Month: July 2014

The most interesting healthcare debate this month concerns the $84,000 price tag for Sovaldi, the breakthrough Hepatitis C drug from Gilead Pharmaceuticals. The national conversation happening right now touches on drug patent incentives, sustainable growth in national health spending, equity and access to care, and more.

The insurance industry is forming coalitions to protest the high cost of the drug and the price has (to put it lightly) piqued the curiosity of Congress. Oregon’s Medicaid program has outlined a plan to control costs by rationing Sovaldi to the sickest patients. Patient advocates have cried foul over the high barriers to access.

Gilead is digging in its heels, contending that the $1,000/day cost of the 12-week course of treatment is necessary to recoup the costs of research and development. Although this is not the first time that a high-cost drug has provoked this conversation, the breakthrough nature of the treatment adds to the ethical complexity.

Our national drug development industry is based on the free market, so the numbers must create the parameters for ethical decision-making. Gilead’s conventional justification for pricing Sovaldi at $84,000 per course of treatment is the $11 billion that Gilead spent to acquire Pharmasset, the small firm that researched and developed the promising drug. Critics point out that Pharmasset priced the drug at $36,000 per course of treatment and question where the additional $48,000 of value comes from.

$11,000,000,000 divided by $84,000 is equal to 130,952 fully-insured treatments to break even. There are nuances to this calculation, such as the 23.1 percent discount for Medicaid programs, which amounts to 195,743 Medicaid treatment to break even. Quick research finds that one-quarter of chronically-infected Hepatitis C patients in the United States are covered through Medicaid or the prison system. Weighting for this distribution of coverage yields an approximation of 147,149 treatments to break even. Let’s be generous to Gilead and round up to 150,000 treatments to break even.

There are 3.2 million people in the United States chronically infected with Hepatitis C. However, that does not mean that all of them can and should be treated with Sovaldi. Oregon, for instance, has proposed to treat only those patients who are at risk for stage three or four fibrosis, also known as cirrhosis. According to data from the CDC, between 5 and 20 patients per 100 infected with Hepatitis C will develop cirrhosis within 20-30 years – the time for treatment is now or past due given that many people were infected in the 1970s and 1980s.

For the sake of simplicity, let us assume that 10 patients out 100 infected will require the treatment in order to avoid death resulting from complications such as liver cancer or cirrhosis. These treatments will take place within the first few years of Sovaldi’s launch in the United States. That rate equals 320,000 treatments and total revenue of $26.88 billion, yielding Gilead a 144 percent return on investment during the initial sales period in the United States market alone.

This enormous return on investment will happen before international drug sales are measured and before the treatment of new Hepatitis C patients who enter the high risk realm in the United States down the road. Furthermore, the return on investment does not take into account the remaining value of the Pharmasset portfolio of research that Gilead acquired for $11 billion. Although Pharmasset’s focus was Hepatitis C, the firm also worked on treatments for HIV and Hepatitis B.

On the other side of the coin, Gilead may be pricing Sovaldi so high due to the specter of strong competition from firms such as AbbVie and Merck that are preparing to enter the Hepatitis C market. The pricing strategies for these new entrants are still a mystery, but even if Gilead’s market share were only reduced to half of the market described above, the return on investment would be severely constrained. When net present value and ongoing costs of manufacturing, marketing and distribution are factored into the equation, Gilead actually appears quite vulnerable.

My limited view on the situation is this: Gilead will hold the price at $84,000 (for privately insured patients) long enough to recoup the initial investment of $11 billion before reducing the price to contend with the entry of competitor drugs. However, the treatments from each of these pharmaceutical titans will likely continue to run into the thousands of dollars. The industry seems to be shifting away from pricing based on the need to recoup investments and toward pricing based on “value” to the healthcare system in terms of reduced utilization of expensive treatment in the future.

Perhaps I’ll research and write a post about how cost-effectiveness impacts drug pricing and willingness-to-pay from insurers and patients. That would be interesting to explore!

Daniel Pink’s TED Talk on human motivation is eye-opening. He shows that people who are incentivized with rewards to solve problems more quickly – when those problems require creative thinking – actually perform poorly compared with people who are not incentivized for speed and accuracy. Here is the most amazing moment from his talk:

“Last month, just last month, economists at LSE looked at 51 studies of pay-for-performance plans, inside of companies. Here’s what the economists there said: ‘We find that financial incentives can result in a negative impact on overall performance.’” 

“There is a mismatch between what science knows and what business does. […] If we really want high performance on those definitional tasks of the 21st century, the solution is not to do more of the wrong things, to entice people with a sweeter carrot, or threaten them with a sharper stick. We need a whole new approach.

Pink was not discussing the healthcare industry in particular, but his comments reflect spreading concerns about the effectiveness of physician pay-for-performance plans being rolled out by insurers and health systems across the nation. Wrote Andrew M. Ryan and Rachel M. Werner in Harvard Business Review, “…to the extent that health care providers have responded to pay-for-performance programs, that response has been narrowly focused on improving the measures for which they are rewarded.”

The care that clinicians provide for patients is neither simple nor mechanical. Fitting cash rewards that are effective for linear, low-involvement tasks onto multi-dimensional and high-involvement physician decision-making sounds like a disastrous model that will reward narrow diagnosis and treatment at the expense of appropriate treatment that considers a wider range of diagnostic and procedural options.

Let us back up for a moment to consider how pay-for-performance is defined and how these programs are being administered in the current landscape. The Robert Wood Johnson Foundation says that pay for performance “refers to initiatives that provide financial incentives to health care providers to carry out improvements focused on achieving optimal patient outcomes.”

Notable to observe in this definition is that the programs are focused on improvements leading to better outcomes as opposed to just better outcomes. To my knowledge, this focus on process instead of the traditional preference for outcomes is due to the difficulty of proper risk-adjustment that measures “observed over expected” outcomes accurately. Providers who receive lower bonuses in pay-for-outcomes programs would complain that they see sicker patients than other providers see.

Prominent pay-for-performance programs include California Pay for Performance, the Massachusetts-based Alternative Quality Contract, and initiatives from CMS such as Value-Based Purchasing, the Premier Hospital Quality Incentive Demonstration, and the Physician Group Practice Demonstration. For example, an analysis of the Premier Demonstration led by Rachel M. Werner showed that short-term quality improvements were not sustained over the course of the five-year demonstration.

Although studies measuring the impact of pay-for-performance programs on quality are mixed, none of this is to say that providers should not be rewarded for meeting quality or patient satisfaction benchmarks. However, we must also be must be wary of translating clinical uncertainty and intuitive decision-making into rigid, codified process models. Remember the lessons from Daniel Pink described earlier: performance might suffer, along with patient outcomes, if it is still true that healthcare requires creativity and intuition in favor of recipes and cookbooks.

Future pay-for-performance programs should be designed with limited goals and should seek input from affected providers to improve the chances of success. This collaboration will become more important as pay-for-performance programs expand to account for a wider range of healthcare diagnoses and treatments.