Incentivizing High-Value Drug Development: An Interview with Dr. Peter Bach

As a physician, healthcare researcher, prolific writer, and Director of the Center for Health Policy and Outcomes at Memorial Sloan Kettering Cancer Center, Dr. Peter Bach is one of the world’s foremost experts on prescription drug development and policy. Dr. Bach’s work has been published in the New England Journal of Medicine, Journal of the American Medical Association, The New York Times, The Wall Street Journal, among other medical journals and publications. Some of his recently published work includes an opinion piece in Bloomberg on how policymakers can take proactive measures to make a future COVID-19 vaccine affordable.

I recently spoke with Dr. Bach to hear his thoughts on how regulatory incentives can maximize high-value drug development.

Liam Bendicksen (LB): How does the knowledge that the vast majority of Americans have health insurance factor into pharmaceutical companies’ R&D expenditures?

Peter Bach (PB): Virtually no Americans have the reserves in their own bank accounts to buy the most expensive drugs on a regular basis. It’s only the presence of insurance that allows prices to be anywhere close to what they are. That is the function of insurance in the prescription drug market: to provide a sort of buffer or protection for people for chance events happening to them that are very, very costly. Absent health insurance, it’s difficult to imagine a pharmaceutical market that would look anything like the one we have today with expensive drugs.

LB: How do you think policymakers will react to the current trend towards pricing drugs at whatever the market will bear?

PB: There was a huge amount of focus on the topic of high prescription drug prices in the 2016 elections. Many voters rated the high cost of prescription drugs as their top priority, not just in healthcare, but overall. But policymakers have really struggled to take substantive steps forward. There are currently a few pieces of legislation in the House and the Senate, but those don’t seem to be moving forward. There is no reasonable explanation for why more federal action hasn’t been taken on the prices that patients are facing, like insulin prices today or for the EpiPen a few years ago. I’m an optimist in the long run, but in the short run I’m pretty cautious about policy change to tackle high drug prices.

LB: How can we incentivize high-value drug innovation?

PB: It’s a really interesting question. You don’t need some elaborate cost-effectiveness analysis to demonstrate that we’re not buying a lot of health with expensive but low-value drugs. That gap is what led to the idea that we should be paying for value. It’s what led to the launch of ICER [the Institute for Clinical and Economic Review], some of our work [at the Center for Health Policy and Outcomes], and other organizations’ initiatives to assess the value of drugs.*

We want to pay the minimum possible amount to a pharmaceutical company to incentivize high-value innovation and development. That’s complicated. It’s hard to know in advance how much you need to pay a company to do a certain type of work and take on certain types of risks. But it’s still the right first-order question.

Above a certain price floor, there are better uses of our dollars. If we’re willing to pay $150,000 per quality-adjusted life-year (QALY), then that’s always the most we should pay for something. If we start to pay more than that, we don’t have money to pay for other things, whether it’s unemployment benefits or roads or education.

If you set a ceiling price like $150K per QALY, incentives work better. For example, there’s no question there’s way too much focus on oncology right now. Drugs to treat other major causes of death haven’t been developed because the rewards are not there. This inefficient allocation derives, first and foremost, from the lack of a value ceiling.

LB: If drug manufacturers’ profits are resting on government-funded basic science or translational research, should that also mean that we pay less as a society for that drug?

PB: Yeah, it should. The math is hard, but the directionality is obvious. But I’m not wildly enamored with the idea that if the government paid for some of the research, then we’re sort of paying twice when a drug company has a successful product. It’s directionally correct, I just think it’s very hard to do the allocation.

I think putting price controls on drugs that originate from government research would actually have negative consequences, for example if pharma abandoned all research that came out of the academy because of price controls. I think that would make us potentially all worse off. I don’t know how likely that is. I think it depends on how you regulate the space.

I have a separate concern that the academy has become a biotech incubator. I think the way to deal with this really is to focus on price regulation writ large, and then stick with this basic idea that the academy creates basic knowledge that should be widely available. My biotech incubator concern is that the more the basic work is viewed as an asset rather than a public good, which is how we typically view knowledge that results from public investment, the more the academy focuses on protecting and monetizing rather than sharing broadly. I think that’s a troubling trend that will likely make us all worse off.

LB: How should we fund comparative cost-effectiveness research? Is nongovernmental funding problematic?

PB: I think it’s worth worrying about whether funding is influencing the work. But I draw bright lines between the foundation funding that is infrastructure type funding, which is really how ICER is funded, and commissioned work by economists paid for by pharmaceutical companies for the purpose of submitting in a dossier where it is abundantly clear, and nearly a necessity, that the finding of the research supports the company’s financial objectives. I think foundation-level funding leaves more free reign for intellectual honesty than commissioned work.

I’ve helped private firms procure consultants, and in that process it is essentially a requirement that results come out a certain way. My impression is that at some level the firms that do this work routinely focus on “what’s the conclusion I need to have and how do I reverse engineer it from the analysis I’m conducting?”

Would ICER function better as a fully independent entity? I think so. I’d love to see ICER be completely government-funded. But right now, I generally think it’s reasonable to say foundation-level support of entities is considerably less sullied than contract-level work.

LB: In an interview for The Incidental Economist, Professor Garthwaite stated that he doesn’t “believe ICER is as independently beneficial as other people might.” In your view, what value does ICER bring to the payers and the market?

PB: It’s a basic rule of markets that lack of transparency creates inefficiencies and favors the party with more knowledge. Cost-effectiveness evaluations take a level of modeling expertise and focus that starts to give price signals that can be quite different from what people would just guess.

Professor Garthwaite may feel that having an estimate for the number of quality-adjusted life-years generated by a treatment does not provide additional information of value to purchasers because they already act rationally. But markets work better at finding a more efficient price when both sides of the transaction know as much as can be known about the product that is changing hands in exchange for money.

If the market were already using a price ceiling without ICER, and doesn’t need ICER for any of this stuff, then the market would never pay for any of the cystic fibrosis drugs that come from Vertex. Even if these drugs took you from dead to fully healthy, they would cost more than $150,000 per QALY. There’s no way that the market is figuring out what the right calculations are and coming to the right number and then acting upon it.

The only way Professor Garthwaite is right is if the market doesn’t actually care about the value or the amount of health it’s purchasing. That would be a very odd market and one pretty out of alignment of the expectations of the purchasers I would say. So I think it’s really, really useful for ICER to add more information to the market.

LB: Is lowering drug spending a bad goal?

PB: I’m not sure if we’re spending too much or too little on drugs. But I am absolutely convinced that we are spending the money in inefficient ways and sometimes in really dumb ways. Those decisions have compounding effects. If we pay for drugs that don’t work in rare diseases, we will get more drugs that don’t work in rare diseases. That’s why everyone is worried about incentives for innovation, and I am too. I want profit incentives to be aligned with public health.

* Both ICER and Dr. Bach receive funding from the Laura and John Arnold Foundation.

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