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November 6, 2019

How this 'obscure' pricing model is helping lower Rx drug prices

Daily Briefing

    An old pricing model called quality-adjusted life years, or QALYs, puts a dollar value on the benefits a drug can have for a patient—and it's increasingly being used by Harvard Medical School's Institute for Clinical and Economic Review (ICER) to nudge drugmakers into lowering prices, Denise Roland reports for the Wall Street Journal.

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    What are QALYs?

    QALYs were first developed in the 1960s by Alan Williams, a British economist.

    According to the QALY system, one year in perfect health is equal to one QALY. One year with some sort of health problem that has an effect on quality of life would be worth less than one QALY, depending on its severity.

    For example, if a 55-year-old whose life expectancy is another 24 years, lives those 24 years in perfect health, that equals 24 QALYs, Roland reports.

    By contrast, if that person is suffering from untreated rheumatoid arthritis, those 24 years could come with extreme pain and a loss of mobility that could equal just 10 QALYs. However, if a drug is able to reduce the person's pain and improve mobility, another five QALYs may be added for a total of 15, according to Roland.

    When it comes to crunching the numbers on the value of a drug, ICER reviews the available data on the drug and translates its outcome into QALYs, Roland reports. ICER has determined that the maximum value a single QALY can have in dollars is $150,000. It made that calculation based on a variety of health-economics studies on how much Americans are willing to pay for their health care and how health care spending compares per capita worldwide.

    Looking at the arthritis patient, if an arthritis drug could add five QALYs, the maximum cost of the drug should be $750,000, Roland reports. That value is then spread over the 24 years the patient is expected to use it, coming to a cost of $31,250 per year.

    The benefits and drawbacks of QALYs

    A QALY system with varying maximum values is used around the world, including in Canada, England, Ireland, and the Netherlands, Roland reports. Those countries use the QALY calculations to determine which drugs should be covered by government-funded health systems and how much they should cost.

    This gives government buyers a large amount of leverage in price negotiations over drugmakers, Roland reports, and the practice has been proven to be effective at lowering drug prices. However, the practice also can deprive patients of new drugs if the maximum prices are above what the government is willing to pay.

    That's part of the reason why the Obama administration banned the use of QALYs in Medicare under the Affordable Care Act. The Trump administration has been similarly wary of using QALYs, but is considering a proposal to tie certain U.S. drug prices to those paid elsewhere worldwide, which likely would include some countries that use QALYs, Roland reports.

    Steve Miller, chief clinical officer at Cigna, noted that there's historically been a cultural difference between the United States and other countries on drug prices. "This is America not wanting to put a value on the price of life," Miller said.

    Some drugmakers argue that QALYs don't take into account the novelty of new medicines or their effect on the lives of caregivers along with patients. They also argue that the values used in QALY calculations are arbitrary.

    However, Michael Sherman, CMO at Harvard Pilgrim Health Care, said he welcomes the use of QALYs. "We are [already] putting a price on a year of life," he said. "We just let the pharmaceutical companies choose it."

    How ICER is using QALYs to help lower drug prices in the US

    ICER for its part has found QALY to be an effective way to lower drug prices in the United States, Roland reports.

    A spokesperson for ICER said that, before each report, the organization works with manufacturers, patient advocacy groups, and providers, and seeks public comment and shares its economic models with drugmakers. The spokesperson added that the reports do eventually appear in peer-reviewed journals.

    According to Roland, while many insurance pharmaceutical companies continue to pan the QALY approach, others are beginning to integrate the approach into their practices and relying on the ICER reports for price comparisons.

    For example, Switzerland-based Novartis AG set the price of its gene therapy Zolgensma at a limit set by ICER. Dave Lennon, president of the unit in Novartis that makes the drug, said ICER has increased transparency in drug-price analysis.

    Similarly, last year Sanofi SA, based in France, and Regeneron Pharmaceuticals, based in the United States, dropped the price of their cholesterol drug Praluent to line up with ICER's recommendations. Kyle Hvidsten, head of global health economics and value assessment at Sanofi, said, "ICER's independent view of value was something we were willing to align with"

    Pharmacy benefit manager CVS Caremark has also started offering self-insured employers a list of medicines that exclude drugs with a per-QALY cost of more than $100,000 unless the drugs are considered to be breakthroughs, Roland reports.

    Troy Brennan, CMO for CVS Health, said, "People are finding the QALY concept to be more and more acceptable" (Roland, Wall Street Journal, 11/4).

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