Pharmacy Benefits Uncut

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As an employer concerned about exponentially rising prescription drug costs, you need to balance the competing objectives of providing your plan members with access to effective medications while also ensuring your pharmacy benefits plan is financially sustainable.

Like many employers you might not know how to approach the economics of your drug spend. But assessing the cost-effectiveness of drugs gives you a powerful tool to address sky-high prescription drug costs.

So today I want to talk about how you can use cost-effectiveness to get value for your drug spend.

I also want to discuss some of the controversies around cost-effectiveness and flip the script so you can use it to make decisions that are consistent, equitable, and justifiable.

The Difference Between Cost and Cost-Effectiveness

Let’s begin this discussion by distinguishing between cost and cost-effectiveness: the cost of a drug is what you pay for it, whereas the cost-effectiveness of a drug is the health improvements you get in return for what you pay for the drug.

By considering cost-effectiveness you’re evaluating the trade-offs between a drug’s health benefits and its cost. Basically, it’s a way to assess whether you’re getting bang for your buck.

A high-cost drug is one that’s expensive.

A highly cost-effective drug is one that provides meaningful health improvements at a fair price.

Be careful not to conflate cost and cost-effectiveness. Just because a drug is expensive doesn’t mean it’s necessarily cost-effective.

Expensive drugs provide good value (i.e. are cost effective) when they lead to large improvements in health (e.g. direct-acting antivirals for hepatitis C).

Many inexpensive drugs also provide good value by leading to large improvements in health (e.g. beta-blockers for the treatment of cardiovascular disease).

Using Cost-Effectiveness to Achieve Value

Researchers conduct a cost-effectiveness analysis of a drug by using models to combine data on clinical effectiveness and costs of treatment and compare it to a treatment alternative. The results are presented as an incremental cost-effectiveness ratio (ICER), which is the ratio of difference in the costs between the two drugs being compared to the difference in health improvements between the two drugs.

These health improvements are quantified in terms of quality-adjusted life years (QALYs), a measure that accounts for both survival and quality of life associated with a drug.

The ICER of a drug is reported as its cost-per-QALY. Put another way, it’s the amount of money you’d have to spend to buy a year of perfect health with said drug. Drugs with lower ICERs are more cost-effective than those with higher ICERs since it costs less money to buy a year of perfect health with them.

To interpret ICERs in the context of your pharmacy benefits plan you need to adopt a cost effectiveness threshold. This is the point below which you consider a drug cost effective (i.e. fair value for money) and above which you consider it cost ineffective (i.e. poor value for money). Commonly used thresholds in the US range from $100,000 to $200,000 per QALY.

​The Institute for Clinical and Economic Review conducts cost-effectiveness analyses of many new drugs and makes its reports publicly available.

Let’s look at the example of ensifentrine (Ohtuvayre), for the treatment of chronic obstructive pulmonary disease, which was recently assessed by the Institute. The yearly wholesale acquisition cost (WAC) of this drug is $35,400. At this price the drug’s ICER is $492,000 per QALY. This ICER is well above even the upper limit of usual cost-effectiveness thresholds, but reducing the price to $14,600 would lower its ICER to $200,000 per QALY and reducing the price further to $7,500 would lower its ICER to $100,000 per QALY. This example shows how a cost-effectiveness analysis can be used by healthcare payers to negotiate drug prices.

Controversies in Cost-Effectiveness

Although the QALY is a composite measure that captures both quantity and quality of life and allows us to directly compare the trade-offs between drugs used to treat different diseases, its detractors claim it’s discriminatory. They contend it discriminates against elderly individuals and those with disabilities since many of these people may not be able to achieve full health, the health state with the highest QALY value. They claim these individuals may be denied care when QALYs are used to evaluate a drug.

But these claims are based on a misunderstanding about how QALYs are used. QALYs are not used to make treatment decisions for individual patients but rather are used to measure average changes in health between groups of patients who receive a drug therapy compared to groups who don’t. This average measure may then be used alongside other criteria such as equity, patient preferences, and the availability of other effective treatments for a given condition when making coverage decisions and negotiating drug prices. It’s also important to understand that patients with severe or disabling health conditions have the potential to gain more QALYs (through larger health improvements) than those with mild health conditions.

The view that using QALYs leads to rationing care is based on the false premise that healthcare resources are unlimited. As you’re likely aware, cost-related non-adherence to medications is not uncommon in the employer-sponsored insurance market. As an employer who’s a health care payer, you have a fiduciary duty to safeguard the resources of your organization and your plan members, which requires you to carefully consider the trade-offs between a drug’s cost and its health benefits. Understanding the basics of cost-effectiveness will help you do this.

Bottom line

So far, most employers haven’t been able to rein in skyrocketing prescription drug prices, and continued failure to do so threatens the health and financial well-being of your employees and their dependents. Cost-effectiveness assessments are an important tool to help you lower drug prices in a systematic and transparent way. They ensure you pay higher prices for drugs with greater health benefits compared to those with fewer health benefits. This is the principle that underpins a value-based drug pricing framework.

Measuring health benefits is complex, and while QALYs are an imperfect measure of health, they’re currently the only composite measure we have that accounts for both survival and quality of life and also allows us to directly compare the value of drugs used to treat different diseases.

Finally, keep in mind that cost-effectiveness is seldom the overriding factor when making drug coverage or pricing decisions, but rather it’s a single input in a decision-making process which should focus on value and include multiple evidence sources and inputs from various stakeholders.

That’s all for this week.

See you in two weeks,

Nina

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Pharmacy Benefits Uncut is produced by Healthcare Decision Making, a consultancy that helps small and medium sized employers optimize their pharmacy benefits plan. We offer a comprehensive range of services focused on three areas: PBM procurement, ongoing management of your pharmacy benefits plan, and self-policing and oversight of your pharmacy spend. To learn more about how Healthcare Decision Making can help you, email Nina Lathia at nina.lathia@healthcaredecisionmaking.com

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