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Life, Death, and Money: The Hidden Economics of Cancer

With new developments in immuno-oncology and targeted therapies, there has never been a more hopeful time for people fighting cancer. However, these advances continue to be followed by media claims that “drugs are too expensive,” a claim that has dogged the pharmaceutical industry for nearly a hundred years (see newspaper articles from 1988, 1955, and as far back as 1917.)

As a health economist and cancer survivor, I’m here to tell you that most of what you read about cancer drug cost tells only a small part of the story.

Reporters quote medical bankruptcy statistics and blame “big pharma” for high drug costs (at the same time that pharma companies are bringing game-changing products to patients). But the picture is so much larger, and so much more complex, than what most stories report.

Here are five things that you may not know when it comes to the opaque economics of cancer:

ONE: Spending on cancer drugs is likely to reduce overall health care spending and has a macroeconomic benefit as an investment in the health of society.

The insurer UnitedHealth ran an experiment where doctors were able to prescribe as many cancer drugs as they thought were appropriate, regardless of cost. The doctors prescribed more drugs, and more expensive ones. And then a funny thing happened — total cost of care for these patients went down. Why? It appears that using drugs appropriately, and optimally, lowers overall costs by reducing side effects and keeping patients out of the hospital.

Higher drug spending is actually desirable when it displaces hospital spending or reduces side effects so that patients can continue working. Most cancer spending comes not from drugs, but from hospitalizations and other services. Cancer drugs account for less than 1% of overall US health spending. Medicines save and extend lives; they are an investment in better health, not an expense. Longer and healthier lives mean longer participation in society and the economy, more taxpayers, and more macroeconomic spending; premature death, illness, and lost productivity due to cancer has enormous costs. One study projected that the economic impact of US lives lost early to cancer will be $1472.5 billion in the year 2020.

TWO: Insurance companies, not drug companies, determine what patients pay for drugs.

Medical bankruptcies and financial struggle are caused when patients can’t pay their bills. Usually, this is because a patient has no insurance (and in many cases, a hospital will write off their debt as charity care), or is “under-insured” and left with a considerable share to pay out-of-pocket because of less-than-comprehensive coverage. While the Affordable Care Act has made insurance more accessible and reduced medical debt, people are increasingly buying health insurance plans with large deductibles and large percentage co-insurance on drugs. These plans can leave coverage gaps adding up to thousands of dollars.

Drug companies have absolutely no control over what insurance companies charge patients for medicines. It is the insurance company that decides whether the patient’s share for a prescription is $20, $100, or $1000. Even if drug companies deeply slashed their prices (and in many cases, they offer insurance companies rebates and discounts), the insurer is under no obligation to pass this discount on to the patient or even tell the patient about it. Often, insurance companies do not pass along manufacturer discounts.

Drug companies do their best to off-set rising patient cost sharing through coupons or co-pay cards, or by giving out free medicine to those who can’t afford it. In fact, the pharmaceutical industry far outpaces other stakeholders in the health care sector, such as insurance companies, in terms of charitable giving. However, some insurance companies prevent patients from using these benefits. Insurance companies pay less when a patient doesn’t fill a prescription at all. Medicare and Medicaid patients, who are among the most likely to need these coupons and consumer discount cards, are prohibited from using them.

THREE – Discounts don’t apply only to insurers. Nearly half the hospitals in the US, and clinics that are part of these systems, get drugs at a discount of 20% to 50%. These savings are kept by the hospital system, and do not lower the patient’s cost.

I’ve written before about the 340B program, a program originally designed to help hospitals serving the poor by giving these hospitals a deep discount from pharma companies for outpatient drugs. Now, that program is growing rapidly, covers nearly half of hospitals and their off-site clinics, and includes even well-insured patients. Hospital systems are buying drugs through this program at a typical discount of 24% or more. But the co-pays these hospitals charge are still based on the “retail price” of the drug, not its real price after the discount. One of the saddest aspects of this discount is that Medicare patients (mostly over the age of 65) who have a 20% copay and no extra, “supplemental” insurance for these drugs such as infusion chemotherapy are still charged the 20% on the “retail price” — even in cases where the hospital’s 340B discount is as deep as 50% of the total.

Combining 340B, Medicaid discounts, and the VA, the federal government controls at least half what accounts for cancer drug pricing to patients.

FOUR – What your insurer charges as a drug co-pay often has nothing to do with the drug’s clinical efficacy, but instead depends on discounts negotiated between the insurance company and the drug’s manufacturer.

With the insurance industry’s talk about “paying for value,” you may assume that insurers assign lower co-pays to drugs that are proven to work best or have few side effects. However, while such a program might bring “value” to the patient, it doesn’t necessarily help the insurer’s bottom line. The lowest co-pays are reserved for generic drugs and highly discounted drugs, even when they do not have the best clinical profile compared to similar medicines.

Insurers often place the newest drugs on a “specialty tier” with co-insurance of up to 50%. Keep in mind that, to be FDA approved, new drugs have to prove they are at least as effective as previous treatments. If a cancer drug changed price from $8,000/month to $800/month, a 50% co-insurance rate imposed by the insurer would still be unaffordable when most Americans lack even a $400 emergency fund. The rationale behind health insurance is that it should cover unexpected expenses; for cancer care, that is not happening.

When drug companies and insurers do negotiate discounts, the co-insurance rates are usually charged on the “list price,” not the discounted price, so the insurer accrues the discount. Unless insurance companies are forced to change their policies and limit co-payments or co-insurance, or are mandated to pass discounts on to their customers, drug companies can do very little to influence patient costs.

FIVE – Your doctor may be incentivized to prescribe a less-than-ideal medication because of a deal made between the hospital she works for and an insurance company, or because of discounts negotiated between insurers and pharma companies.

Large health insurance companies such as Aetna, UnitedHealth, Anthem/WellPoint, and Cigna are increasingly leveraging two policies, sometimes simultaneously: one called “step therapy” and another called “pathways,” to directly influence doctors’ freedom in choosing what medication a patient should receive.

In “step therapy,” sometimes called “fail first,” an insurance company won’t pay for a medication unless a similar one, usually cheaper or discounted, is tried first and doesn’t work. These medications don’t need to be exactly the same. For the case of a leukemia drug, the coverage policies of two major insurers (Aetna and UnitedHealth) require in most cases that a patient tries nilotinib, and that it fails to work, before using dasatinib. The clinical issue with this policy is that nilotinib has two FDA black box warnings — the most severe and serious type of side-effect warnings that the FDA can require. Dasatinib has no black box warnings, but different side-effects that may make one drug preferable for some patients and the other better for other patients. Should this be the insurance company’s decision, or a doctor and patient’s? Why do these insurers prioritize a drug with black box warnings over one with no such warnings? Is one drug discounted more heavily than the other?

With “pathways,” certain groups of drugs, often associated with price or discounts, are considered “on pathway” while others are “off pathway” for treatment. A patient may not even be aware that their diagnosis has these associated lists. In this case, a patient’s payment may be the same, but the doctor or hospital is actually paid a bonus for offering only drugs “on pathway.” With a complete lack of transparency to the patient for why certain drugs are prescribed over others, a hospital may be profiting by offering patients a constrained number of clinical options.

The bottom line? Most of the headlines about drug cost are only telling part of the story. Insurance companies and other stakeholders in health care have a vested interest in hammering drug prices — because this helps them put pressure on manufacturers to extract discounts, most of which are never passed along to patients, and also helps justify high co-payments and direct patient anger to “big pharma” instead of “big health insurance.” But without more transparency, better understanding, and clearer reporting, the status quo is unlikely to change.

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