The eye-popping price tags on some new cancer drugs pose two fundamental questions: are the drugs worth their cost, and if they are, how can we afford them? The Penn Precision Cancer Medicine Consortium considered cost trends and drivers in the second of its conference calls leading up to an in-person conference in May.

In a previous post, we discussed the dramatic growth in spending on precision cancer drugs—intravenous and oral therapies that target the changes in cancer cells that help them grow, divide, and spread. In a deeper dive into these costs, two major trend emerge: higher launch prices, and price increases after product launch.

Launch prices (that is, what commercial insurers are paying) account for much of the overall cost trend.  A recent analysis of commercial claims data showed that mean monthly spending (in constant 2014 dollars) for oral cancer drugs in the year of product launch increased from $1,869 in 2000 to $11,325 in 2014.

Source: Drug Pricing Trends for Orally Administered Anticancer Medications Reimbursed by Commercial Health Plans, 2000-2014, JAMA Oncology, 2016;2(7):960-961.

Another analysis found that after adjusting for inflation, launch prices for cancer drugs increased by 10% annually— an average of $8,500 per year—from 1995 to 2013. The price increases, in themselves, might be warranted, if the newer drugs carried greater survival benefits than the older ones.  As shown below, by conventional cost-effectiveness analysis, this is not the case. Translating their findings into simple terms, Howard and colleagues said: “in 1995 patients and their insurers paid $54,100 for a year of life. A decade later, 2005, they paid $139,000 for the same benefit. By 2013, they were paying $207,000.”

Source: Pricing in the Market for Anticancer Drugs, Journal of Economic Perspectives, 2015;29 (1): 139-162.

The consortium discussed a number of issues that complicate this analysis. First, these data represent survival benefits in unselected patients; for the subset of patients that did respond, the benefit can be dramatic. The responding group can then yield information about better targeting populations to achieve greater effectiveness (the precision approach). This opens up the likelihood that the precision medicine approach is an iterative one, in which early learning in undifferentiated patients leads to greater cost-effectiveness of drugs in subsequent analysis.

But the prospect of improving the cost effectiveness of the drugs by better targeting poses its own dilemmas. With smaller and smaller populations that could benefit, the costs of drugs will continue to go up, as pharmaceutical companies try to meet revenue expectations and maintain a consistent return on investment despite ever-smaller markets. Consortium members noted that pharmaceutical companies are struggling with a business model that can account for smaller target populations, while still having the incentive to develop new cancer drugs.

Further, even at $207,000 per year of life gained, the consortium felt that the public would perceive that cancer treatments provide acceptable value. Even in well-organized, tightly controlled systems such as the National Health Service, cancer drugs are carved out of the overall drug budget. The reasons why the public and professionals might have a higher cost-effectiveness threshold for cancer drugs are complex, but as one member said, “The downside of getting it wrong is so high.”

So how are these prices set? In some sense, the answer is that the prices are whatever the market will bear, as is the case for other drugs in the U.S.  It appears that pharmaceutical companies are setting launch prices for new cancer drugs within 10% of previous drugs, a form of reference pricing that leads to escalating costs when divorced from any consideration of comparative effectiveness. If there is a ceiling on what the market will bear for new cancer treatments, we have not defined, much less reached, it.

The consortium also discussed whether the drivers of precision cancer drug prices are any different from the overall drivers of drug prices. These factors include the market exclusivity granted to prevent competition, lack of provider incentives to choose lower-priced drugs, and lack of good information on comparative effectiveness. Further, the rise in precision medicine treatments coincides with a broader pharmaceutical industry shift to higher-cost specialty drugs, making it difficult to separate the parallel trends.

Other possible cost drivers include increases in R & D costs, pricing to offset discounts in programs such as 340B and Medicaid, and legal barriers that do not allow payers to refuse coverage.

While many of the cost drivers are the same, the trends in the costs of precision medicine drugs may also stem from what a consortium member called the “wow” factor, or the “Jimmy Carter” effect surrounding precision cancer drugs. At the same time, many of these targeted drugs provide incremental benefits to cancer patients who have not responded to previous treatment; even if the gains can be measured in weeks or months, many people believe the change is worth paying for. How to pay for it, however, continues to be a challenge.

Which brings us back to the question of whether cancer occupies a special place in the public consciousness, one that might explain different thresholds for value, price inelasticity, and the demand for precision cancer drugs.  The consortium will delve into the historical, social, and policy evidence of this “specialness” in its next conference call.

The Consortium is made possible through a philanthropic gift to the University of Pennsylvania by Donald R. Gant, Wharton ’52 and the Gant Family. It is led by LDI Senior Fellows Justin Bekelman and Steven Joffe. Other members of the Consortium and their backgrounds are here.