In mid-2021, American biotechnology company Biogen received the US Food and Drugs Administration (FDA)’s approval to market Aduhelm, its new drug to treat Alzheimer’s disease. The decision was controversial. FDA experts had advised against approving the drug, finding that its benefits were uncertain, and its most severe side effects—such as potentially deadly brain swelling—too frequent.
But the medication, whose generic name is aducanumab, had another problem, too: A list price of $56,000 per year of treatment for a patient weighing up to 74 kg (about 163 lbs) and even more for heavier patients.
Biogen thought the price tag was fair. “We have established a price for Aduhelm that reflects the overall value this treatment brings to patients, caregivers and society—and one that will enable continuous innovation,” the company’s CEO Michel Vounatsos wrote in a statement.
Yet six months later, Biogen slashed the price of Aduhelm to $28,000 a year, making the drug a high-profile example of the often arbitrary nature of drug pricing in the US. Further, it’s evidence that, despite the company’s statement, maximizing profit was the only consideration it made when initially pricing the drug.
There are better way to determine the price of drugs, including new ones that essentially hold a monopoly for treating particular conditions. In addition, there a few practical changes that could be made to the system to rein in runaway drug costs.
When Biogen initially priced Aduhelm at $56,000 a year, few thought it was worth the money. According to the Institute for Clinical and Economic Review (ICER), a Boston-based independent organization that specializes in cost-benefit analysis of medical treatments, a price reflecting the drug’s actual benefits would be drastically lower, between $2,500 to $8,300 per year.
Biogen’s pricing decision had an impact even before the drug went on sale. Medicaid, which insures an estimated 6 million American patients affected by Alzheimer’s, raised its premiums by $10 before even deciding whether to cover the drug. Given the number of potential patients who might receive Aduhelm, the government agency could spend more than $300 billion on the drug every year, and had to prepare for that eventuality. Biogen, on the other hand, would record up to about $50 billion in sales annually from the drug.
Then in December, ahead of Medicare’s decision on coverage, Aduhelm went on sale. At the same time, Biogen announced it was cutting its price in half, bringing it down to $28,000 a year before other discounts were negotiated. “Our goal in lowering the price is to lower out-of-pocket expenses for patients as well as reduce the potential financial implications for the U.S. healthcare system,” Allison Parks, a spokesperson for Biogen, wrote to Quartz in an email.
Eventually, Medicare decided to cover the drug, but only for patients involved in clinical trials. This indicates very limited confidence in the effectiveness of the drug, based on the current data. “Nobody can precisely say whether this treatment will be disease-modifying, and to what degree it will modify the disease,” says Jakub Hlávka, who researches health policy and economics at the Schaeffer Center of the University of Southern California.
Patients would still pay more than $5,000 for it, and Medicare would pay up to $37 billion annually for the drug, and that’s without accounting for costs of ancillary services such as administration, monitoring, or treatments for side effects.
But what happened that rendered the drug, once worth $56,000 (to its maker, at least), suddenly half that much? Did it suddenly cost less to manufacture it? Did Biogen collect new evidence on the efficacy of the drug?
No. Despite limited evidence of the drug’s effectiveness, Biogen initially set the price so high that it impacted its potential sales, and it got caught in a backlash that risked damaging its reputation.
“The only limit [to drug pricing] is the reputational cost. Well, Biogen blew it. They went too high,” says John Abramson, a Harvard Medical School professor and the author of Sickening, a book on the role of big pharma’s pursuit of profit in American healthcare.
What happened with Aduhelm isn’t the norm with drug pricing in the US. Typically, the manufacturer sells to Medicare at a heavily discounted rate, but also to many other private insurers, all of which end up paying less than the official list price for the drug.
In this case, however, Medicare covers almost all of the patients who would receive the drug—senior citizens with Alhzeimer’s—so its position mirrored the power of countries with universal healthcare coverage, where one large buyer negotiates with the drug manufacturer. That’s the system in every other high-income country besides the US. Because Medicare isn’t allowed to negotiate prices, Biogen’s decision was especially important in bringing the drug price closer to one that reflected its benefits.
“In the United States, the drug companies’ pricing formula is very simple. How can they maximize their profits? Period. And that is determined by price times the volume of sales. There is a price point at which the volume of sales will go down because it’s just going to be too expensive,” says Abramson.
Unlike other countries, the US has no price caps on drugs nor does it have a formal, government process of health technology assessment to evaluate the benefits of a drug. So pretty much the only consideration a drug company is bound to take into account when setting the price is trying to maximize profits.
“When the company says something like, we feel that this price does depict the value, but gives you no parameters to understand how they arrived at that conclusion, you’re really left wondering if this is just a price that’s testing the waters in the US market, which is not a luxury manufacturers have in any other developed nation,” says Daniel Ollendorf, a health economist at the Center for the Evaluation of Value and Risk in Health at Tufts Medical Center.
But while pharma companies in the US have no restrictions on setting prices, things could be different, and a few reforms could give a more informed assessment of drug prices to regulators, insurers, and the pharmacy benefit managers who decides what drugs millions of Americans have access to.
One way would be to look at a drug’s benefits, both in terms of the individual and the health system. Does the drug improve a patient’s quality of life compared to existing drugs? How much does it extend life expectancy? By how much does it reduce hospitalization and the costs associated with it?
A measure of this is the so-called QALY, or quality-adjusted life year, which attributes a value to a drug based on how much longer it extends a patient’s life, and what quality of life they enjoy.
It is similar to the way ICER establishes the value of a new drug, by comparing it to an existing drug and calculating the value of treating the patient the drug is designed for, as well as the costs to the health system. That cost-effectiveness analysis by the non-profit ICER is similar to what in other countries is done by government agencies such as the UK’s National Institute for Health and Care Excellence, or the German Institute of Medical Documentation and Information. These agencies, however, have a regulatory power that ICER doesn’t have, and government officials negotiating prices with drug makers have to take into account their findings.
An approach based on the benefits delivered isn’t without risks, however. For instance, it isn’t effective in establishing the value for new drugs that are effective against a disease for which there is no other treatment, says Abramson. He gives the example of Trikafta, a drug for cystic fibrosis made by Vertex, that has a list price of $311,000 per year.
“It seems outrageous because it hasn’t even been shown to reduce mortality, it just improves pulmonary function 3% to 14%. But there’s nothing else that provides any kind of hope like that for people of cystic fibrosis, so they’re exploiting the monopoly,” says Abramson.
Another approach to controlling costs would be to embrace the capitalistic nature of the pharmaceutical industry—within reason. “Determine what a reasonable profit margin is. You get paid for developing the drug and then after you’ve covered your development costs, what’s a reasonable profit margin?” says Abramson.
Deciding what is reasonable could be a matter of negotiation, and might change depending on the drug. This approach, too, could have serious limitations. A price that puts a cap on profits could dissuade the drugmaker from pursuing further innovation and investing in more research. “It would be very hard to find the level that would not prevent more innovation and could actually pay for all the previous investment,” says Hlávka. “What if the profit is not really tied to quality, and then the first drug that reaches the market gets all the profits, and there is no incentive to improve,” he says.
But before any negotiation could begin, the US would need to solve its biggest issue when it comes to assessing the value of a drug: the information asymmetry.
Much could be achieved by making information about drugs easily available to public bodies and independent evaluators.
Drugs introduced in the US, and especially new ones, have just one actor with access to all the data about it: the manufacturer. Unlike other countries, the US does not have a public agency dedicated to health technology assessment, so it has to depend on the manufacturer for data.
“We’ve got to have data transparency. You can’t possibly have a functioning market with one side not knowing the benefit of what they’re buying,” says Abramson.
Establishing a government body that reviews a drug’s performance might be a long shot, but the US should at the very least ensure the fairness of system of evaluation. Currently, drugs are assessed through trial data shared by the manufacturer, and studies that are peer-reviewed based on the same data, and appear in journals with complex incentives to publish them.
Further, the US doesn’t allow government-funded cost-effectiveness research, nor does it require that drugmakers publish the cost of drugs alongside guidelines with their use, with comparison to other similar treatments. Changing this would give negotiators the opportunity to objectively assess the benefit of a drug and allow for informed coverage and prescribing decisions.
Drug companies aren’t exactly pleased with the prospect of giving up the ability to independently set prices, and have used all the power of their lobbying—the most well-funded in the country—to push back against reforms. Yet pressure is mounting for a political solution.
“There is an understanding that seems to be growing out there, that these pricing practices are not sustainable, that at some point there will be enough uproar coming from the patient and consumer community, from clinicians, and others, that something will have to change,” says Ollendorf.