James Raftery: Ever higher cancer drug prices—driven by US policies and genetic sequencing

The high prices charged by companies for cancer drugs has led to lots of speculation, but very little explanation. The most interesting attempt to explain these high prices has been made by a US oncologist Scott Ramsey. As the article is paywalled, I summarise it below (with thanks to the author for a copy).
His identifies two major factors: US health policies and technology.

Ramsey identifies three recent changes that conspire to fuel increases in the prices of cancer drugs. Since 2005 Medicare has paid for cancer drugs on the basis of a mark up on average sales price in turn derived from the “list price.” The list price normally sets the global price.

The second has to do with policies mandating coverage of cancer drugs. Medicare and Medicaid are legally obliged to fund drugs that are listed in a “compendia.” Many compendia exist with low evidence thresholds. Further, many states have required private insurers to do the same.

The third factor is the expansion of coverage under Obama’s Affordable Care Act so that Medicare and Medicaid fund the bulk of treatments for new cancer patients. Worry that this will be curtailed, he suggests, has led to a “gold rush” mentality by cancer drug makers.

These three factors, he suggests, have led to this being the “good times” for setting high prices.

Ramsey however suggests that the most profound factor fuelling cancer drug prices has been technology, specifically the rapid decline in the cost of sequencing the human genome. Researchers are using advanced technologies to comb through the DNA, RNA, and proteins that constitute cancerous tissues to find “targets.”

“This vast expansion of knowledge, combined with the lowered barriers to entry described above, has compelled nearly every major pharmaceutical company to pour resources into cancer drug development.”

Although increased competition might be expected to reduce prices, the distorted pricing under the above policies, combined with delays with obtaining FDA approval, and the risk of rivals taking the smaller personalised markets, have encouraged companies to charge ever higher prices.

Ramsey discusses Pfizer’s crizotinib (xalkori) for advanced lung cancer as an example. As this drug targets a genetic mutation (ALK fusion) present in only 4-5% of patients, it faces a dramatically reduced market. Worse it knew a competitor drug, ciritinib, was in the offing. Pfizer chose to set the price high at $10k per month, giving a cost per QALY of $250k.

NICE, even with an offered price reduction, put the cost per QALY of crizotinib at over £100k. Although NICE recommended against its use in the NHS (despite it qualifying as an end-of-life drug) crizotinib has been funded through the Cancer Drugs Fund.

Beyond setting high prices, Ramsey suggests companies are also hedging their bets by searching for new indications. No less than 42 trials are investigating crizotinib across a range of tumour types. If successful, the initial high price set for lung cancer will stand.

Ramsey concludes that cancer drug pricing decisions are driven by factors that have very little to do with the intrinsic value of the products themselves.

Ramsey provides the best account I have read as to why US cancer drug prices are so high. And given companies generally try to maintain US prices, it helps explain why the rest of the world has an even greater problem.

James Raftery is a health economist with several decades’ experience of the NHS. He is professor of health technology assessment at Southampton University. A keen “NICE watcher,” he has provided economic input to technical assessment reports for NICE, but has never been a member of any of its committees. The opinions expressed here are his personal views.

Competing interests: The author has no further interests to declare.