Soon after Sanofi Pharmaceuticals’ Inc. August 2012 launch of the biologic drug ziv-aflibercept (brand name Zaltrap) into the U.S. market, its price triggered an unusual act of defiance on the part of oncologists. Physicians from Memorial Sloan-Kettering Cancer Center stated in a New York Times op-ed piece that they wouldn’t prescribe the drug because it cost twice as much as Genentech’s Avastin (bevacizumab), a competing biologic drug with similar expected clinical outcomes for colorectal cancer patients. In response, Sanofi said they would reduce the price of the drug by 50 percent.
Doctors and prescribing hospitals stand to benefit hugely from Sanofi’s pricing move, while payers and patients do not, at least over the next several months and likely much longer.
To understand why involves questions about pharmaceutical price setting and the arcane world of ‘buy and bill’, the system for physician-administered drugs under which doctors first buy drugs at one price and then submit for reimbursement for the drug to a third party payer (and the patient). The system as applied in fee for service Medicare, the public insurer of adults aged 65 and older and the largest insurer of cancer-related treatment in the U.S., is illustrative of larger concerns. In 2009, Medicare spent approximately $11 billion on physician-administered drugs.
Below, we explain how this “buy and bill” pricing system works, and how it operates in the case of ziv-aflibercept. We also examine the policy implications of the ziv-aflibercept episode and offer some thoughts on how Medicare could improve the way it sets pharmaceutical reimbursement rates.
How Drugmakers Set The Price Of Ziv-Aflibercept And Other Branded Cancer Drugs
The U.S. market for branded pharmaceutical drugs has been protected from downward price competition through the granting of patents, which grant the manufacturer temporary monopoly rights. These rights make them the sole supplier during the FDA-approved drug’s period of exclusivity, on average about twelve years, in exchange for undertaking the risky and uncertain costs of invention and validation. Manufacturers seize on this protection when they set the list price, or average wholesale price (AWP), of their new drug. It is commonly assumed that the manufacturer indexes their drug’s price to be some profit margin above the variable costs of development, production and distribution, marketing and meeting regulatory manufacturing requirements.
One of the more intriguing aspects of the ziv-aflibercept episode is the public focus on purchasers’ willingness to pay as influencing the price. Interviews with Sanofi officials published in The Cancer Letter revealed that they had set the ziv-aflibercept launch price to match a dose of bevacizumab they thought was routinely used to treat colorectal cancer.
It was also this aspect of pricing that was mistaken. In the U.S., only half of the bevacizumab dose used in treating other cancers is routinely used to treat colorectal cancer. Therefore, ziv-aflibercept’s list price overshot the bevacizumab price by a factor of two.
Another notable aspect of the ziv-aflibercept episode is the unusual actions of physicians at Memorial Sloan Kettering Cancer Center. In the past, U.S. purchasers, including patients, physicians and insurers, have been willing to pay extraordinarily high prices for physician-administered specialty drugs like ziv-aflibercept, with little regard to their expected incremental efficacy. This is in part because a patient’s expected survival upon diagnosis is often low, and there may be few alternative treatment options. In addition, patients are largely shielded from decision making by the presence of highly specialized physicians and generous insurance coverage.
Hence, it is physicians and insurers who are faced with the task of trading off ziv-aflibercept’s 1.4 months incremental survival gain versus its costs on behalf of a fully insured patient. Finally, as we discuss in detail below, outpatient oncology practices and hospitals face direct financial incentives from the current system of purchasing and seeking reimbursement to utilize expensive branded cancer therapies over less costly alternatives.
The Prices Purchasers Pay For Ziv-Aflibercept And Other Branded Cancer Drugs
The system of physicians and hospitals purchasing and seeking reimbursement from insurers for the use of physician-administered specialty drugs is colloquially called “buy and bill” (Figure 1). Physicians and hospitals purchase drugs from wholesalers and specialty distributors and are reimbursed by public (Medicare and Medicaid, through the Centers for Medicare and Medicaid Services (CMS)) and commercial insurers. Net revenues of outpatient oncology practices and hospitals have traditionally been tied to the difference between the acquisition price and the level of insurer reimbursement for physician-administered cancer drugs, sometimes called “cost recovery” or “spread.” Recent empirical work suggests oncologists choose drugs to treat cancers based in part on the magnitude of the spread.
Different measures of price and reimbursement. There are at least six prices that figure in transactions for ziv-aflibercept and similar drugs (Table 1): (1) The manufacturer- or catalog publisher-determined price (AWP); (2) The wholesale acquisition cost (WAC) paid by wholesalers to manufacturers (with a discount) and the wholesale acquisition cost paid to wholesalers by oncologists and hospitals; (3) The Medicaid best price, set as a function of the Average Manufacturer Price (AMP); (4) The 340B price paid by qualifying hospitals and clinics to manufacturers, set as a function of AMP; (5) The reimbursement public and commercial insurers pay to oncologists and hospitals for administration of the drug to patients, based on the average sales price (ASP) or WAC; and (6) Coinsurance or copayments patients pay to oncologists and hospitals for treatment, based on ASP or WAC.
* Office of the Inspector General, Review of Drug Costs to Medicaid Pharmacies and their Relation to Benchmark Prices. A-06-11-00002.
**Section 1927(k)(1) of the Social Security Act, as amended by section 2503(a)(2) of the Patient Protection and Affordable Care Act (ACA) (P.L.111-148).
***Section 1927(c)(1)(C)(i) of the Social Security Act, as added by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA, P.L.108-173).
Ψ First Databank.
Manufacturer Discounts in the 340B Program Offer Benefits, but Federal Oversight Needs Improvement, GAO-11-836.
A simple numerical example for a hypothetical physician-administered cancer drug is useful in understanding the relationships among these prices (Table 2). For illustrative purposes, we assume the drug’s AWP is set at $1200 per treatment dose per patient.
Wholesalers and GPOs. Wholesalers commonly acquire these drugs from manufacturers at 83.3 percent AWP with an additional 1-2 percent prompt payment discount. The majority of outpatient oncology practices and hospitals belong to group purchasing organizations (GPOs). GPOs consolidate demand for many different drug products over their members and consequently are frequently able to negotiate discounts off WAC with manufacturers directly.
Physicians and hospitals. In turn, physicians and hospitals generally acquire the drugs from wholesalers or from the GPO at WAC ($1000 in our example, Table 1). Some physician groups and hospitals can negotiate even more favorable pricing terms. Discounts from wholesalers may be directly related to purchaser’s volume.
In addition, many hospitals and clinics qualify for additional discounts off the acquisition cost of cancer drugs used in the outpatient setting through the 340B program. Although traditionally a program limited to some federally-qualified health centers, disproportionate-share hospitals, and specialized public health clinics, in 2010 the program was significantly expanded to include critical access hospitals, free-standing cancer hospitals, and some community hospitals (P.L. 111-148).
According to the most recent statute, the 340B price for branded drugs like ziv-aflibercept must be at least 23.1 percent discounted off of the Average Manufacturer Price (AMP). Although its precise definition is complex and still being litigated, AMP is essentially the average price wholesalers and certain pharmacies pay to manufacturers for drugs distributed to retail community pharmacies, with certain exclusions. In practice, in the first two quarters after launch, 340B discounts are approximately 50-80 percent WAC for branded drugs. If the average 340B price is 60 percent WAC, the undiscounted 340B price for our hypothetical drug would be $600 (Table 2), with a range of $500 to $800.
Finally, for Medicaid insured patients, manufacturers are required to provide “best price” rebates for the purchase of these drugs to treating physicians and hospitals based on AMPs. This means Medicaid prices are about equal or slightly greater than 340B prices.
Insurers. If a patient is insured under Medicare, the use of ziv-aflibercept is reimbursed to physicians or hospitals under the Medicare Part B benefit covering outpatient and physician office services. Commercial insurers commonly follow Medicare’s reimbursement policy for Part B drugs, or otherwise provide reimbursement that is linked to the drug’s list price.
Medicare Part B reimbursement policy specifies that in the first two quarters after launching a new branded drug, the reimbursement physicians and hospitals receive for purchasing and prescribing it is equal to 80 percent WAC. Therefore, reimbursement from Medicare to outpatient oncology practices and hospitals for our example amounts to $800 in the first two quarters after launch (Table 2), while $200 is gathered from the beneficiary copayment or that beneficiary’s third party insurance (e.g. Medigap).
The spread obtained from drug administration by outpatient oncology practices, physician offices, and hospitals equals the difference between Medicare reimbursement at 80 percent WAC, patient coinsurance off WAC and any discounts received from GPOs and 340B eligibility. In practice, for most treated patients the spread may be zero up to several percentage points of WAC for a physician-administered drug (Table 2). 340B eligibility provides purchasers a larger spread than WAC alone (Table 2).
After the initial two-quarter time period, including partial quarters, Medicare reimbursement for Part B drugs is set to 80 percent of 106 percent of the Average Sales Price (referred to as “ASP+6 percent”, Table 2) lagged by two-quarters (Section 1927(c)(1)(C)(i) of the Social Security Act, as added by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA, P.L.108-173), while patients are responsible for 20 percent of the 106 percent of ASP. ASP represents the price purchasers (with some exceptions) pay for a given drug including discounts and rebates.
Since ziv-aflibercept was launched in August 2012 (3rd quarter 2012), ASP-based reimbursement takes over as the basis of ziv-aflibercept reimbursement in the 1st quarter of 2013. What ASP is in the 1st quarter of 2013 and thereafter depends on the weighted distribution of sales for treatments given to Medicare and commercially insured patients, the transactions prices at which those sales occurred, and how the sales and prices evolve over time in the previous two quarters.
Patients. Medicare beneficiaries’ coinsurance rate for physician-administered cancer drugs is set at 20 percent of the Medicare reimbursement price, which is WAC for the two quarters following launch and weighted two-quarter lagged ASP+6 percent thereafter. Therefore, for patients covered by Medicare and without supplemental insurance, the coinsurance amount for the hypothetical drug example paid to providers in the first quarter after launch is $200 (20 percent*$1000) (Table 2).
Implications Of The Ziv-Aflibercept 50 Percent Discount For Purchasers
Given this system, what are the implications of the ziv-aflibercept 50 percent discount announced by Sanofi?
For patients, physicians and hospitals and insurers who have already acquired ziv-aflibercept at the full price, the manufacturer has not offered restorative rebates.
With the new discount, wholesalers, physicians and hospitals should be able to purchase ziv-aflibercept at 50 percent off WAC. In our example, this is equivalent to $500 (50 percent*$1000) (Table 2). For the care of patients eligible for 340B discounts, physicians’ and hospitals’ net acquisition prices will be lower still (in our example, $300 – 60 percent of $500 — per treatment dose).
By statute, CMS could not immediately reduce Medicare reimbursement rates to physicians and hospitals for ziv-aflibercept to reflect the manufacturer’s discount offer to purchasers. Consequently, Medicare reimbursements will not decline until the 1st quarter of 2013 and thereafter, as purchasers realize discount offers reflected in ASP. In our example, if WAC was $1000 for the 1st quarter after launch, and $500 for the 2nd quarter and the patient insurance distribution and count in each quarter was equivalent, weighted ASP in the 3rd quarter after launch would amount to $750, $600 paid by Medicare and $150 paid by the patient (Table 2). Medicare patients on ziv-aflibercept will also not enjoy coinsurance reductions fully reflecting the discounts offered to purchasers until Medicare reimbursement declines accrue.
Meanwhile, in the near term, physicians and hospitals will likely enjoy additional revenue opportunities from ziv-aflibercept use. In our example (Table 2), the spread may be considerable: equal to $250 per treatment dose (insurer + patient reimbursement ($750) – discounted acquisition cost ($500)) and for 340B eligible purchases, $450 per treatment dose (insurer + patient reimbursement ($750) – discounted acquisition cost ($300)). Additional revenues may incentivize physicians and hospitals to favor ziv-aflibercept over bevacizumab to treat colorectal cancer among Medicare eligible patients, despite the treatments having equivalent expected clinical outcomes. The strength of the incentive is based on comparing the magnitude of the spread obtained with the use of ziv-aflibercept to that obtained with bevacizumab.
Unlike Medicare, commercial insurers could bargain for immediately lower reimbursements with community oncologists and hospitals based on the public offer of discounts (Table 2). These negotiations would in turn translate into coinsurance savings for patients. Lower reimbursements would also erode physician and hospital spreads and therefore temper incentives to prescribe ziv-aflibercept over bevacizumab to treat colorectal cancer among patients who are commercially insured. Commercial insurers and other hospitals, like Memorial Sloan Kettering Cancer Center, could also decide not to include ziv-aflibercept on their formularies at all.
Policy Implications Of The Ziv-Aflibercept Episode
There are three takeaways from the ziv-aflibercept episode for policy makers. First, this episode underscores the importance of purchaser willingness to pay as the basis of manufacturer price setting among cancer drugs in the U.S. market.
Second, the episode underlines the fact that the threat of formulary coverage exclusion (in this case, by a prominent hospital) appears to have been an effective tool in altering the acquisition price of a branded physician-administered cancer drug in the U.S. It remains to be seen whether oncologists, other physician groups, hospitals and commercial insurers will increasingly exert their newly-found leverage to influence the price setting of other branded specialty pharmaceuticals in the U.S.
Third, this episode highlights unintended consequences of Medicare’s ASP-based reimbursement policy under MMA. The Office of the Inspector General has previously suggested that ASP’s two-quarter reimbursement lag be shortened to allow taxpayers and Medicare beneficiaries the opportunity to reap immediate cost savings from the generic entry of Part B drugs. CMS has rejected that recommendation, arguing that manufacturer compliance and CMS administrative costs would be quite burdensome.
The ziv-aflibercept episode suggests another reason for policy makers to shorten the lag: when a branded drug manufacturer offers deep discounts on acquisition prices for whatever rationale, manufacturers stand to acquire market share from therapeutic competitors even as physicians and hospitals reap additional revenues. Meanwhile, taxpayers and Medicare beneficiaries overpay. This suggests an important focus of future policy research: what alternative Medicare reimbursement policies and 340B acquisition cost arrangements could prevent the appearance of spreads to physicians and hospitals that potentially distort treatment choice towards the use of drugs offering no or limited clinical benefit for patients?
Note: Rena M. Conti (firstname.lastname@example.org) is an Assistant Professor of Health Policy and Economics at The University of Chicago, Department of Pediatrics, Section of Hematology/Oncology. Ernst R. Berndt (email@example.com) is the Louis E. Seley Professor in Applied Economics, Alfred P. Sloan School of Management, at the Massachusetts Institute of Technology in Cambridge. Conti acknowledges support from a K07-CA138906 award from the National Cancer Institute. The opinions expressed are solely those of the authors and not those of The University of Chicago, The Massachusetts Institute of Technology nor the National Cancer Institute.