How Much Should Cancer Drugs Cost?

Memorial Sloan Kettering doctors create pricing calculator that weighs factors such as side effects, extra years of life

ENLARGE

Dr. Peter Bach, who led a project to create an interactive calculator for cancer drugs, said drug prices don’t reflect their value to doctors and patients. Photo: MICHAEL LOCCISANO/GETTY IMAGES

Peter Loftus

The Wall Street Journal

CANCEL

Biography Peter Loftus
@Loftus
Peter.Loftus@dowjones.com

June 18, 2015 11:21 a.m. ET

31 COMMENTS

One of the nation’s top cancer hospitals is challenging the pharmaceutical industry to adopt a more rational approach to drug pricing.

Memorial Sloan Kettering Cancer Center in New York has created an interactive calculator that compares the cost of more than 50 cancer drugs with what the prices would be if they were tied to factors such as the side effects the drugs produce, and the amount of extra life they give patients. In many cases, the website calculates a price that is lower than the drug’s market price.

The project, led by Peter Bach, a physician and director of the hospital’s Center for Health Policy and Outcomes, is the latest salvo from doctors and others against the escalating costs of cancer drugs, which increasingly carry price tags of $100,000 or more per patient for a year or a course of treatment. A colleague of Dr. Bach’s at Memorial Sloan Kettering recently blasted cancer drug prices as excessive in a speech before thousands of cancer doctors at a meeting in Chicago.

In an interview, Dr. Bach said prices for many new cancer drugs don’t reflect their value to doctors and patients. “Right now, manufacturers have total price control, and total control of prices has led to irrational pricing behaviors,” he said.

To model what he calls “value based” pricing, Dr. Bach created the “DrugAbacus” research tool, which he hopes will get drug makers, insurers, doctors and patients talking about the factors that should determine price.

ENLARGE

“We could have a value-driven system for pricing cancer drugs and probably other drugs, and here’s a first draft of how to do it,” he said.

The home page of the website (www.drugabacus.org) features images of Merck MRK -0.94 % & Co.’s melanoma treatment, Keytruda, and Novartis AG NVS -1.35 % ’s Gleevec for a form of leukemia. The site lists their per-bottle price—$2,500 for Keytruda and $9,000 for Gleevec—and then asks: “But is that the right price? Should they cost more? Or less?”

The calculator is presented in the form of an abacus with two beads on each wire representing two different prices: the actual price as an immovable bead, and the “abacus” price, which slides up or down based on different factors chosen by the user.

For instance, a user can select what he sees as the monetary value of an additional year of life, ranging from $12,000 to $300,000. Other adjustable components include a “toxicity discount,” which lowers the price to reflect the severity of drug side effects; and cost of development, which can move the price higher based on the number of patients in clinical trials.

When the value of a year of life is set at $120,000, with a toxicity discount that subtracts 15% off that level, the abacus price for many of the drugs is lower than the actual market price. A few have significant gaps at those settings, including Amgen Inc. AMGN 0.37 % ’s Blincyto, approved by the U.S. Food and Drug Administration in December for the treatment of a rare type of leukemia. The market price for Blincyto is listed on Dr. Bach’s site as $64,260 a month, but the suggested abacus price is just $12,612.

Dr. Bach said Blincyto should be discounted because many patients must be hospitalized to undergo the start of treatment to allow monitoring for side effects, which adds to the cost of administering the drug.

An Amgen spokeswoman said Blincyto is the first major treatment advance for patients with a rare type of leukemia, who typically live just three to five months after diagnosis.

“The price of Blincyto reflects the significant clinical, economic and humanistic value of the product to patients and the health-care system,” the Amgen spokeswoman said. “The price also reflects the complexity of developing, manufacturing and reliably supplying innovative biologic medicines.”

Dr. Bach has previously challenged the drug industry on prices. In 2012, Memorial Sloan Kettering decided not to give Sanofi SA’s new drug, Zaltrap, to colorectal cancer patients because Dr. Bach and other doctors there believed its efficacy didn’t justify its $11,000-per-month price tag. The doctors wrote a newspaper editorial laying out their decision. Sanofi subsequently cut the price by 50% for U.S. oncologists.

Dr. Bach said he got the idea to develop a price calculator in meetings he has had with drug companies, insurers and patients, during which he started writing down various components of what should determine price. Dr. Bach stopped seeing patients about four years ago to focus on research, but says he was also inspired by hearing stories of patients who didn’t fill prescriptions because they couldn’t afford the out-of-pocket costs, which are linked to the overall price.

‘Currently cancer drug prices aren't linked to the benefit they provide. They’re currently priced on what the market can bear, which is an unsustainable system.’
—Daniel Goldstein, a medical oncologist at Winship Cancer Institute of Emory University

Dr. Bach and two workers in his office spent much of the past two months setting up the site, with help from contractors at Real Endpoints, a drug-cost analysis firm, and engineers from software firm NetQuarry. Memorial Sloan Kettering funded the costs, which Dr. Bach estimated were in the “low six figures.”

Some drugs fare well on the abacus when set at $120,000 for a year of life, and a 15% toxicity discount. Teva Pharmaceutical Industries Ltd.’s Treanda treatment for blood cancers has an “abacus” price of $21,227 a month, well above the actual price of $7,725. A Teva spokeswoman said the company is pleased to see Treanda’s value to patients recognized.

Daniel Goldstein, a medical oncologist at Winship Cancer Institute of Emory University who has researched cancer-drug pricing, said Dr. Bach’s site provides a starting point for value-based pricing.

“Currently cancer drug prices are not linked to the benefit they provide,” Dr. Goldstein said in an interview. “They’re currently priced on what the market can bear, which is an unsustainable system.”

Patricia Danzon, a professor of health-care management at the Wharton School of the University of Pennsylvania, said assigning a monetary value to an additional year of life and discounting a drug’s toxicity should be key components of any pricing system. The ability to adjust the monetary value on Dr. Bach’s website is helpful, she said, because different health payers may be more willing to assign higher values and pay higher prices.

But she said she takes issue with the online calculator’s inclusion of such factors as a drug’s novelty, or its cost of development.

“That’s essentially saying companies should be reimbursed for whatever they spend,” she said in an interview. “That’s not how a competitive market works. In a competitive market, prices reflect the value that the products give to consumers.”

Write to Peter Loftus at peter.loftus@wsj.com

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John McLaughlin subscriber

Cancer Drugs Cost - Run a Muck?

With Cancer Drug Prices of $100K+/year! - who will Kill this random, pick a number out-of-the air, Pricing?

Oh, and how about the setting of prices based on the "value" of "life expectancy".

No Manufacturer on the Planet bases Prices on Life Expectancy - Not the Military manufactures, not even Apple with their whoopee Prices.

Do they go to that extreme with supplements - and promises of longevity? No, not even remotely close.

How about a heart rate monitor - to better manage health and longevity.

Automobile manufactures with seat belts, didn't do this.

"But it costs so much for research." BS OK it costs a lot, so have the Government mandate cost Audits?

Or - Mandate that all drug research be government funded?

Or - Let's just Exclude Patents for all drugs?

What do you think?

John McLaughlin, StockCoach

Master Day Trading Coach -

StockTwits - http://stocktwits.com/DayTradingCoach -
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#drugcosts

31 comments

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Bill Wald subscriber

This is the most important (most amusing) story in a long time. Why? Because it blows away the people who like to say, "You can't put a price (value) on a human life and qualifies the Great American Myth, "All men are created equal."

RALPH NIELSEN subscriber

The big difference between healthcare today and medicine of the 1880's is the availability of effective, specific pharmaceuticals, and better technology to enable proper diagnosis. Today, more people survive cancer and other serious illnesses because modern drugs work. And the cost of the drugs is a small portion of overall healthcare costs.

Doctors now and in the 19th century were equally good at bedside manner and holding patients' hands, while collecting a good living. But except for a few specialties like surgery, doctors generally don't directly cure illness other than by doing proper diagnosis and prescription. Even the surgeons can't help without antibiotics, etc. Maybe some drugs are overpriced--but if they work, they are worth it.

Those (often on the left--see HillaryCare) who attack drug companies for taking healthcare dollars away from doctors and bureaucrats, suppress the development of future drugs and display both their immorality and scientific illiteracy.

Pedro Mendez subscriber

You must work for drug industry. Why would the same drug cost say 3000 dollars in the USA, 2000 in Canada and 1000 in Western Europe?, forget about 100 dollars in India.

@Pedro Mendez

I've never worked for the drug industry. But I understand economics well enough to know your point is way off base, if not immoral.

Assume your US drug company spends 15 years and $3B R&D; for FDA approval, selling the drug only 5 years on patent. Each yearly drug dose costs $200 to manufacture. 100,000 patients need it in the US per year. 500K patients are in Canada, Europe and India.

You could sell the drug only in the US, and charge $6,000 per patient. You gross $0.58 B per year (minus $20M to manufacture 100K doses), recouping your development cost in 5 years.

So you also sell in India for $300, help a lot of people there, and at least break even on added manufacturing cost.

If socialists in Canada and Europe set max prices of $2K or $1K, you also sell there, allowing you to lower the US cost a little. Only the US market is profitable, but you let the socialists freeload on the US patients.

Ever wonder why very few drugs come from Canada, Europe or India?

Eric Caplan subscriber

I wish drugs costs less. That said, the argument that "pricing drugs on what the market can bear is an unsustainable" is specious both logically and empirically. I am hardly a free market ideologue, but I'm also not a fool. Were the price of drugs greater than what the market could bear, then of course those prices would be unsustainable. No one is putting a gun to the head of Express Scripts or Aetna and forcing them to accept whatever price Merck or Sanofi suggests. What's more, I suspect Dr. Bach believes he is entitled to a salary that places him firmly among the one percenters. If Dr. Bach believes the government should determine the price of drugs, perhaps he should work for the VA and earn a considerably more modest government salary.

Scott McClave subscriber

Is there any irony in a hospital calling out drug companies on unjust and non-value-based pricing?

SANDEEP DUTTAGUPTA subscriber

It is easy to point towards drug prices and blame the pharma companies, without probably acknowledging that it has about 96% failure rate (something that cannot be changed overnight) . In US, drug costs constitute 10-11% of the total health care expenditure, but still an easy target because no one will ever tell you what's the actual cost of other services that people incur. Just looking at price tag doesn't help without looking into the incremental value that the innovation brings.

Sailesh Kapadia subscriber

Perhaps the abacus could be used as an indicator of what PATIENTS would be willing to pay if there was no backstop provided by health insurance companies.

Robert Hutchings subscriber

Maybe the Memorial Sloan Kettering Cancer Center (or anyone else that thinks that medicines are mispriced) should start their own pharma company. Alternatively, they could pool their money together with like-minded people and buy one or more pharmas. Then they could apply their theoretical pricing models or even give their drugs away for free. Let me be the first to thank them for their future generosity.

Robert, you don’t seem to understand how this socialism thing is supposed to work. It’s not about what Memorial Sloan (or anyone else) does with their own time and money; it’s about forcing what is done with the time and money of other people.

Barrie Harrop subscriber

It seems to me the US health insurance companies have very a good business model, you pay you get sick they cancel.

Buzz Mills user

Doctors slam Big Pharma for price gouging Cancer Patients http://www.whiteoutpress.com/articles/q22013/doctors-slam-big-pharma-for-price-gouging-cancer-patients/

There's a very informative table at the end of the above article showing the difference in drug prices country-to-country .. None compare to the U.S. which has the highest drug prices in the world.

@JEFFREY DUGAS other nations have price controls which result in drugs being sold for less than what they truly cost

that's total bullcrap and you know it

JEFFREY DUGAS subscriber

@Buzz Mills

"None compare to the U.S. which has the highest drug prices in the world."

That's because many other nations have price controls which result in drugs being sold for less than what they truly cost. So you, here in the US, get to pay more to subsidize the drugs of consumers in those nations.

Someone has to pay.

How do you spell Novartis? G-R-E-E-D ... Novartis Gleevec oral chemo for chronic myeloid leukemia (CML): $24K/yr. 2001 intro; $47K/yr. 10/2009; $120K/yr. 02/2015; expecting another increase soon

Paula Glissman subscriber

I cannot believe anyone commenting on this article in support of current drug pricing in this country has read any of the dozens of in-depth articles and analyses on how drug companies are ripping off everyone. With all of the facts that are available it seems impossible to me that there could be anyone left that would make even a feeble attempt at justifying their actions. I wish I could attach 5 or 10 of these articles as evidence. How can you not be aware of the realities of what they are doing???? The myths of "research and development" have been long exposed as smokescreen and fallacy. I dislike government control as much as anyone, but health care desperately needs a single payer that establishes payment levels. I guarantee the general health of people in this country would rise dramatically within a decade. And BTW, we're not even in the top 10 any longer. Does that tell you anything at all about allowing health care to be a capitalistic business model?

@Paula Glissman

Total nonsense.

richard shuey subscriber

Makes a lot of sense. Bureaucrats should set the price of goods and services, rather than using something arbitrary like the actual cost of development and production. Huh!?!

Robert Goldberg user

Cancer drugs are less than 1 pct of spending.. They are 18 pct of MSKCC revenue. Why not a calculator for the other 82 pct based on value. 6 MSKCC execs make $1mil a year. How about a calculator for that.

New meds reduce the overall cost of treatment long term.. Where's the calculator for that.

Bach's calculator prejudges value and is one size fits all in an age of personalized medicine.. Using clinical trial data to judge prices will kill patients

Susan Corwin subscriber

So, academics with no skin in the game, think their perceived "ivory tower value" of a drug should determine the price paid by folk with no value to provide?

Last I checked, this was called either "envy" or "greed".

If the development cost is so negligible, why don't the academics just dominate the market and provide the drugs?

Oh? The academics are incompetent and, of the 7 billion people, "everyone deserves" everything, even if they are retired/loafing/leeching/expanding the population, on a beach in Hawaii at the age of 25?

D Dykes subscriber

As long as the US govt allows "re-importation", we should be OK. But the days of drug companies gouging US clients, and then turning around and providing the exact same drugs that US consumers are funding, to other countries at a fraction of the price, needs to end. Now.

Our govt should get out of the business of enabling this gouging of its citizens by private companies. That change alone would drive down the US price for drugs dramatically - using simple market forces.

edward sorr subscriber

In the old days drug efficacy was proved in clinical trials, the results presented to physicians at professional meetings and new drugs were ordered by physicians on the basis of the clinical data. Drug company representatives came to physician offices to make the case for and to promote the use of the new drug. Nowadays billions of dollars are legally spent by drug companies on television, print ads and signage to encourage patients or prospective patients to request the drug being promoted from their physician. The ads are deceptive and intrusive and really unnecessary as a reference source for patients given today's internet access.

I feel these advertising dollars should not be a legitimate component for determining drug development costs. Development costs and promotional expenses belong in two separate categories. If we delete the latter from the computations, drug prices should more justly reflect value-based pricing.

Robert Holman subscriber

@edward sorr How right you are! When a drug rep calls on a doctor the only thing that ISN'T mentioned is the COST. Doctors have absolutely NO IDEA what that great new drug will cost the actual payor (government or insurer). Notice, too, that the ONLY thing that isn't mentioned in direct-to-consumer drug advertising on TV or print is the COST of the drug. The FDA and Federal Trade Commission could change this INSTANTLY by requiring drug advertisers to include the Average Monthly Wholesale Cost of the drug as part of the advertising. THAT might actually have some REAL impact on reducing drug costs. Ahhh - if only the drug company lobby weren't so powerful.

David Langston subscriber

Very interesting, but incomplete.

As far as novel myeloma drugs listed, the blockbuster mainstay, Revlimd (lenalidomide), is omitted. The salvage drug, Kyprolis (carfilozimib), a potential competitor to Velcade (bortezomib) isn't listed as well.

The cheaper old-line mainstay drugs are not listed such as Melphalan and Cytoxan (cyclophosphamide) which are essentially solid versions of mustard gas. Nor is Doxil (liposomal doxorubicin), aka "red death" to those taking it, listed.

Even dexamethosone, a cheap but powerful steroid, should be listed as it is a standard treatment drug taken concurrently with all the others previously described.

There is also an error in their database as Farydak (panobinostat) is not listed for myeloma.

Donald Arkin subscriber

‘Currently cancer drug prices aren't linked to the benefit they provide. They’re currently priced on what the market can bear, which is an unsustainable system.’ Exactly the opposite of the truth. What's unsustainable is pricing drugs based on what users want to pay. News flash: users aren't responsible for inventing, developing, testing, and marketing drugs. The economic ignorance of the doctors quoted in this article is beyond shocking. They would be better off moving their practice to, uh, Russia? No, even Russia has moved beyond that model. Nowhere, I guess. Maybe they should focus on what they know how to do and get out of the business of discouraging drug development. And while they're at it, why not get them to price out their professional services, along with the wages of all the medical employees, as well as hospital services, based not on what would allow the hospitals not to go bankrupt, but rather on what those services are worth to patients.

Michael Berkovich subscriber

How did they come up with the $120,000 value for an extra year of life? Is everyones extra year really worth the same? How would lower drug prices affect future drug reasearch and development? If a year of life is worth $120,000, should insurance not pay for treatment that costs more than $10,000 per month? Should they pay for any treatment that only extends someones life by a few months?

Nils Wessell subscriber

@Michael Berkovich I doubt your life is worth $120,000 a year, but I am convinced mine is.

@Nils Wessell

Exactly how many Fascists or Communists or Progressives would think. That is the problem with putting a dollar value on life and rationing centralized healthcare.

@Nils Wessell @Michael Berkovich Why are we even debating this? In the year 2015, haven't we all seen by now that the free market has been a total failure and that government-set prices have always provided superior products in abundance? I mean, really.

VERNON PARMLEY subscriber

@Michael Berkovich When we ask others to subsidize or all out pay for our health care, then they will place a value on our life. Or should I say a price? Things to do to keep drug prices down? Torte reform. Longer patent times. Less time and expense to get a drug to market (although this may cause more risk). If a patent is only for 15 years, and it takes 7 to 8 years to bring a drug from conception to market, then a drug company only has 7 years to recoup R&D; costs and make some kind of profit. This becomes more complicated when the target population is small.

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