A recent Wall Street Journal article raised the challenge related to Novartis’ high-cost orphan drug Ilaris, which may have clinical potential in a broader use as a cardiovascular drug. For the cardiovascular use, the company would have to charge a significantly lower price to gain adoption in the market. It’s a fairly extreme example of a common situation where drugs with potential uses in different indications, different population sizes and different competitive price levels are posing a tough dilemma for the drug company. Indication-based pricing, allowing for a different price across diseases treated, would provide a solution to this problem and would, in some cases, allow for earlier and broader patient availability of new prescription drug treatments.
A recent article in the New England Journal of Medicine by two professors from Harvard and Northwestern explains the concept of indication-based pricing with some theoretical examples. While they explain the principle of indication based-pricing clearly, the authors also contend somewhat populistically that the drug industry will take advantage of this situation by overcharging patients who obtain the highest benefit. The academic analysis has a number of significant flaws, as it does not recognize the role of U.S. government prescription drug price regulations and the potential for increased competition by allowing indication-based pricing. The analysis is also blatantly ignoring the role of the health insurance industry, of which the most vocal entity, Express Scripts, has been strongly advocating for indication-based pricing.
What’s the drug company "dilemma"?
Drug companies often are faced with tough choices regarding the pursuit of the development of multiple indications for drugs because chemical entities sometimes offer solutions for multiple related or unrelated ailments. Orphan drugs require a relatively high price, as the significant research and development price tag needs to be recouped over a small prescription volume. A new indication in a larger patient population often won’t reach patients because the combination of development risk and the unintentional impact of U.S. government pricing rules create a strong negative economic incentive for companies to invest in the required clinical trial programs to qualify for FDA authorization.
In the case of Ilaris, an approved cardiovascular indication potentially could avoid strokes in the large population of patients with previous cardiac problems. It obviously wouldn’t be viable to charge insurance companies $16,000 per dose for these treatments, but given the potentially large patient population, it really wouldn’t be necessary. Moreover, health insurance companies wouldn’t agree to broadly cover for this use at such a price because competing treatment options are much less expensive.
Patients should be central in healthcare discussions. However, while patients are paying part of a premium and co-payments, they don’t directly pay for the drug cost. Public payers and private insurance carriers do, so we have to consider their decisions and the impact on patients. Private health insurers generally have been in favor of the ability to differentiate prices between indications. After all, it allows them the opportunity to negotiate payment for drugs on the basis of the drug’s competitive value for each individual use. Actually, Express Scripts has been leading the way by asking drug companies to make specific proposals for indication-based pricing, particularly in oncology. The Centers for Medicare and Medicaid Services also has initiated a test of indication-based pricing as part of a demonstration project.
What’s preventing the industry from engaging in indication-based pricing?
Unfortunately, the same rules that provide Medicare and Medicaid programs favorable pricing also are severely restricting competition in the private prescription drug market. Medicare payments for physician-office-administered drugs (Medicare Part B) are reimbursed to the provider at a rate that’s the average selling price across most commercial customers plus 4%. Medicaid demands the best price that’s charged to any customer (with some exceptions for specific programs such as 340B), and at least a mandatory 23.1% discount for all of its acquisitions of most brand drugs (17.1% for blood-clotting factors and pediatric indications) and 13% for generics. A drug company that sells one pill with a 40% discount then needs to discount all sales for that drug to Medicaid with 40%.
A probably unintended side effect of these rules is that they impede competition and preclude companies from making agreements with private payers that differentiate on pricing between uses—say, $40 per pill for a rare disease and $5 per pill for a more frequently occurring condition. Modifying these rules will allow for the development of new indications that aren’t explored today because companies are practically forced to ensure that the launch indication is the one that extracts the most favorable price.
Indication-based pricing will allow for a better match between patient value and insurance payments to the manufacturer, thus increasing competition in the market and enabling indication-by-indication negotiations between health insurance and drug companies. It’s kind of like getting a deal on a Broadway show: You may have been able to get cheaper tickets because the theater wasn’t fully booked that night. But if the government mandated that your deal on the ticket be applied to everybody attending the show this year, you likely wouldn’t have gotten that discount because the theater would have preferred to leave half of the theater empty.
What needs to happen?
The introduction of indication-based pricing for prescription drugs in the U.S. will take some consensus-building across various public and private players in the U.S. healthcare ecosystem. However, before this can happen, we need to remove some regulatory hurdles. Government pricing rules (both Medicaid and Medicare) need to be modified to allow for price differentiation between approved indications. Practical implementation still has to be studied more closely, but the concept seems practically viable. Medicaid would, for example, still be guaranteed a best price for each individual indication.
Some other elements would have to be considered during the implementation of indication-based pricing:
- Where applicable, drug industry and health insurance companies will have to reach agreements on indication-based rebates to reflect indication-based prices on a net basis.
- In order to avoid increases in patient co-payments, health insurance companies would have to agree to pass on rebates to patients—a change that seems long overdue anyhow.
- Information systems will have to be streamlined to capture drug utilization data by indication.
- Controls will have to be put in place to avoid the abuse of price differences between indications by providers.
Most of all, it’s important that government and private stakeholders engage in a constructive dialogue about the benefits of and concerns about indication-based pricing so that solutions can be found that ensure a competitive industry, payment for demonstrated value to the patient, and broad access for patients to the healthcare that they need at a reasonable co-payment that they can afford.