reposted from Health Affairs Blog: Joshua Liao and Mark Pauly, Orphan Drugs: Pursuing Value And Avoiding Unintended Effects Of Regulations, Health Affairs Blog, May 4, 2017, http://healthaffairs.org/blog/2017/05/04/orphan-drugs-pursuing-value-and-avoiding-unintended-effects-of-regulations
Copyright ©2017 Health Affairs by Project HOPE – The People-to-People Health Foundation, Inc.


Amid ongoing scrutiny of high pharmaceutical drug prices, debate about the value of “orphan drugs”—those designed to treat rare conditions that affect fewer than 200,000 individuals—continues to capture public and policy maker attention.

The latest examples involve Emflaza and Spinraza, drugs used to treat the rare genetic childhood disorders of Duchenne muscular dystrophy and spinal muscular atrophy, respectively. Both have been approved by the Food and Drug Administration (FDA) and provide meaningful efficacy and value to patients affected by these conditions. However, outcry has developed in response to extremely high list prices: Emflaza has been priced at $89,000 per year, while Spinraza has a list price of $750,000 for the first year of an infant’s treatment and $350,000 per year thereafter.

Policy makers have expressed concern about the effect of this dynamic on patients and the public. Extremely high prices could prompt payers to severely restrict or deny coverage for some of the patients who would benefit. Additionally, insurers that choose to cover these medications are likely to distribute added costs across other individuals who do not need them, increasing costs but not value—at least in the short run—for this unaffected population.

High Prices As An Unintended Effect Of Government Regulation

It is worth noting that such aggressive price setting arises in part from an unintended effect of government regulation of orphan drugs. Since 1983, the Orphan Drug Act has incentivized pharmaceutical companies to develop new drugs for rare diseases by providing manufacturers with tax credits, fee waivers, and most importantly, seven years of exclusive patent rights. However, these incentives apply not only to newly developed medications but also to older, existing drugs that manufacturers can successfully market for different indications or settings.

Emflaza, for example, has been available in other countries for decades at a fraction of its current $89,000 list price. However, the manufacturer was able to raise the drug price substantially by acquiring its rights and securing approval from the FDA to begin selling it in the United States. Coupled with the FDA’s prioritization of drug efficacy and willingness to expedite orphan drugs such as Emflaza for fast-track approval, regulatory policy has created a strong unintended effect: providing drug manufacturers that repurpose older drugs with more market power.

Potential Solutions

Policy Approaches

There are several potential solutions for addressing this issue and pursuing value. Policy makers could weaken the connection between regulatory approval of an orphan drug and the subsequent exclusivity in its sale. In particular, for drugs that were developed and discovered a long time ago, there is no need for exclusivity to motivate innovation. In such cases, exclusivity may be needed to motivate clinical trials for new indications; however, a shorter or less exclusive grant of approval may be enough to motivate these manufacturers, which do not need to invest in research and development outlays and other costs, to pursue the necessary clinical trials. Thus, old orphan drugs, such as Emflaza, could be subjected to different regulatory provisions than new ones.

Market Approaches

Beyond public policy reform, insurer- and patient-focused strategies could also blunt manufacturers’ overly optimistic estimates of their market power. Such market-based solutions revolve around the question: Would patients accept a premium increase large enough for insurers to cover the medication in question?

Economically speaking, the answer lies in the fundamental notion of value, which reflects the point at which a buyer’s best option is to “walk away” or curtail purchasing behavior. Within this frame, the core issue is not whether insurers as purchasers could somehow be forced to cover a medication when its list price exceeds its value. Value-determination resides with the purchaser, and insurers that believe price outstrips value should not pay for the medication. An insurer that covers a medication is suggesting that, frustration about price notwithstanding, it has not been charged more than its valuation of benefits.

An analogous dynamic exists for individuals as purchasers of medication coverage via insurance. Despite support for using value-based pricing as a solution for controlling drug costs, the solution is far from simple. Moreover, there is unlikely to be one single value-based price that applies to all individuals. There is variation and heterogeneity in individual patient values because of multiple factors—for example, some individuals value access to certain medications more than others; individuals have variable response to medications; some individuals value certain health outcomes more than others. As a result, some individuals are more willing to pay more for policies that cover certain medications, while others would rather walk away.

Orphan drugs, which treat conditions that often have a genetic basis, may provide benefit to some patients and not to others. To provide valuable treatments to the former while mitigating cost burdens on the latter, insurers still could offer an array of plans in which premiums are pegged to different amounts of medication coverage benefit, such that more expensive plans provided more generous orphan drug coverage. This strategy would create appeal to a spectrum of buyers with heterogeneous value preferences and likelihoods of requiring costly medications. Individuals would be able to select plans reflecting personal value preferences, revealing what the market will or will not bear. The strategy would avoid serious problems of adverse selection in either of two cases: if the disease is equally likely to affect all insurance buyers, or if (as implemented in the Affordable Care Act) risk adjustment payments are made to insurers that attract high risks.

Worldwide, growth in the orphan drug market segment could outstrip that of the broader prescription medication market; orphan drugs could represent 20 percent of worldwide prescription sales and total $178 billion by 2020. Solutions are urgently needed to address the issue of orphan drug prices. Although well-intentioned, government regulation has inadvertently provided manufacturers that repurpose old orphan drugs with significant market power. Sustainable solutions, whether based in public policy or market strategies, must address this unintended effect.

Author’s Note

Dr. Liao is a member of the Pennsylvania State Medicaid Pharmacy & Therapeutics Committee.