Bundled Care Has Power to Rein In Drug Price Escalation

Zachary Landman, MD

The attempt by Turing Pharmaceuticals to boost the price of the anti-parasitic pyrimethamine (Daraprim) 5500% is now under reconsideration, but it shows up the flaws inherent in a fragmented payment system, says Zachary Landman, MD, a senior institute associate at the Institute for Strategy & Competitiveness at Harvard Business School.

“The Daraprim case is an example of a flawed reimbursement system, in which each part of the care cycle is paid for independently of one another. Those willing to exploit inefficiences and distribution barriers are able to seize incredible profits without driving meaningful improvements to patient outcomes. This is an example of the zero-sum competition that Michael Porter described in Redefining Health Care, in which in this case, is clearly a shifting of cost to the consumer. Those paying for and receiving the treatments (ie, patients) are the losers whereas the pharmaceutical company is the winner, reaping the resulting profits,” Landman says.

“In order for our health system to succeed, we need to move away from zero-sum competition to value-based competition, therapies are evaluated in the context of the broader care cycle and are paid for accordingly by their ability to drive value to the patient—improve condition-specific outcomes or reduce those costs to deliver those outcomes,” he says.

Daraprim, useful for those with weakened immune systems such as cancer and AIDS patients, saw its per pill price raised from $13.50 to $750 in August after Turing Pharmaceuticals purchased US rights to the drug from Impax Laboratories. In India and the United Kingdom, the drug is available for far less than a dollar a pill.

“Unfortunately, Daraprim isn’t a commodity that you can choose to buy or not to buy,” says Erin Fox, director of the Drug Information Service at the University of Utah. “There really aren’t good alternatives for some of these drugs we have seen major price increases for—and patients, hospitals, and clinics end up in the middle.”

Landman, who is delivering a talk on value-based oncology at the upcoming Chemotherapy Foundation Symposium in New York in November, says Daraprim is an example of the need for a broad discussion on how drug development costs should be funded. He adds that a system of aggregating medical costs in the form of bundled care can exert leverage to bring down the high cost of medicine.

“What is clearly needed in order to address the broader issue of drug price escalation is both a social and political conversation whether the healthcare system can continue to subsidize the global pharmaceutical R&D budget and whether that will require legislative involvement, and secondly, how we pay for healthcare more broadly. We must move away from a piecemeal payment system to bundled payments which aggregate both the costs and outcomes over a broader care cycle. These two levers have the power to diminish the bargaining power as demonstrated by the Daraprim.”

Presidential candidate Hillary Clinton saw the Turing moment as an occasion to announce a package of drug pricing reforms that she would attempt to enact if elected.

Those include eliminating tax breaks for consumer advertising, limiting out-of-pocket drug costs to $250 per month for patients with certain chronic or serious health conditions, promoting generic drug production by trimming the amount of time companies can exclusively produce new treatments, allowing Americans to import drugs from Europe if the safety standards are similar, and giving Medicare negotiating power, especially for drugs with limited competition.

Similarly many individual states have begun efforts to increase drug pricing transparency by instituting reforms. New York is among them, with a bill introduced in the state Senate in May that would require drug cost disclosures for prescription products with wholesale acquisition costs of $10,000 or more annually or per course of treatment, so that consumers, payers and others would be able to understand how market prices were determined.

“Pharmaceutical companies have long maintained that the exorbitant prices are needed in order to cover the costs associated with research, development and clinical trials. However, neither the consumers who need these prescriptions, or insurance companies, including Medicare nor Medicaid who pay for them, have any idea if what the pharmaceuticals contend is actually true,” states the bill, which is one of several introduced in state legislatures around the country over the past year.

John Castellani, president and CEO of the Pharmaceutical Research and Manufacturers of American (PhRMA), said Clinton’s initiative would stifle innovation and reduce patient access. “The sweeping proposals outlined in Secretary Clinton’s plan to regulate prescription drug prices would restrict patients’ access to medicines, result in fewer new treatments for patients, cost countless jobs across the country and could end our nation’s standing as the world leader in biomedical innovation,” he wrote in a blog post.

PhRMA’s objections to the specifics of Clinton’s plan do not address the overwhelming public frustration with high drug prices; the sentiment is not limited to consumers but has extended to physicians who cannot get patients to stick with medication due to cost. Meanwhile, President Barack Obama has called for giving Medicare negotiating power in the 2016 budget and HHS Secretary Sylvia Mathews Burwell has made similar pleas in public remarks.

American Journal of Managed Care Editor Mary Caffrey contributed to this report.