Price pressure

Last year, the Utah-based SelectHealth insurance company paid $1 million to provide just five patients with the critical enzyme-replacement drug Cere-zyme, which when used over a lifetime prevents the enlarged organs, fragile bones and heightened cancer risk of a rare genetic disorder known as Gaucher disease.

Enter the competition. After getting approval from the Food and Drug Administration for an alternative called Elelyso, Pfizer priced its entry in the tiny market—only an estimated 5,000 patients worldwide suffer from the disease—at roughly $12,500 a month or $150,000 a year. SelectHealth, which has seen costs for such specialty drugs rapidly climb, will now start patients on the less expensive option.

But that's scant consolation to either insurers or the patients they cover, who increasingly must pay more of the bill as health plans shift a greater share of the costs onto households.

Elelyso is among a growing number of costly entrants in the high-priced specialty drug market, where the drugs to treat life-threatening, chronic or rare diseases can run $300,000 to more than $400,000 a year. Annual price hikes for existing drugs for these small-population diseases and other specialty drugs are easily outpacing both inflation and the price increases in other segments of the retail drug market.

For the drug industry, price increases on specialty drugs have largely offset revenue losses from the growing use of generics. And industry analysts say the large number of specialty drugs in development will accelerate spending in the subsector in the years ahead.

Manufacturers defend the high prices in the niche—comprised of drugs for diseases with at most 200,000 patients or treatments for cancer or other complex diseases—by saying their development demands hefty investment and involves significant risk. Drugs are priced accordingly.

Yet the strategy has its limits. Specialty drugs' rapid price escalation is prompting pushback at some hospitals and physician offices, and has prompted debate over whether the manufacturers' price points are justified.

“They are coming out priced literally at what the market will bear,” said Anne Jacques, vice president of pharmacy markets for Highmark, a Pittsburgh-based insurer with 4.1 million enrollees.

Manufacturers see a lucrative opportunity in the specialty market, which lacks the price-lowering effect of competition. The companies appear to be testing “who can be more ridiculous with the price,” Jacques said.

Spending for specialty drugs will increase 20% annually between 2012 and 2014 with price increases driving two-thirds of the growth, the pharmacy benefit-management company Express Scripts estimates.

Drugmaker Sanofi, which recently purchased Genzyme, the maker of Cerezyme, told the New York Times in November it would discount its new colorectal cancer drug Zaltrap by half after doctors at Memorial Sloan-Kettering Cancer Center in New York denounced its $11,063 per month price tag on the newspaper's op-ed page. The oncologists, noting it provided scant improvement over existing therapies, said it was “no longer tenable” to overlook cost.

“Soaring spending has presented the medical community with a new obligation,” they wrote. “When choosing treatments for a patient, we have to consider the financial strains they may cause alongside the benefits they might deliver.”

Sloan-Kettering is not alone in rejecting drugs whose value doesn't justify their cost. In Arizona, Banner Health last year added an economic review to its clinical appraisal of formulary drugs. “As more and more expensive drugs come out, you have to look,” said Denise Erickson, clinical pharmacy program director for Banner, which owns and operates 22 hospitals across seven states.

The system's economic review uses drug industry and other models as well as internal data to project the economic benefit for a drug, which includes the price and other factors such as potential savings from a medication that prevents hospitalization. Banner recently agreed to include a $4,000-per-vial scorpion anti-venom on its formulary using the model, but rejected Ofirmev, an intravenous acetaminophen, for which the costs and clinical benefits did not justify its use.

Blue Shield of California, which spends roughly $200 million annually on specialty drugs, is expected to target specialty drug spending growth in pilot projects this year with the insurers' accountable care organizations, said spokesman Steve Shivinsky.

When specialty drugs do compete, insurers say they have increasingly adopted strategies that offer incentives to doctors and patients to choose the lower-priced alternative for comparable medications.

At SelectHealth, the insurer's pharmacists work with physicians to see if less-costly competing drugs can be substituted for an existing medication, said Eric Cannon, chief of pharmacy for SelectHealth, the insurance arm of Intermountain Healthcare. If so, the insurer may offer to waive out-of-pocket costs for patients who switch. The insurer also designates the less-costly drug as the first choice for newly diagnosed patients, as is the case with Gaucher disease. “Our goal is, as more patients come along, we get them on Elelyso and not on more expensive Cerezyme,” he said.

Insurers are also looking to negotiate price breaks either when competitors enter the market or with contracts to buy specialty drugs through a single pharmacy for enrollees and physicians.

But opportunities to wrest control—or at least exert influence—over specialty drug prices remain limited by the market's unique products and incentives, health policy experts and industry officials said. Many specialty drug manufacturers face no competition, leaving insurers and patients powerless to shop around.

Other specialty drugs, especially in oncology, compete for patients by emphasizing convenience—substituting a pill for an intravenous injection, for instance. Or they tout the minor differences in outcomes, such as drugs that only extend life for a few weeks compared to the alternatives.

Yet those improvements come at much higher prices, putting insurers and doctors in the difficult position of deciding for patients whether the drug is worth the cost.

“It's almost like rubbing salt on the wound,” said Dr. Michael Neuss, chief medical officer at Vanderbilt-Ingram Cancer Center, Nashville. “It's so unfair to someone who is frightened because they have a serious illness. ... What price is too high to have a chance of living longer?”

For many, the hope that a drug could improve an outcome is enough. “We always take the chance,” Neuss said.

Erickson said Banner's economic review is too limited to apply to such drugs because it cannot account for the value patients place on additional time. Those choices are made between a doctor and a patient.

And when they opt for the expensive new option, patients are more frequently facing a huge financial burden. Health plans increasingly require patients to pay higher fees or a greater percentage of the cost for high-priced drugs, a so-called fourth tier in value-based plans that require patients to pay higher co-pays for brand name drugs when generics or cheaper still-on-patent drugs are available.

Dr. Ed Pezalla, national medical director for pharmacy policy and strategy in Aetna's office of the chief medical officer, said the model has gained popularity as insurers seek to curb premium growth. However, some plans are capping the total amount that patients must spend on specialty drugs.

Half of those with insurance through an employer that included fourth-tier drug benefits saw their spending capped at a maximum amount last year, a Kaiser Family Foundation survey found.

The insurance perversely gives drugmakers an incentive to price drugs high and pick up patients' out-of-pocket costs under financial aid programs, eliminating any price sensitivity among patients to consider lower-cost options, one health economist argued. The caps appropriately protect patients from catastrophic expenses from such high-priced drugs and insurers continue to cover the bulk of the drugs' costs, wrote Patricia Danzon, a professor of healthcare management with the Wharton School at the University of Pennsylvania and a pharmaceutical consultant, in an 2010 article in the Oncologist, the journal of the Society of Translational Oncology.

Oncologists also have incentives to stick with higher-priced drugs under payment models that pay doctors the average sales price plus 6% of that amount when physicians purchase the drugs. That may change under new payment models that tie reimbursement to the overall rate of health spending. Individual reimbursement for drugs has been eliminated under some contracts.

Pittsburgh's Highmark now buys many drugs for oncologists, which eliminates direct reimbursement to the doctors and boosts the insurers' buying power with drug manufacturers, Jacques said.

Dr. Russell Hoverman, an oncologist and medical director of managed care at the US Oncology Network and vice president of quality with Texas Oncology, said US Oncology doctors negotiated contracts that preserve doctors' margins but tied those margins to low-cost drugs, which saves money for insurers and patients. US Oncology, a division of McKesson Corp., is the nation's largest network of stand-alone cancer centers.

But a bundled-payment experiment between UnitedHealthcare and one of US Oncology's medical practices excluded drug costs from the payment model. Spending for oncology drugs is unpredictable, and because prices are so high, spending could soar and erode any margin for the payment bundle, Hoverman said.