July 16, 2007

Over the weekend, the New York Times ran a very interesting article on how some drug companies are offering European governments money-back guarantees on expensive drugs for cancer and multiple sclerosis.

"Drug companies like to say that their most expensive products are fully worth their breathtaking prices. Now one company is putting its money where its mouth is - by offering a money-back guarantee. Johnson and Johnson has proposed that Britain's national health service pay for the cancer drug Velcade, but only for people who benefit from the medicine, which can cost $48,000 a patient. The company would refund any money spent on patients whose tumors do not shrink sufficiently after a trial treatment."

The Times suggests that this a harbinger of a "new pay-for-performance paradigm" - and it may very well be, in a certain sense. Many new cancer drugs, like Herceptin for breast cancer, are targeted only at cancer cells with certain molecular biomarkers (in this case, the HER/neu protein expressed in about 20-25% of breast cancers).

Genetic tests linked to these biomarkers can help doctors match these drugs with the patients who are most likely to benefit from them. Patients benefit from improved treatments and insurers benefit by not spending tens or hundreds of thousands of dollars on drugs that are probably not doing patients much good.

But the field is still very, very, young and good biomarkers don't exist for the vast majority of medicines. Many more biomarkers will develop over the next decade or two, but in the meantime "pay for performance" may hurt patients and slow drug innovation.

The problem is that while insurers and governments in Europe are trying to shrink the number of patients receiving expensive treatments, companies may find themselves with very restrictive definitions of effectiveness for reimbursement purposes.

Companies who agree to "pay for perfomance metrics" can, of course, charge higher prices in smaller patient populations in order to recoup their investments and compensate for their greater risk exposure - but this is a shift that governments are very unlikely to accept. This impasse could lead to frozen prices and declining revenues, a clear signal to the market that drug innovation is a poor investment.

There are a couple of wild cards here. Jack Calfee, at the American Enterprise Institute, has written that European countries are paying U.S.-level prices for new biotech medicines, suggesting that the industry may have more pricing power for those medicines than for traditional pharmaceuticals.

Also, the U.S. has thus far resisted price controls on pharmaceuticals and "cost benefit" analyses like those embraced by many European countries. As long as the U.S. does this - thus generating the lion's share of industry proftits - companies can afford to make more concessions to European payors, i.e. "it works or you get your money back."

But if the U.S. was to embrace the European approach to drug pricing global drug development would slow to a crawl.

In the long run, the market is surely moving to a "pay for performance" paradigm for drugs and other medical services, which is all to the good. In the meantime, however, that process should not be dictated by government payors whose primary interest is not in improving care (or attracting customers), but in containing spending.

Innovation, after all, often begins with lots of hit-or-miss experiments (think: off-label drug use), rather than guaranteed success.

Posted by Paul Howard at July 16, 2007 08:38 PM

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