Oncology economics is the product of driving forces in the health insurance market that are intrinsic to oncology in managed care and unlikely to change.
The concept of oncology economics emerged from recent qualitative market research that addressed the coverage and reimbursement of pharmaceutical products under managed care. Findings from these studies point to specific health insurance market behavior in which the underlying economics of oncology drugs are sufficiently distinct to suggest that oncology economics merits its own categorization. Oncology economics refers to pharmaceutical products and has no bearing on either professional or hospital oncology cost components.
The proposition put forth here is 3-fold: (1) Oncology economics is the product of 3 driving forces that combine in the health insurance market, (2) these driving forces are rooted in inherent factors that are intrinsic to oncology in managed care and unlikely to change, and (3) oncology economics is sui generis—it is unique and stands on its own. The 3 driving forces and implications for what oncology economics means in the broader context of managed care are discussed ahead.
Secular Cost Pressures
Secular cost pressures underlie oncology economics. The secular dimension is reflected in long-term trends and governed by inherent cost factors. It is the inherent element that underpins secular cost escalation. A series of recent in-depth interviews with regional and national managed care medical directors and pharmacy executives identified 4 inherent factors that play a critical role in generating secular cost pressure on oncology budgets.
- High cost, new volume. The emphasis here is on “high cost” and “new,” with the sheer number of cancers representing unmet needs seeing breakthrough designation. Most additions to the oncology armamentarium are new products treating previously inadequately treated conditions. As one national medical director put it, “This adds an entirely new and extremely high cost treatment, as opposed to a new product in a disease state where most patients are already adequately treated, such as rheumatoid arthritis.”
- Late-line. The growing volume of new, late-line treatment comes with a particularly high price. Three factors stand out: (1) superior outcomes advancing standard of care, (2) small patient population with limited market size for revenue generation, and (3) high market penetration because no other treatment option is available. In short, the economics of late-line treatment translate into higher pricing per agent, and the more late-line treatments that are developed, the more pronounced the cost pressure will be in oncology.
- Add-on. Instead of replacing a drug and creating an incremental cost increase, the broad tendency is for new drugs to be add-ons, introducing a new, high cost. With combination therapy the norm for many cancer types, a regional medical director commented that “it’s almost always add-on, not substitution.” Rather than a patient switching from a drug that costs $10,000 to $20,000 per month, combination treatment now costs $30,000 a month. In multiple myeloma, for example, where treatment may have been dexamethasone plus a single specialty drug, there are now quadruplet therapies with at least 2 high-cost specialty medications. The prevalence of patient populations in which add-on therapy is clinically justified appears to be increasing not only more in oncology than in other conditions but at a faster rate.
- Duration and prevalence. High-cost patients with cancer are living longer and growing in numbers. As described by a national medical director, “Where the average use in the disease state was 12 months, now it’s 24 or 36 months; plus, the number of patients is going to grow as well.” In the myeloma example, the recent addition of maintenance therapy has dramatically increased costs. This is the economic predicate to advances in cancer treatment: a multisegment increase in population cost structure times a growing population. Put differently: more clinical wins plus a steeper, secular cost curve.
In addition to secular cost pressures, manufacturer market power is responsible for super-high drug prices. Diverse mediating factors, however, suggest market power is more contingent than independent. Market power is most likely where there was no treatment before, standard of care reached its limit, or an add-on agent conferred additional benefit. But market power is exercised after a manufacturer has gone through costly research and development, often with numerous failures. Also, where market power does not exist, manufacturers still gain power from state mandates or Medicare requirements.
Consequently, although oncology economics consists of both secular cost pressures and manufacturer market power, despite the capacity to stretch what the market will bear, market power is also situational and dependent on inherent factors dictating coverage. Where inherent factors and secular cost pressures do not apply, market power diminishes.
Limited Impact of Utilization Management
Despite the strategic role that utilization management (UM) plays in the specialty pharmacy space, interviews with key decision makers suggest that payers can do little in oncology to limit or steer product use through UM. UM focuses on appropriate use, with coverage tied to indication and National Comprehensive Cancer Network (NCCN) clinical practice guidelines. Beyond confirming indication and that treatment fits guidelines, the UM role is marginal. Where one of the main goals of UM is to advance cost containment, its reach into oncology is highly circumscribed. Five inherent limitations stand out:
- Oncology is different. Payers have to cover everything based on label and NCCN guidelines. Although not indifferent to price, when a product is the sole agent indicated, payers have no recourse. In addition, antineoplastic agents are a Medicare-protected class, and payers are loath to cover 1 patient but not another for the same condition. UM being different in oncology was described by a regional pharmacy executive this way: “In oncology we cover everything based on NCCN guidelines. I feel like we’re stuck. We don’t even consider price; we just feel like the only solution we have is doing the right thing.”
- Wide range of rare cancers preempts business rationale for UM. Rare cancers do not lend themselves to significant UM engagement because there is little opportunity to achieve savings. With no other option, there is no lower-cost alternative to require first. “If we’re going to start doing UM to save money in every single cancer type, we’re spending a lot of energy in these rare cancer types where there are very few options…We can do a lot of administrative work for a little bit of savings,” according to one national medical director. Also, as succinctly put by another respondent, “we’re not going to be the ones who say, ‘No, you cannot live.’”
- Nuance trumps UM rule book. Evidence-based medicine in oncology does not fit into neat boxes. As explained by a regional medical director, guidelines supporting UM in other specialty areas “tend to be more concrete. With NCCN guidelines, they’re just all over the place. ‘You can use this, you can use that, and it’s up to you.’…In oncology we have a lot more restrictions on what we can do, so we tend to be a lot less aggressive with UM.” Notably, NCCN has begun to categorize regimens as preferred first-line single agents, preferred first-line combination regimens, and useful in specific circumstances. As long as the oncologist provides clinical justification, however, UM should accommodate.
- Step requirements are not a natural fit for cancer treatment. There is a general belief among medical directors that “you don’t have much ability to influence” how oncologists treat patients, with step requirements being an important example. Step requirements are tricky because as drugs get better, their gains may vary with respect to safety or efficacy. For example, a few medical directors note that a less costly drug may pose greater risk for toxicity with 1 patient than with another or a patient’s “disease state will be more advanced and not able to tolerate failure of a less effective therapy.” Consequently, “step edits are not used in oncology other than what’s in the package insert and the NCCN guideline.”
- Sentinel effect limits denials advancing to external appeals. The sentinel effect of UM on physicians is generally recognized. A sentinel effect involving UM appears to exist with payers as well, driven by anticipation of coverage denials reversed by external appeal. This is particularly applicable in oncology, where small details tip decisions for patients. With Medicare, the sentinel effect is tied to Star ratings. A regional pharmacy executive said that every denial overturned by outside review “is a mark against the plan in its Star ratings because it implies the plan should have approved the treatment rather than make the member appeal.” Although Star ratings don’t apply to commercial members, payers want consistency between Medicare and commercial. Also, any pattern of successful appeals could affect Healthcare Effectiveness Data and Information Set measures, prompt state insurance department involvement, or trigger adverse headlines. In short, the sentinel effect on payers works toward coverage through UM rather than risk denials through external appeals.
This discussion does not suggest that the authorization process is easy. Documentation demands aside, however, interviews with payers suggest that UM in oncology is weighted toward coverage. Objectives tend to be different from those of other specialty pharmacy areas. “In oncology,” as a regional medical director put it, “we’re just trying to determine appropriateness, whereas in other classes, we’re trying to manage utilization or promote the use of a preferred agent.”
Contracting Reinforces Volume Business Logic Over Value
Although the occasional headline will note a risk contract, the broad pattern suggested by payer interviews shows no sign of oncology trending toward value-based contracting. When payers have no leverage, manufacturers will rarely offer a contract. When payers have leverage, business policy favors a volume logic in access contracts.
Two inherent factors are at work here. First, payers have long said risk contracting is more complicated than it’s worth. Second, payers naturally operate with a volume-based financial model: (1) drawing on claims experience to estimate future volume and budget impact, (2) judging competitors financially based on unit cost and manufacturer capacity to generate market share, and (3) projecting rebate in simple, volume-discount terms. Beyond these business factors, inherent pragmatic factors also dictate volume over value in oncology economics.
- Monopoly in indication—no contracting. With 1 agent indicated, that agent has to be available, eliminating the need for manufacturers to contract. Manufacturers have no reason to offer a discount, and payers have no leverage to require one. Payer viewpoint is to accept the extreme price and address where they have leverage.
- Competition in indication—access contracting. Respondents pointed to 5 areas in which manufacturers are likely to see competition and contract: breast, renal, lung, and prostate cancers plus chronic myeloid leukemia. Contracts almost always noted were access, with noncontracted agents being nonpreferred and subject to stringent step requirements. Shaped largely by what is permissible in consensus pathways and Medicare, the intent is to come as close as possible to an all-or-nothing framework. This enables payers to secure maximum possible discounts and manufacturers maximum possible share.
- Not a natural environment for value-based contracting. Although there will always be exceptions (eg, payers that seek out risk arrangements), at least 3 barriers work against outcomes-based risk contracting in oncology:
- National plans gain greater financial value by leveraging their size for access discounts rather than working through all the complexities of a risk arrangement.
- Regional plans typically lack the size to (1) command meaningful payback for failure or (2) level out population biases for risk models to work. On this last point, commented a regional pharmacy executive, “I would like to do outcomes-based contracting, but we don’t have a large enough population in any 1 space to be able to definitively say whether it was because of the product or the population that we didn’t meet our outcome.”
- Data and case-by-case administrative demands work against implementing a contract in which, for example, the efficacy standard from the clinical trial is progression free for 6 months, but the patient progressed in the third month. For each patient, as a national pharmacy executive noted, “You have to come to an agreement with the manufacturer to say, ‘You owe us for 3 months of drug because your trials said this patient wouldn’t progress for 6 months, but our member progressed after 3.’” Although electronic medical records could reduce some barriers, there is still the case-by-case element that makes access contracting more efficient. That said, risk contracts tied to discontinuation from adverse effects or toxicities appear easier to operationalize.
Despite the considerable momentum to reorient managed care around value rather than volume, inherent factors governing contracting appear to align oncology economics with volume logic under access arrangements. However, 3 clarifying points on value bear emphasis. First, when contracting occurs in oncology, value appears to be the most direct and predictable in access arrangements rather than contending with the varied machinations of outcomes-based risk. Second, because contracting is almost certain to occur only when 2 agents share the same indication, access contracting is indication specific. In that sense, optimal value is realized by payers striking their preferred balance between competitors’ clinical profile and cost.
Finally, if offered by a manufacturer, payers could adopt an indication-specific, outcomes contract. Manufacturer motivation would likely be for 1 of 2 reasons:
- Price is extremely high, so much so that legitimacy is part of the financial calculus. Gene therapy is a recent example.
- Manufacturer anticipates competition, concluding that a successful risk arrangement creates entry barriers, reducing future threats.
Under either scenario, responsibility is on the manufacturer to provide resources for a simple, transparent mechanism to operationalize the arrangement.
Summary and Implications
Oncology economics is sui generis and can be expected to resist industry pressure to shift from volume to value. This is not to suggest secular cost escalation will only occur or downward pricing pressure won’t occur. It is to suggest that with only 1 product for an indication, pricing should remain extremely high, but with more than 1 product, when contracting occurs, net cost will likely fall significantly. It is also to suggest that when contracting occurs, volume math in access contracting offers the best vehicle for payers to maximize value.
Oncology economics also raises a question about inherent factors. The role of inherent factors alone and the interplay of inherent factors with market power each merit greater attention in public policy, business strategy, and managed care research.
Lastly, oncology economics sits on 1 side of the payer market continuum. As such, it can be considered a yardstick for evaluating the degree to which other specialty pharmaceutical disease areas can be expected to have similar or different behavior. Are multiple sclerosis and cystic fibrosis subject to comparable secular cost pressures, UM constraints, and impetus favoring access contracting? What about Parkinson disease and rheumatoid arthritis?
The suggestion here is, there are no degrees of variation translating to degrees of latitude for premium pricing. Either yes, there are the 3 inherent driving forces or, no, there are not. Where “yes,” the pharmaceutical market will likely be premium priced to the extreme or with competition in the indication, commodified under access contracting. Where “no,” conditions should exist to give payers greater latitude for cost management through UM, tough access contracting, and, if feasible, outcomes-based risk.
Note: Respondent quotations were edited slightly for ease of exposition and maximum clarity.About the Author
IRA STUDIN, PHD, MPH, is president of Stellar Managed Care Consulting. Stellar is a pharma business strategy consulting firm specializing in qualitative market research in the payer and hospital channels. Dr. Studin can be reached at email@example.com.