Pricing trends in the market for anticancer drugs

“Specialty” drugs are genetically-engineered compounds targeted at low-prevalence conditions like late stage cancer and multiple sclerosis. The conventional wisdom, fueled by commentaries in top medical journals and reports in major media outlets, is that the launch prices of specialty drugs have been increasing over time and that increases are unrelated to improvements in product attributes. According to a commentary in the British medical journal The Lancet “…the cost of the new generation of drugs is getting out of all proportion to the added benefit.” (Cavalli 2013). We examine trends in the launch prices of anticancer drugs approved since 1995 and assess whether prices, adjusted for benefits, are increasing over time. We choose to focus on new anticancer drugs because they figure prominently in debates over health reform and use of survival time as a primary outcome measure provides common scale for measuring benefits.

We developed a list of anticancer drugs approved by the FDA since 1995 where the primary goal of therapy is extending survival time. For each drug, we calculated the lifetime price, which equals the expected cost to Medicare for the drug from the point of initiation to discontinuation, and the survival benefit in months. We obtained information on survival benefits from phase III approval trials and, for drugs approved based on single-arm studies, cost-effectiveness analyses.

The sample includes 57 drugs. The average price is $81,000 and the average survival benefit is 7 months. Regression results indicate that inflation-adjusted prices are increasing by 6% [95% CI: 3.3%-7.0%] per year, or about $8,000. When we restrict the analysis to drugs to treat solid tumors (as opposed to blood cancers), the percent and marginal effects are 6.6% [95% CI: 2.4%-10.7%] and $3,700. Results are robust to the inclusion of controls for side effects, orphan drug status, and whether the drug was approved based on the results of a randomized trial or a single arm study. The coefficient on survival months implies that the value of a statistical life year is $80,000, which is on the low end of previously published estimates but reasonable considering the quality-of-life of patients with late stage cancer.

Third party coverage of chemotherapy drugs is more or less guaranteed, and many patients are well insured at the margin against the costs of chemotherapy drugs. Under these conditions, it is not clear that the traditional monopoly pricing model can explain the pricing trends described above. We argue that “referring pricing” models provide a better explanation of pricing behavior. The prices of previously approved anticancer drugs serve as a “reference price” against which oncologists, who have no direct financial incentives to avoid high-cost drugs, assess the reasonableness of a new drug’s price. There is a “zone of indifference” around the reference price such that stakeholders ignore small deviations from the reference price. Manufacturers set the prices of new products slightly above the prices of existing drugs, balancing profits against the risk of a backlash.