrum of tools is wide, some of which shift the costs or create new costs, like higher copayments or coinsurance and diagnostic testing and pre-authorization before treatment. Other potential measures include insisting that patients abstain from drugs and alcohol for some time and refusing subsequent rounds of treatment if a patient fails to follow the regimen.
As evidence of the magnitude of the challenge, the American Academy of Actuaries working group believes mitigation is viable and sustainable only if it is "within the requirement of developing actuarially sound Medicaid capitation rates."
Some specialty drugs such as Sovaldi are only at the beginning of their product generation's life cycle. Harvoni, also manufactured by Gilead and Sovaldi's successor, further reduces side effects and can be dosed over a shorter treatment period. Harvoni is priced at $100,000 per treatment, went on sale in October of last year and has already exceeded Sovaldi's initial sales figures.
Undoubtedly, Sovaldi has been a huge leap forward in Hepatitis C treatment and healthcare innovation is a wonderful thing. The debate if innovation can be achieved at a sustainable price within our healthcare system, the by far most expensive one in the world, will go on. Concerning the specialty drug market, payers will continue to look for ways to mitigate the cost explosion and to manage reimbursement expenses.
What are your thoughts? Can there be innovation at sustainable costs?
Category: Funding longer lives: Health/medicine