The High Price of Precision Healthcare

Why drugs targeted at smaller populations will necessarily cost more, how that’s impacting pharmaceutical and insurance companies, and what patients can do to find payment alternatives.

By Joseph Guinto featured image

They say you can’t put a price on human life. But if you could, the price for Gregg Baumbaugh would be $397.42 per day, or $145,058 per year. That’s what Baumbaugh, a 53-year-old executive from Elkhart, Indiana, is charged for Xalkori (crizotinib), an anti-cancer drug that is, for the moment, his last, best line of defense against stage 4 lung cancer.

Baumbaugh was first diagnosed with a lung tumor, measuring 3 centimeters, in the summer of 2009. Chemotherapy and surgery to remove the lower portion of one lung followed, and the cancer went into remission. But in the summer of 2012, it returned and spread. Doctors found five tumors in Baumbaugh’s lungs. “Needless to say,” he says, “that just scared the s— out of me.”

But that fear and Baumbaugh’s cancer have been tempered thanks to advances made in genetic testing since his first tumor appeared in 2009, as well as to a breakthrough drug approved for sale in 2011.

New genetic tests on Baumbaugh’s original tumor identified the molecular pathway where Baumbaugh’s non-small cell lung cancer occurred — a mutation in a gene known as EML4-ALK. Cancerous mutations in that gene are rare, affecting perhaps as few as 5,000 people in the United States. And Xalkori, the breakthrough drug approved for use by the Food and Drug Administration in 2011, is one of the only proven options for treatment.

Baumbaugh has been on his twice-a-day regimen of Xalkori for two years — months beyond the time the drug is expected to work before the cancer mutates its way around the treatment. “It’s working so far — knock on wood,” says Baumbaugh, a nonsmoker who runs 3 to 5 miles per day and works as CEO of FlexForm Technologies, a small company that makes fiber composite panels like the ones that give the inside of your car door its shape. “And I’ve had almost no significant side effects.”

It would be silly to ask Baumbaugh if he thinks keeping his cancer at bay is worth the $397.42 a day, or $145,058 a year, that his insurer, Anthem Blue Cross, has covered — completely — since his cancer returned. Not quite as silly: asking Baumbaugh whether the price being charged by Pfizer, the $52 billion pharmaceutical company that developed Xalkori, is fair. “You’ve got drug companies spending billions of dollars in research to develop these drugs, and they’ve got to recoup their money,” Baumbaugh says. “With Xalkori, there’s pretty much no competition, and when you’re in a dominant market position, you better take advantage of it. I don’t fault the drug companies for that at all.”

Not everyone is so understanding. Pharmaceutical companies today are facing increasing criticism from patient groups, physicians, and insurers over the six-figure prices they’re charging for medicines that treat rare conditions. Some critics worry that qualified patients won’t be able to afford to buy what may be lifesaving treatments, and others fret that the healthcare system will eventually falter under the cumulative costs of treating rare diseases with very expensive drugs — especially as genetic testing helps identify more people who have rare conditions. Even the man who is most directly responsible for the boom in rare drugs, Henry Waxman, a Democratic Congressman from California, has soured on the pharmaceutical industry. Waxman was the sponsor of a 1983 law called the Orphan Drug Act, which offers pharmaceutical companies regulatory relief and tax breaks for the development of drugs treating rare conditions. Waxman recently told the Seattle Times that drugmakers are now taking advantage of his law’s incentives, “to charge excessive profits and to reap windfalls far in excess of their investments.”

But pharmaceutical lobbying groups argue that drugs treating rare conditions often replace existing therapies that cost as much or more — potentially offering a net savings for patients and insurers. “The reality is that innovative treatments often provide the opportunity for patients to improve outcomes and reduce future use of other expensive healthcare services,” says Jennifer Wall, a spokeswoman for the Pharmaceutical Research and Manufacturers of America. “Medicines for rare diseases offer hope to patients who currently have few or no treatment options and often increase people’s ability to work and engage in daily activities, enhancing quality of life for patients (and their caregivers) and helping to avoid substantial future healthcare services and costs.”

Insurers may or may not agree, but there’s little to suggest that insurers aren’t paying the often-high prices for the latest orphan drugs. But they are increasingly shifting the burden of paying for those drugs onto patients. A study released this year, by Joshua Cohen and Abigail Felix from the Tufts Center for the Study of Drug Development in Boston, concluded that insurers are paying for most orphan drug treatments, but that the drugs “are increasingly subject to formulary restrictions. For example, in recent years, U.S. payers have shifted from fixed copayments per prescription to ‘co-insurance’ for most orphan drugs. That is, the patient’s out-of-pocket expenses are calculated as a percentage of the drug’s cost. Co-insurance percentages have, on average, risen from 15 to 28 percent in the past decade.”

That shift could mean thousands, perhaps tens of thousands, of dollars in new payments for patients. And that’s just one reason why some of those who bear the bulk of the costs for the increasing number of orphan drugs sometimes don’t think those costs are reasonable. Consider Xalkori: The drug rang up $298 million in revenue for Pfizer in 2013, a tiny slice of that company’s $51.6 billion in 2013 earnings. But that same year, the United Kingdom’s National Institute for Health and Care Excellence said it would not recommend that the country’s National Health Service cover Xalkori because the drug wasn’t cost-effective. Earlier this year, Canadian researchers writing in the Journal of Clinical Oncology agreed, saying that, on average, patients with the ALK mutation taking Xalkori enjoyed .379 additional “quality-adjusted life-years” at an added cost of $87,000. In layman’s terms: The average Xalkori patient in Canada lives 4.5 months longer in mostly full health than he would with standard care. Is 4.5 months of relatively healthy life worth $87,000?

Again, it would be silly to ask that of Gregg Baumbaugh, who is doing much better than the average Canadian. But apply that kind of benefit at that kind of cost to the entire healthcare system, and maybe it’s a reasonable question: Can we afford the high price of drugs treating rare diseases?

Paying The Price For Treatment

In 1983, the first federal law to promote the development of rare-disease drugs was signed into law. Representative Waxman, the bill’s main sponsor, called it the Orphan Drug Act because he believed drug companies had abandoned the development of rare-disease drugs because of limited financial incentives. The act created those incentives. It gives drugmakers seven years of market exclusivity with their products — two more years than makers of brand-name drugs for the masses get in the U.S. It also accelerates the FDA’s approval process over the one used for standard drug development. The act gives orphan drugmakers tax credits that allow them to deduct up to half of their research and development costs.

Does that mean orphan drugs are cheaper to produce than typical drugs, which the Pharmaceutical Research and Manufacturers of America says cost, on average, $1.2 billion to bring to market? Yes, according to healthcare market research firm Evaluate. That company found in a 2013 study that Phase 3 orphan drug development (the final phase in the process before FDA approval) costs half that of non-orphan drugs. In fact, Evaluate said that once U.S. tax breaks associated with the Orphan Drug Act are factored in, Phase 3 development of orphan drugs could cost one-quarter of what non-orphan drugs cost.

One example: NPS Pharma executives have said they spent just $250 million to develop the orphan drug Gattex (teduglutide). That drug was released in 2013 and helps patients with short bowel syndrome absorb nutrition naturally, through food, instead of having to receive it parenterally, or through a vein. The drug costs patients, of whom there might be 15,000 in the United States, $295,000 a year.

When Gattex was released, NPS officials blitzed the media, telling both the New York Times and Forbes that Gattex — which, like most orphan drugs, treats symptoms but is not a cure — will save other healthcare expenses. Parenteral nutrition, these executives said, costs more than $100,000 a year. If home healthcare workers are required to administer those parenteral treatments, or hospitalization is required, as can be the case, the costs can rise higher. Besides that, the executives said, many short bowel syndrome sufferers who receive home care are unable to return to work. Many Gattex patients, however, can resume working.

Is all that worth $295,000 a year to insurers? Apparently so. NPS executives told Forbes that they polled insurers — or “payers,” as they’re often referred to in the industry — before the drug was released and asked if the price was acceptable. Some 70 to 80 percent said they’d pay for Gattex, and many said they would have paid more than $295,000 a year.

Why more? Consider the math: NPS thinks that of the maximum 15,000 short bowel syndrome suffers, somewhere between 3,000 and 5,000 will benefit from Gattex. At most, that means the drug would cost payers $885 million a year, though NPS expected initial earnings to be more like $350 million. Spread that across hundreds of insurance companies, Medicare, and other payers, and it’s not an absurd cost, especially if Gattex does help patients save money in other ways.

“Payers often look at what things are costing them in the aggregate rather than on an individual basis,” says Russell Teagarden, senior vice president for scientific and medical affairs at the National Organization for Rare Disorders. “Today, orphan drugs, because the number of patients is so small, may be less than half of 1 percent of their total outlays. So what’s the impact on the bottom line at the end of the year? For now, it may not be significant. But the more of these drugs that are developed, and the more expensive those drugs, even if they’re used in small patient populations, the more the costs are going to add up.”

That’s not to say insurers aren’t taking notice of the very high costs of very targeted medicine. “Many in the [drug-making] industry discuss the reimbursement hurdle as being at least as daunting as the regulatory approval hurdle,” says Doug Paul, a partner with Medical Marketing Economics, a pharmaceutical industry consulting firm based in Oxford, Mississippi. He says that payers use increasingly sophisticated “health technology assessments” to determine the economic value of a drug and compare it to what payers think a drug should be worth. But in many recent cases, payers seem to agree with drugmakers that new orphan drugs are worth a lot. Soliris (eculizumab), an orphan drug that treats a rare blood disease called paroxysmal nocturnal hemoglobinuria, is the leader in those terms. Approved by the FDA in 2007, it is the world’s most expensive drug, priced at $440,000 or more per year. Soliris’ potential patient pool in the U.S. is thought to be no more than 8,000. Annual sales in 2012 were $1.1 billion worldwide.

“Many in the [drug-making] industry discuss the reimbursement hurdle as being at least as daunting as the regulatory approval hurdle.”

In pharma-industry parlance, breaking the billion-dollar sales mark still qualifies the drug as a “blockbuster.” But not everyone who uses Soliris contributes to the drug’s bottom line. The same could be said for most orphan drugs, industry experts say. They explain that, typically, commercial insurers who agree to cover an orphan drug will pay about 70 to 80 percent of the total costs and will require patients to pay the remainder. NPS Pharma’s launch plan for Gattex assumed that most patients would face copays of 15 to 20 percent of the drug’s price. For a $295,000 drug, that could be almost $5,000 a month.

To help patients cover those costs, drugmakers for the newest, most expensive orphan drugs usually offer patient assistance programs. Those programs may refer patients to secondary insurance plans or may connect them with nonprofit, rare-disease foundations that have funds to help patients cover the costs of treatments. The National Organization for Rare Disorders, the Patient Advocate Foundation Co-Pay Relief Program, and Good Days From CDF are three such nonprofits offering help.

Financial assistance is also, increasingly, coming from partnerships between rare-disease nonprofit groups and drugmakers. Boston-based Vertex Pharmaceuticals has such an assistance program for its cystic fibrosis drug Kalydeco (ivacaftor). Approved in 2012, Kalydeco treats the 4 percent of cystic fibrosis patients who have a rare gene mutation called G551D. To help patients pay for the drug, Vertex and the Cystic Fibrosis Foundation have teamed up to offer as much as $88,200 in out-of-pocket expenses that might be related to deductibles or copays. Commercially insured patients or those with Medicare and Medicaid can access that money. Even so, Vertex officials have said that the majority of Kalydeco patients are paying no more than $50 a month for the drug because most insurers pick up the rest of the $300,000 annual price tag.

In the eyes of three cystic fibrosis doctors, that’s not good enough. Writing jointly in the Journal of the American Medical Association last year, doctors from Stanford University and the Universities of Massachusetts and Pittsburgh said Kalydeco has been priced too high for patients who will have to take two Kalydeco pills every day for the rest of their lives. “The vast majority of patients cannot afford this financial burden,” the doctors wrote, “and transferring the cost to private or federal insurers does not obviate the underlying problem — an unsustainable pricing structure.”

Vertex disagrees. The company offers the product free to uninsured patients with incomes under $150,000 per year. Many orphan drugmakers have similar programs that offer free medication for low-income or uninsured patients. Pharmaceutical industry officials say that when all these patient-pay programs are taken together, it shows there is little evidence to suggest that people who qualify for very expensive treatments for rare disorders aren’t able to access drugs approved to treat them. In fact, drug companies often dispatch “care counselors” or those with similar titles to find potential patients and to ensure they can be insured for the expensive drugs on offer. Those counselors will lobby insurance companies on a patient’s behalf, will handle paperwork, and will connect patients to secondary insurers or nonprofits to help defer out-of-pocket costs. For Gattex, NPS has 38 such people on staff, some of whom make in-person visits to Gattex patients.

Clearly, drug companies have a profit motive to offer that kind of personal touch. The more qualified patients they can find, the more specialized drugs they can sell. But, for patients, orphan drugmakers can become a rare advocate in the world of healthcare — an outsider who will lobby on their behalf to connect them with care that has been clinically proven to work. The catch, of course, is that care could cost patients anywhere from a few dollars to a few thousand dollars per month.

The Role of the Genome

So how are all those qualified patients being found? Genetic testing is one key way. And whether a genetic test can determine that a patient has a rare disease or not, insurers are increasingly being asked to cover the costs of those tests.

A study released in 2013 by UnitedHealth, one of the nation’s largest insurers, says its claims for genetic testing have increased 15 percent per year in recent years. The company estimates that Americans overall spent $5 billion on genetic testing in 2010, and it projects that number will balloon to between $15 billion and $25 billion by 2021 as genetic tests become more effective.

For now, effectiveness — or, in medical parlance, “clinical utility” — is the main thing keeping insurers from paying for more genetic testing. Take Gregg Baumbaugh as an example. His insurer spent only a few hundred dollars on the genetic test that found the EML4-ALK mutation. The reason they agreed to that cost was simple. If that mutation was found, there was a proven course of treatment for Baumbaugh — Xalkori. The same is true for women who have mutations in the genes known as BRCA1 and BRCA2. Those mutations have been linked to a higher risk of breast and ovarian cancer. And, depending on other factors like family and personal history, a course of treatment for those cancers is already in place. That’s why insurers rarely refused to cover BRCA gene tests — which are now required to be covered under the federal Affordable Care Act if recommended by a healthcare provider.

But what happens in cases when the clinical utility of a genetic test has not been so well established? A genetic test today can tell you if you’re at a much higher risk for developing Alzheimer’s disease. But insurers don’t generally cover the costs of those tests. Or, if you were to sequence a whole genome — at a cost of somewhere around $4,000 — you might uncover the cause of an idiopathic disease that no other test has uncovered, but you might not discover anything useful in the treatment of that disease. That leaves insurers unsure about whether to pay for such testing.

One of the nation’s biggest insurers, Aetna, says it considers genetic testing “medically necessary to establish a molecular diagnosis of an inheritable disease” only when a patient “displays clinical features, or is at direct risk of inheriting the mutation in question (presymptomatic); and the result of the test will directly impact the treatment being delivered to the member; and after history, physical examination, pedigree analysis, genetic counseling, and completion of conventional diagnostic studies, a definitive diagnosis remains uncertain,” and when one of more than 90 different diagnoses is suspected — anything from cystic fibrosis to maple syrup urine disease.

That sounds complicated. It might even sound like insurers are throwing up roadblocks to keep patients from getting their genetic tests covered. But a recent survey by the Center for Business Models in Healthcare at Northwestern University’s Fineberg School of Medicine recently found that isn’t the case. The center surveyed the nation’s seven largest payers (insurance companies and others who cover the costs of healthcare for consumers) to find out, in part, how they’re covering genetic testing for their 100 million customers. The results, says the center’s director, Christine Weldon, came down to clinical utility.

“If a patient has a clear, defined need for a genetic test and the test results have some clinical utility — meaning something can be done with the results and that there are proven procedures or preventive or therapeutic measures that can be undertaken once the results are in — then payers, for the most part, will cover the costs of a genetic test,” Weldon says. “When it gets to be a gray area is when there is not a defined patient history or when the test results are just not actionable or where the ability to act on them is unclear. In that case, payers still might offer coverage or they might not. It’s not one-size-fits-all.”

“It’s easy to criticize insurance companies. But they’re in a difficult bind. They have to demand some evidence that these genetic tests produce actionable results.”

There are, however, some genetic tests that are almost always one-size-fits-all in terms of getting coverage. Prenatal tests that help identify birth defects, blood tests run on newborns to identify the risk of rare genetic disorders, and testing for many forms of cancer now known to be caused by specific gene mutations are now routinely covered by insurers. “If there are existing tests that look for genetic abnormalities and if the patient has a family history or other risk factors and if there’s both a reliable test and some potential benefit, such as a medical treatment that’s recommended by a standard-setting organization like the U.S. Preventive Services Task Force or the National Comprehensive Cancer Network, then getting coverage is generally routine,” Weldon says.

But suppose you want to be tested for risks for breast cancer, colorectal cancer, or Long QT syndrome, an inherited heart condition? For those conditions, insurance company Cigna is sending its customers to a genetic counselor before it agrees to pay for genetic testing. The company says tests for those conditions are the most commonly ordered genetic tests, and it believes those test results are also the most commonly misunderstood. So, in 2013, the company required that genetic counseling be a part of the process for customers who want those tests. Other insurers have not yet followed suit, but many do strongly encourage a genetic counselor get involved before genetic tests are ordered.

“The number and kinds of genetic tests are expanding rapidly, so it can be hard for payers to stay on top of the technology and to get a policy put in place at the same speed that the tests are hitting the market,” says Joy Larsen-Haidle, president-elect of the National Society of Genetic Counselors.

“And for patients, too, staying on top of the technology can be a challenge,” she adds. “There are times that patients are concerned about something they’ve heard in the media or about something they’ve seen in their own family history, so they think they might need a genetic test. We can explain to them why a test may not be necessary. Because an unnecessary test can be a big expense.”

Does that sound like a roadblock? Larsen-Haidle says it shouldn’t. She says in some cases, when a patient doesn’t meet the criteria for testing, or there is no proven clinical utility behind a test, genetic counselors may still advocate that testing be done, and be covered by insurance, if they see some benefit to the patient. For instance, if they think a genetic test might reveal a condition that could be treated with an orphan drug.

Put another way, even at the risk of repetition, there is no one-size-fits-all in terms of which genetic tests will or won’t be covered by insurance. “It’s easy to criticize insurance companies,” says Jim Evans, a professor of genetics and medicine at the University of North Carolina and the editor-in-chief of Genetics in Medicine, the journal of the American College of Medical Genetics and Genomics. “I do it. But they’re in a difficult bind. They have to demand some evidence that these genetic tests produce actionable results.”

But as the months and years go on, it seems likely that more genetic tests will produce those kinds of results — uncovering mutations that, when properly treated, sometimes through the use of pricey orphan drugs, can help people live longer, more productive lives. The orphan drugs don’t come cheaply, and the genetic tests are not free. And we may all share, in one way or another, in the increasing costs of improving or saving the lives of others. So what price are we willing to put on that? As Evans says, “Society has to make some very tough decisions.”