3. Divide by the number of years the drug will be used, in this case 24
Maximum drug price per year
Consider a 55-year-old, whose life expectancy might be another 24 years. If that person is in perfect health, those 24 years would mean 24 QALYs.
For someone suffering from untreated rheumatoid arthritis, though, those 24 years could be marked by extreme pain and loss of mobility and translate to just 10 QALYs. If a certain drug reduces the pain and improves mobility, it might add back another five QALYs, for a total of 15. ICER works out the QALY benefit by reviewing the available data on the drug and translating the outcomes into QALYs.
ICER has affixed a maximum value, $150,000, for each QALY a drug can add. That is based on various health-economics studies into how much Americans are willing to pay for health care and how health-care expenditure compares to per-capita income around the world.
Because the arthritis drug adds five QALYs, the maximum cost should come out to five times $150,000, or $750,000. That cost is then spread over the 24 years the patient is expected to use it. That comes out to $31,250 per calendar year.
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That same approach—with varying maximum values—is used widely in other developed countries, including Canada, Britain, Ireland and the Netherlands. In those countries, the calculations help determine which drugs their government-funded health systems should cover and at what cost.
That gives such government buyers leverage over drugmakers in price negotiations and has
proved effective at significantly lowering drug prices. Branded prescription drugs in England can cost less than half of what they do in the U.S.
The approach also can cut off patients from new drugs if they are priced above the maximum those governments have set.
England has just emerged from a yearslong standoff with
Vertex Pharmaceuticals Inc.
over the cystic fibrosis drug Orkambi. The National Health Service, the U.K.’s free-for-everyone, government-funded health-care system, in 2016 used a QALY-based assessment to determine that the drug’s £104,000 ($132,000) a year price tag was too high.
It refused to pay for it. Negotiations on a compromise took nearly four years. Last month,
the two sides announced a deal, without disclosing the final price.
Concerns like those are at the heart of the U.S. government’s unease with QALY-based methodology. The Obama administration banned its use in the Medicare program in the 2010 Affordable Care Act.
“This is a cultural issue,” says
chief clinical officer at
, an insurer. “This is America not wanting to put a value on the price of a life.”
The Trump administration also has been wary, although a still-fuzzy proposal being considered by the White House to peg some prices to those paid elsewhere in the world would reference some countries that use QALYs.
chief medical officer of insurer Harvard Pilgrim Health Care, welcomes ICER’s perspective. “We are [already] putting a price on a year of life,” he says. “We just let the pharmaceutical companies choose it.”
In the U.S., insurers don’t have the option that makes cost-per-QALY analyses so effective in curbing drug prices in other countries: the ability to walk away. They are prohibited from refusing to pay for treatments solely on the grounds of cost.
They can, however, nudge customers toward better-value drugs by throwing up barriers, such as higher copays, for pricier ones. They also can use those levers to extract bigger discounts from drugmakers. Some are using ICER’s cost-per-QALY reports to help with that.
New York state’s Medicaid program last year used ICER’s assessment on Vertex’s Orkambi—the same drug that took nearly four years for England to agree on a price for—to support its own finding that the cystic fibrosis drug was too expensive. It asked the company for a bigger rebate. Vertex has so far refused to lower its price, but talks continue. The Veterans Health Administration also uses ICER’s reports to inform its coverage decisions.
CVS Caremark, the pharmacy-benefit-manager arm of CVS Health Corp., offers self-insured employers, which don’t have to cover all drugs and treatments, a list of medicines that excludes ones with a cost-per-QALY exceeding $100,000, unless they are considered breakthrough drugs.
“People are finding the QALY concept to be more and more acceptable,” says Troy Brennan, chief medical officer of CVS Health. “As these kinds of approaches get adopted…pharma will have to change its view on what best pricing is.”
Hedge fund billionaire
prominent advocate of lower drug prices, has helped ICER gain influence. He has granted ICER $27.6 million since 2015 through the foundation he runs with his wife, Laura, a former corporate lawyer. Arnold Ventures is ICER’s single-biggest funder, contributing 69% of its funding for 2018, according to an ICER spokesman.
“Enough people are paying attention to these reports that if a pharma company comes out with a price outside the range, it can cost them market share,” says Mr. Arnold. ICER “has started real conversations about paying for value.”
Hedge fund billionaire John Arnold, an advocate of lower drug prices, has helped ICER gain influence.
Todd Spoth for The Wall Street J for The Wall Street Journal
Many drugmakers, though, say QALYs are too blunt a tool for measuring the value of drugs and don’t take into account a new medicine’s novelty or its effect on the lives of caregivers, not just patients. Critics also say the values used in QALY calculations are arbitrary and unscientific.
“You win or you lose, based on some arbitrary, nontransparent, non-peer-reviewed report,” says
executive director and co-founder of Patients Rising, an industry-funded group that campaigns for improved access to drugs.
The ICER spokesman says that before each planned report, the organization engages with manufacturers, patient advocacy groups and doctors, seeks public comment and shares its economic models with drugmakers. He says the reports eventually appear in peer-reviewed journals.
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The QALY concept originated with a network of American and Canadian economists who, in the late 1960s, started developing ways to compare the cost-effectiveness of different health-care options. Those studies inspired
a British economist, to try to create a universal method for scoring someone’s health.
His team decided to use a three-point scale, with one signifying no health problem and three representing a severe debilitation. He applied that across five core components of quality of life: pain, mobility, ability to take care of oneself, ability to carry out daily tasks and mental health.
He then surveyed thousands of Britons to affix a quantitative value to each of the 243 “health states” created by that scoring system. It remains the basis of the system used to test prices in Britain.
When Britain decided to inject more money into its National Health Service in 1999, it created the National Institute of Health and Care Excellence, or NICE, to advise how to best spend the extra money, using Dr. Williams’s approach. The drug industry fought NICE from the start, arguing it would block access to drugs.
NICE concluded that one of the first drugs it evaluated—a flu treatment called Relenza—was too expensive for the NHS to cover, prompting the drug’s maker to threaten legal action. A year later, NICE recommended Relenza for use in high-risk patients.
NICE eventually adopted a QALY methodology, stipulating £30,000, or about $38,000, as the maximum value of every additional QALY a drug might add to a patient’s life. That level remains in place today.
Of the roughly 800 drugs the agency has evaluated since its founding, around one in seven have been turned down. For the rest, NICE has either recommended the drug at its asking price or after the manufacturer offered a discount.
Chief executives of pharmaceutical companies testified about drug pricing before the Senate Finance Committee in February.
Win McNamee/Getty Images
who teaches at Harvard Medical School, did a yearlong stint at the U.K. agency in 2004. Back in the U.S., he set up ICER in 2006 as an academic research unit inside Harvard Medical School. He tailored the U.K. approach to the market-driven U.S. health system, including adjusting for the higher overall cost of American health care.
Initially, ICER focused not on drugs but on pricey procedures such as new forms of radiation therapy for cancer. Its focus shifted in 2013, when
Gilead Sciences Inc.
’s hepatitis C drug Solvadi—the first $1,000-a-pill drug—hit the market.
ICER found that Solvadi was cost-effective but would strain state Medicaid budgets because of the high number of eligible patients. It suggested that insurers prioritize those most in need. Since then it has evaluated dozens of new drugs, often concluding they are too expensive.
“Cost per QALY is not a goal in of itself,” says Dr. Pearson. “The goal is to have independent information available to catalyze the kinds of discussions that should be happening in broad daylight—because they involve difficult decisions that involve patients—and not behind closed doors.”
Write to Denise Roland at Denise.Roland@wsj.com
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