Oncology Economics

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.

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