Why Are Cancer Drugs So Expensive in the U.S.?
WASHINGTON, April 3, 2015—The cost of cancer drugs in the United States has skyrocketed in the past decades. However, the reason for such a meteoric rise depends on whom you ask.
The pharmaceutical industry justifies high prices by arguing that because the cost of developing new drugs and going through the onerous process of approval is enormous, high prices are necessary to foster innovation. On the other hand, there are a growing number of oncologists and health advocates that argue that the main reason for this increase is the emphasis on profits and basic corporate greed.
Nobody disputes that cancer drug prices in the U.S. have soared in the last 15 years.
“In the United States, the average price of cancer drugs for about a year of therapy increased from $5000 to $10,000 before 2000 to more than $100,000 by 2012, while the average household income has decreased by about 8% in the past decade,” according to an article written by two prominent oncologists, Dr. Hagop Kantarjian and Dr. S. Vincent Rajkumar, published online in the journal Mayo Clinic Proceedings in March.
However, prices for cancer and other prescription drugs have not risen as steeply in the rest of the world. In general, prices for the same cancer drugs are 20 to 40 percent lower in Europe, according to a 2014 IMS Health study.
The high cost of cancer drugs in the U.S. takes a heavy toll on individuals and families, where a cancer diagnosis may be tantamount to bankruptcy. According to a 2006 national survey, one in four individuals with cancer stated that paying for care had drained all or most of their savings. A 2013 study found that US cancer patients were 2.5 times more likely to declare bankruptcy than people who do not have cancer.
As patient advocates argue for more government control of the healthcare industry in the U.S., drug manufacturers contend that price controls would deter companies from investing in innovation and delay or even obliterate the hope of new and better life-saving drugs.
The high cost of research and development
Estimates of how much it costs to bring a new drug to market range from $1 to $4 billion and more, depending on what costs are included in the analysis (cost of drugs that did not make it to market, etc.).
Regardless of the amount spent on research and development on any particular drug–$100 million or $11 billion—major pharmaceutical companies spend a small percentage of their annual profits on R&D.
For example, according to Statista, in 2013 Novartis made $46 billion in prescription sales, and spent $9.4 billion on R&D; Pfizer made $45 billion in prescription sales and spent $6.3 billion on R&D. It is important to note that these figures are for prescription sales; in 2013 Novartis made $58 billion in global sales, Pfizer made $52 billion. They also spent $15 and $11 billion respectively on sales and marketing for the same year, significantly more than on R&D.
Given these numbers, it is difficult to believe that the need for funding of research and development is driving drug prices—especially cancer drug prices—so high. Profit margins for the pharmaceutical industry are higher than almost any other industry (ranging from 10 to 42 percent in 2013 for the top 10 global pharmaceutical companies), and yet industries with less impressive profits manage to invest in innovation.
Because governments in other parts of the world do not allow pharmaceutical companies to charge exorbitant prices for drugs, pharmaceutical companies justify higher prices in the U.S. by claiming that it is the U.S. profits that pay for the R&D of drugs that save lives around the world.
“The US makes most of the discoveries, the taxpayer funds 85 percent of the basic research, and yet at the end of the day when a drug is FDA-approved — for cancer as well as for other indications — we as Americans are paying at least twice the price as those outside the US,” said Dr. Kantarjian in a 2014 interview.
Many question why Americans should bear this burden for other rich countries.
“Apart from the question of whether a country with a health-care-spending crisis should subsidize the rest of the developed world— not to mention the question of who signed Americans up for that mission —there’s the fact that the companies’ math doesn’t add up,” writes Steven Brill in his groundbreaking article Bitter Pill.
“All the numbers tell one consistent story,” writes Brill. “Regulating drug prices the way other countries do would save tens of billions of dollars while still offering profit margins that would keep encouraging the pharmaceutical companies’ quest for the next great drug.”
Drug companies also argue that as drugs get better, they get more expensive, and that there is a direct cost-benefit relationship between cancer drugs and their prices.
A study published in the latest issue of the Journal of Economic Perspectives, co-authored by David H. Howard, associate professor at Emory University and Ernst Berndt, an MIT economist, found this to be true to an extent.
“We found that the greater the improvement of the drug over the existing therapies, the higher the price,” Berndt explained in a press release. “So price was related to quality — but price increased more than did quality.”
In their study, Howard and Berndt found that the average launch price of anticancer drugs rose by 10 percent or $8,500 annually between 1995 and 2013, regardless of improvement over existing therapies.
Predictably, not every study had the same results. For example, a 2009 study by Virginia Commonwealth University found that there is no correlation between higher cancer drug prices and benefits like survival and quality of life.
“One drug may prolong life by years and another by days, yet both carry similar price tags,” write Drs. Kantarjian and Rajkumar.
In 2012 a group of doctors at Memorial Sloan-Kettering Cancer Center decided to exclude a particular cancer drug because of its astronomical price. They wrote about their decision in a New York Times Op-ed.
The drug in question, Zaltrap, was as effective in treating colorectal cancer as an existing drug, Avastin. However, Zaltrap was introduced at twice the price ($11,063/ month) of Avastin ($5,000/ month) despite the fact that both medicines prolonged patient lives by an average of 1.4 years.
As the New York Times Op-ed was read and shared by millions, Sanofi, the maker of Zaltrap, was subsequently forced to offer a 50 percent discount on the drug.
However, under the 2003 Medicare Modernization Act (MMA), the Centers for Medicare and Medicaid Services (CMS), the single largest payer for healthcare in the United States, is not allowed to make this kind of a comparative effectiveness analysis. Additionally, under the same law, CMS is not allowed to negotiate Medicare drug prices or seek volume discounts.
The MMA requires Medicare to reimburse patients the average sales price plus six percent for every cancer drug approved by the Food and Drug Administration (FDA). There are similar state laws that require insurance companies to do the same, regardless of price or effectiveness.
When the Affordable Care Act (ACA) attempted to establish a Patient-Centered Outcomes Research Institute to expand comparative benefits research along with other proposed programs designed to lower Medicare spending, it prompted some in the Republican party to—incorrectly—charge that the ACA would subject the elderly and infirm to “death panels” where bureaucrats and not doctors would be making decisions on what life-saving drugs patients would receive.
Free market or oligopoly?
Pharmaceutical companies argue that market forces set their prices at a reasonable level—not high enough so that nobody can afford them, but not low enough so that innovation is stifled—and, to an extent, Howard and Berndt’s study supports this assertion.
“I think the value of good health has really increased enormously over the last few decades,” said Berndt. “We treasure it and are willing to pay a fair bit for that.”
However, according to their study, most pharmaceutical companies set the prices of their new drugs at 10 to 20 percent above the price of existing drugs, thereby producing an upward trend in pricing—regardless of improvement over older drugs (or whether the new drug extend life for months or years).
Many question the wisdom and ethics of allowing the market decide the price of life-saving and life-prolonging drugs. Cancer drugs are not an optional commodity like a new pair of shoes or dinner at a fancy restaurant. They should not be something that only the rich can afford. Unlike buying a pair of shoes, an individual with cancer cannot “shop around” for a better price, wait until the price drops or go without the drug if it is too expensive.
Many consider it unethical to make astronomical profits by gouging patients whose lives depend on a product. Such a thing does not happen in most European and other developed countries, where healthcare is universal and/ or governments negotiate drug prices with pharmaceutical companies and device manufacturers.
“The vision and mission statements of many pharmaceutical companies include the desire to help patients and cure diseases,” write Drs. Kantarjian and Rajkumar. “Recently, the perception is that the only mission of drug companies is to maximize profits by any means as the company’s fiduciary duty toward shareholders and investors. However, pharmaceutical companies should also be judged by their corporate social responsibility.”
Drs. Kantarjian and Rajkumar argue that when it comes to cancer drugs, pharmaceutical companies do not operate in a free market, but have established an oligopoly where the manufacturers, not the market, sets prices.
“Even though there may be 5 to 8 cancer drugs approved for similar cancer indications, competition is almost never based on price,” write the oncologists. “Oligopolistic firms refrain from price competition (without explicit price-fixing agreements), virtually producing an equilibrium equivalent to monopolistic agreements. Further, in many instances, patients may need to be treated with each of the approved drugs sequentially because many cancers are still incurable and each drug stops working after a period of time.”
It is obvious that there is a need to stop the rising price of cancer and other prescription drugs in the U.S. Unfortunately, as the issue is increasingly politicized, it appears that a change is not forthcoming unless healthcare can be divorced from politics. That is not likely to happen any time soon in the United States.
Part of our series on healthcare costs in the U.S.