Revolutionary drugs call for revolutionary pricing strategies

By Girisha Fernando

The consumer price index has been shooting up, but the real inflation story is in prescription drugs. While prices in the general economy were up 8.5% year-on-year in July, drug inflation for that period was over 30%. A Harvard study shows that nearly half of new drugs marketed now cost $150,000 or more annually.

The rate of increase is clearly unsustainable; insurers will, of course, pass increased costs onto consumers and organizations that buy insurance for employees and members. With higher drug prices come higher insurance premiums, as providers seek to recoup the ever-increasing expenses they face – and especially to cover the cost of a large coming wave of new, innovative specialty drugs, often based on advanced gene technology and aimed at specific diseases and conditions. A solution will have to entail an overhaul of the way insurers pay for drugs – with value-based pricing, where pricing is based on data that determines the real effectiveness of a drug - among the best solutions available.

A study by the California Department of Insurance, for example, showed that in 2017, specialty drugs – newly-developed treatments for relatively rare conditions– accounted for about 3% of all prescriptions written in the state, but cost insurers nearly half their drug outlay that year. And the bill for those drugs – in California and elsewhere – has only likely gone up, as a number of even more expensive drugs have been developed since then. And to make matters worse, experts say that pharmaceutical makers in 2023 are likely to raise prices they charge private health insurance plans – because of the impending price limits they can charge Medicare as a result of the Inflation Reduction Act.

As prices go up, calls for regulation and cost ceilings will rise as well – and insurers may find themselves holding the short end of the stick, paying pharma makers high prices for their drugs, while limited in their ability to charge customers higher rates. Clearly that's not a sustainable business model. Currently, the only relief for insurers are rebates pharma makers give them against list prices of drugs, but here, too, the costs remain high and are at best just shifted around, industry experts say.

Is there any way to ensure fair prices – both for insurers and consumers? Some look to the Inflation Reduction Act, and the power it (finally) gives Medicare to negotiate drug prices, as a solution to high drug prices. But as we have seen, the plan is not foolproof; drug companies could shift the profitability from drugs with mandated, negotiated prices to drugs that are purchased by doctors and hospitals without negotiations. And if among those drugs are the high-priced gene therapy treatments, then premiums and expenses – both for insurers and premium payers – will only continue to rise.

But if that negotiation model were expanded to all drugs – especially the expensive ones – insurers, whether private businesses or government programs like Medicare and Medicaid, would be able to provide full coverage without breaking the bank. This system, integral to value-based drug pricing, would enable all patients to have access to the drugs they need, and ensure that the “right” price is paid for a treatment.

Those negotiations can be based on the effectiveness of a drug, with higher prices charged for drugs with better outcomes. New data analysis capabilities based on advanced AI and machine learning, enable all those involved in treating patients - hospitals, caregivers, insurance companies, and governments – to derive insights about outcomes from specific drugs. Armed with that data, insurers can work with pharmaceutical makers to determine what the “real” price of a drug should be, based on how it reduces long-term healthcare costs. For example, a treatment for an advanced cancer that puts patients in remission for an extended period of time – saving the caregiver, and insurance provider, the cost of ongoing treatment – will be “worth more” according to this formula.

And with the savings generated, caregivers and insurers will be able to ensure that more patients get access to these life-saving treatments. A good example of this is the advanced therapies being developed for sickle-cell disease. Medicaid currently covers 70% of sickle-cell patients. The disease brings in its wake many negative consequences – from high disability and unemployment rates to high rates of depression to heavy use of opioids, all of which take not only a terrible human toll, but present society with a very high bill.

Advanced gene therapies that have shown good results are being developed in the lab, but they are likely to be expensive. But based on advanced data analysis, it will be easy to discover just how much these therapies are worth; if they significantly reduce the pain of patients, free them from ongoing treatments, and enable them to avoid depression and pill addiction, they will not only benefit patients – they will benefit payers , and overall reduce the cost of care. Those saved resources can then be plowed into expanding treatment for sickle-cell patients – or be used to help patients suffering from other debilitating diseases.

Pharmaceutical makers, too, realize there is a problem with drug prices, and some are working with insurers to reduce the cost of some of their most expensive treatments. But the best solution would be one that could be applied to all drugs – especially the most expensive ones. It's up to all players involved to arrive at a solution – before the government does it for them.

Girisha Fernando is founder and CEO of Lyfegen. He may be contacted at [email protected].