The prices of leading cancer drugs have risen at rates far outstripping inflation over the last two decades, according to a new study published in the Journal of Economic Perspectives (2015; doi:10.1257/jep.29.1.139).
Since 1995, a group of 58 leading cancer drugs has increased in price by 10% annually, even when adjusted for inflation and incremental health benefits, the study found. More specifically, in 1995, cancer drugs in this group cost approximately $54,100 for each year of life they were estimated to add; by 2013, that cost increased to approximately $207,000 per each additional year of life.
Those increases have sparked criticism in recent years from doctors, among other groups, who have questioned the pricing of major drugs. But the empirical results may also show, the researchers said, that rising price levels reflect a greater social tolerance for significant health care costs.
“I think the value of good health has really increased enormously over the last few decades,” said co-author Ernst Berndt, PhD, the Louis E. Seley Professor in Applied Economics at the MIT Sloan School of Management in Boston, Massachusetts. “We treasure it and are willing to pay a fair bit for that.”
The paper noted that there have been some cases of political backlash in recent years, such as in Oregon, in response to proposed policies that would limit the ability of public insurance programs to buy expensive, life-extending cancer drugs. On the other hand, as the authors observe, patient cost-sharing in medical plans has also increased since 1995, limiting the extent to which demand can explain the changes.
Patients do seem to be paying for improved quality, to an extent: The study found a positive correlation between the effectiveness of drugs and their prices. Cancer drug prices rise about 120% for each additional year of life gained by a patient, in aggregate.
“We found that the greater the improvement of the drug over the existing therapies, the higher the price,” Berndt explained. “So price was related to quality, but price increased more than did quality.”
So what else is driving prices?
Globally, cancer drugs are the class of pharmaceuticals with the highest sales, at $91 billion in 2013; $37 billion of that spending was in the United States. As in many major global markets, there is contention about what price levels are justified.
The paper noted that in 2013, a group of 100 prominent oncologists claimed that drug companies’ pricing policies involved a simple formula: Start with the price of the most recent similar drug on the market and price the new drug within 10% to 20% of that price (usually higher).
“Typically drug companies and biotech companies simultaneously study all sorts of medicines,” Berndt notes. Therefore, he adds, “It’s extremely difficult to allocate historical costs of drug development to specific new drugs.”
There may be some additional factors entering into the cost of cancer therapeutics today. The 340B pricing program enacted by Congress in 1992, the paper noted, requires discounts for some hospitals and clinics, which may incentivize companies to raise prices to compensate.
“We believe the direction of causation runs from prices to research and development costs; as prices increase, manufacturers are willing to spend more to discover new drugs; rather than the other way around,” concluded the authors.