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The Importance of Economic Trade-offs in Cancer Drug Pricing

      At this point, the rising cost of oncology care in the United States barely needs introduction. Cancer drugs account for approximately 10% of the total prescription drug market.
      • QuintilesIMS Institute
      Medicines Use and Spending in the U.S.: A Review of 2016 and Outlook to 2021.
      Although the share of overall prescription spending in total health care spending has increased slightly in recent years,
      • Kamal R.
      • Cox C.
      What are the recent and forecasted trends in prescription drug spending? Peterson-Kaiser Health System Tracker website.
      • Fonseca R.
      • Abouzaid S.
      • Bonafede M.
      • et al.
      Trends in overall survival and costs of multiple myeloma, 2000-2014.
      new cancer treatments are now routinely priced at more than $100,000 per year of treatment,
      • Light D.W.
      • Kantarjian H.
      Market spiral pricing of cancer drugs.
      raising pressing questions of both affordability and value to patients.
      Despite the attention that cancer drug pricing has received, relatively little input into the debate has focused on 2 underlying economic principles that are critical to understanding key elements of the debate: whether new drugs offer value to patients and society and whether cancer drug prices can be reduced without adverse effects on innovation.
      In this article, we discuss 2 potential misconceptions about cancer care in the United States, emphasizing that a more robust understanding of existing evidence outside of medicine is needed to address core questions about cancer drugs' value.

      Misconception 1: New Drugs Offer Little Value to Patients and Society

      Economic evidence suggests that the societal benefits from cancer care have historically far exceeded the cost. For example, from 1988 to 2000, investments in cancer research resulted in survival improvements generating 23 million additional life-years and $1.9 trillion of social value for Americans.
      • Lakdawalla D.N.
      • Sun E.C.
      • Jena A.B.
      • Reyes C.M.
      • Goldman D.P.
      • Philipson T.J.
      An economic evaluation of the war on cancer.
      During the same period, health care providers and drug manufacturers appropriated approximately 5% to 19% of this societal value, with the rest of the benefit accruing to patients.
      • Lakdawalla D.N.
      • Sun E.C.
      • Jena A.B.
      • Reyes C.M.
      • Goldman D.P.
      • Philipson T.J.
      An economic evaluation of the war on cancer.
      Yet, with rising drug prices, there is increasing concern that new cancer drugs offer little value to patients, with the typical calculation comparing the incremental cost and benefit of a new cancer therapy relative to a standard of care. Drugs for which the incremental costs per quality-adjusted life-year (QALY) gained exceed a certain threshold, often $100,000 per QALY, are deemed to be of low value. This calculation holds intuitive appeal but remains problematic. Cost-effectiveness analyses rarely factor in the importance of drug rebates, which lower the effective cost of therapies beyond “list prices”—that are frequently used in analyses—and cost-effectiveness analyses infrequently include other important components of economic value such as patient preferences. Furthermore, many ethical problems remain when using QALYs to allocate which care should be provided to patients.
      • Harris J.
      QALYfying the value of life.
      The QALY is also woefully inadequate because it places a lower value for life after diagnosis, an assertion patients rightfully dispute.
      Consider, for instance, how using list prices for drugs affects cost-effectiveness estimates. Using the list price of cancer drugs invariably makes newer drugs appear less valuable, even though health insurers frequently pay prices well below the list price of oncology drugs.
      • Polite B.N.
      • Ward J.C.
      • Cox J.V.
      • et al.
      Payment for oncolytics in the United States: a history of buy and bill and proposals for reform.
      This scenario would be analogous to using the Manufacturer Suggested Retail Price in assessing the value of a consumer good, as opposed to the price that most consumers, in this case health plans, pay. This is not to say that using actual transaction prices would make new cancer drugs cost-effective—they may still not be—but proper accounting is the exception, not the norm.
      The “value of hope” is also not routinely included in value assessments of cancer therapies. Both new and old drugs offer important sources of value beyond improvements in traditionally measured and valued QALYs, none of which are routinely incorporated into value assessments for oncology drugs. For example, some evidence suggests that oncology patients place high value on therapies with outcomes that offer the potential for longer survival to some patients. In the parlance of typical cancer studies, this means that patients may not value median or “typical” improvements in survival as much as they value the probability of getting a better than average response to treatment. Indeed, in one survey of patients with cancer, 77% of those surveyed preferred to gamble on “hopeful” therapies rather on therapies with a certain median survival but less chance of a large survival gain.
      • Lakdawalla D.N.
      • Romley J.A.
      • Sanchez Y.
      • Maclean J.R.
      • Penrod J.R.
      • Philipson T.
      How cancer patients value hope and the implications for cost-effectiveness assessments of high-cost cancer therapies.
      Other sources of value exist as well. For instance, the effects of cancer frequently extend to individuals beyond just those with disease. These “spillover” effects include emotional suffering of loved ones, caregiver burden including work and productivity loss,
      • Grant M.
      • Sun V.
      • Fujinami R.
      • et al.
      Family caregiver burden, skills preparedness, and quality of life in non-small cell lung cancer.
      • Gridelli C.
      • Ferrara C.
      • Guerriero C.
      • et al.
      Informal caregiving burden in advanced non-small cell lung cancer: the HABIT study.
      • Fujinami R.
      • Sun V.
      • Zachariah F.
      • Uman G.
      • Grant M.
      • Ferrell B.
      Family caregivers' distress levels related to quality of life, burden, and preparedness.
      • Grunfeld E.
      • Coyle D.
      • Whelan T.
      • et al.
      Family caregiver burden: results of a longitudinal study of breast cancer patients and their principal caregivers.
      • Girgis A.
      • Lambert S.
      • Johnson C.
      • Waller A.
      • Currow D.
      Physical, psychosocial, relationship, and economic burden of caring for people with cancer: a review.
      and even adverse health effects. Improving cancer outcomes creates value for both patients whose outcomes are improved and their loved ones. The economic value of these spillover effects is rarely incorporated into cancer drug value assessments.
      It is quite possible that given the high price of new cancer drugs, incorporating broader notions of value may still not make these drugs cost-effective by conventional standards. But formal assessments of cancer drug value should take a broader and more economically rigorous view of value, as has been recently proposed.
      • Sanders G.D.
      • Neumann P.J.
      • Basu A.
      • et al.
      Recommendations for conduct, methodological practices, and reporting of cost-effectiveness analyses: Second Panel on Cost-Effectiveness in Health and Medicine.
      To be sure, the issue at odds is not whether QALYs themselves should be used to measure health benefits but that broader concepts of value—such as the value of hope and the spillover benefits of new therapies—are not conceptually ignored in most health care value frameworks.

      Misconception 2: Reducing Prices of Cancer Drugs Would Not Adversely Impact Innovation

      Pharmaceutical companies frequently justify prices on the basis that innovation is risky and that high prices are needed to incentivize company investors to undertake investments that are highly uncertain. Some investigators estimate that 9 in every 10 drugs fail at some point in the research and development (R&D) process,
      • DiMasi J.A.
      • Reichert J.M.
      • Feldman L.
      • Malins A.
      Clinical approval success rates for investigational cancer drugs.
      • Hay M.
      • Thomas D.W.
      • Craighead J.L.
      • Economides C.
      • Rosenthal J.
      Clinical development success rates for investigational drugs.
      with estimated costs of drug development (including failed therapies) of over $2 billion per marketed drug.
      • DiMasi J.A.
      • Hansen R.W.
      • Grabowski H.G.
      The price of innovation: new estimates of drug development costs.
      Critics of this view point to the fact that many marketed therapies received large, initial support from federal sources such as the National Institutes of Health.
      • Kesselheim A.S.
      • Tan Y.T.
      • Avorn J.
      The roles of academia, rare diseases, and repurposing in the development of the most transformative drugs.
      Moreover, critics point to estimates that the pharmaceutical industry spends more on marketing as opposed to R&D and earns profits in excess of other industries.
      • Anderson R.
      Pharmaceutical industry gets high on fat profits. BBC News website.
      These arguments suggest that drug prices could be substantially reduced without any adverse impact on innovation. In addition, these arguments fail to recognize that marketing of products and R&D are complements, not substitutes: economists have recognized the point that innovators spend more on R&D when they anticipate larger demand for their products, which is influenced by marketing. Moreover, many highly successful therapies, such as β-blockers, are routinely underutilized by patients and underprescribed by physicians, which suggests that marketing is an important component of ensuring that successful R&D efforts ultimately reach patients.
      The best available economic evidence tells a different story of the relationship between prices, innovation, and patient outcomes. Like many other innovative industries, the returns from a few successful products cover the R&D costs of many failures. One study found that two-thirds of drugs brought to market have a net present value of returns (lifetime sales) below the cost of development.
      • DiMasi J.A.
      • Hansen R.W.
      • Grabowski H.G.
      The price of innovation: new estimates of drug development costs.
      Evidence also suggests that the pharmaceutical industry does not earn excessive profits relative to other industries once one properly accounts for the costs and risks of uncertain R&D.
      • US Congress, Office of Technology Assessment
      Pharmaceutical R&D: Costs, Risks and Rewards.
      To this point, uncertainty in the R&D process originates not only at the basic science level but also into clinical testing in humans. For example, only one-fifth of the new chemical entities that are subjected to human testing emerge at the end of the process with marketing approval; the rest fail at various stages.
      • US Congress, Office of Technology Assessment
      Pharmaceutical R&D: Costs, Risks and Rewards.
      • Scherer F.M.
      The pharmaceutical industry—prices and progress.
      Ultimately, if pharmaceutical financial returns were disproportionately higher than in other industries after appropriate accounting for risk, large institutional investors would disproportionately weight investment portfolios toward pharmaceutical companies, a prediction that has not borne out.
      The question of whether reduced profits will lead to reductions in innovation also has an answer, although the economic studies that support this finding are unfamiliar to most clinicians.
      • Acemoglu D.
      • Linn J.
      Market size in innovation: theory and evidence from the pharmaceutical industry.
      • Finkelstein A.
      Static and dynamic effects of health policy: evidence from the vaccine industry.
      • Blume-Kohout M.E.
      • Sood N.
      Market size and innovation: effects of Medicare Part D on pharmaceutical research and development.
      Nearly all of these studies evaluate how changes in drug profitability (driven by either changes in the market size for a product, changes in reimbursement, or changes in the speed of approval) influence rates of innovation, with all finding that reductions in profitability reduce rates of innovation.
      The critical question then becomes a normative one. What trade-offs would society make if drug prices were to be artificially manipulated? The evidence is fairly clear that reductions in drug prices will lead to reductions in innovation,
      • Acemoglu D.
      • Linn J.
      Market size in innovation: theory and evidence from the pharmaceutical industry.
      • Finkelstein A.
      Static and dynamic effects of health policy: evidence from the vaccine industry.
      • Blume-Kohout M.E.
      • Sood N.
      Market size and innovation: effects of Medicare Part D on pharmaceutical research and development.
      but that does not mean change should not be welcome. If the counterfactual therapies that never make it to market (because prices are reduced) provide relatively little value to society, then reductions in drug prices would arguably be worth the trade-off of decreased innovation. This may very well be a trade-off society is willing to make, but the notion that no trade-offs exist between drug pricing and innovation is likely false. Moreover, this is an issue in which empirical evidence can guide policy. Although economic evidence is limited, the evidence that exists suggests that the returns to society of greater spending on cancer therapies and cancer R&D have been largely positive.
      • Lakdawalla D.N.
      • Sun E.C.
      • Jena A.B.
      • Reyes C.M.
      • Goldman D.P.
      • Philipson T.J.
      An economic evaluation of the war on cancer.

      Conclusion

      The rising cost of cancer drugs has placed a growing emphasis on better understanding the affordability and value of cancer care. Existing evidence outside of medicine suggests that a failure to broadly and accurately assess value raises the risk of underinvesting in therapies that may create large benefits for society and perhaps overinvesting in therapies whose societal returns are relatively low. Moreover, a failure to understand empirical evidence that demonstrates economic trade-offs exist between cancer drug pricing and innovation risks promoting policy actions that may have unintended, but economically predictable, consequences for patients: lower prices may increase access to cancer therapies, improve cancer outcomes, and possibly lower cancer spending today but may reduce access to innovative therapies and the possibility of better cancer outcomes moving forward.

      Acknowledgments

      The funding source was involved in the conception of the article, reviewing and revising the article critically, and in the decision to submit the article for publication. The funding agreement ensured the authors’ independence in writing the article.

      Supplemental Online Material

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