Cost Effectiveness of Drugs: Is ICER enough?

Yongbin Choi, Ph.D. Candidate

Drug development and innovation in biotechnology has exploded in the past decade. The number of drugs in research and development pipelines has almost doubled from 9,737 in 2010 to 16,181 in 2019, globally. Not only has the number of total drugs increased, but also the quality and degree of innovation has significantly improved with the advent of novel technology platforms, such as cellular therapies and gene editing technologies.

After success in a series of clinical trials, those highly innovative drug candidates can proceed toward the launch and marketing of new drugs. However, one more key aspect that needs to be determined before going to market is the pricing of the drug.

When it comes to determining the price of newly developed drugs, several factors, including the cost of development, market size and competitive landscape of target indication, and cost-effectiveness need to be considered and incorporated into the pricing model.

In 2019, the House passed the Elijah E. Cummings Lower Drug Costs Now Act (H.R.3) which adopted international reference pricing for the Medicare program in an effort to lower drug costs. Considering the price control already in effect in EU countries, such as UK and Germany, H.R.3 would indeed reduce prices, if legislated, but at what cost to innovation?

To better answer this question, it is important to understand the cost-effectiveness analysis currently being used in other countries.

Most of the regulatory agencies incorporate ICER (Incremental cost-effectiveness ratio) based modeling when they set the price threshold for a new drug. ICER is defined by the difference in cost between two possible interventions, divided by the difference in their effect, often measured by improvement in QALYs (Quality-adjusted life years).

UK's NICE (The National Institute for Health and Care Excellence) and Germany's IQWiG (Institute for Quality and Efficiency in Health Care) set their ICER threshold as £20,000 to £30,000 in the UK and 15% improvement in Germany, respectively. Although such thresholds have aided in limiting the increase in drug prices in these countries, there have been heated debates regarding the appropriateness of ICER-based modeling in the price determination of innovative new drugs.

Opponents emphasize that the current ICER-based modeling has several limitations which makes it difficult to fully capture the cost-effectiveness of new drugs. First, ICER-based modeling does not take into account the impact of the genericization. Once the patent expires and a drug loses its exclusivity, several generics and biosimilars come to market which results in a significant decrease in drug price. This scenario can be better understood by the 'mortgage vs rent' metaphor.

Let's say you have a 30 years-mortgage on your house. After 30 years of payment, the house is yours. You can live in that house forever without further payment. On the other hand, if you are paying monthly rent for your house, you will be paying the same, or much higher, amount of rent forever.

Similarly, after a certain period, payers and patients won't pay the initial price for the drug anymore, rather they can still enjoy the benefit at a much lower cost, just like a mortgage. Current ICER-based modeling assumes the perpetual drug price, like paying rent forever, which results in over-estimation of the 'cost' and setting the initial drug price to be much lower than the appropriate price.

Furthermore, ICER-based modeling doesn't consider the different nature of QALY among different diseases. For instance, a 10% increase in QALY in cancer patients versus diabetes patients is totally different considering to the nature of the disease. For a life-threatening disease like cancer, even a slight increase in QALY may very well result in a huge patient benefit, which is not considered in the current ICER-based modeling. Without taking in to account the different nature of the disease and determining the different QALY measures, the ICER-based price model results in a much lower price than the appropriate price for the drug.

As this price threshold limits the drug price so low, the net present value of the drug would be much lower than the investment needed to proceed with the development, which often makes the developing drugs almost uninvestable. Thus, If HR3 were to be implemented early investors would take a massive hit, as their ownership will be heavily diluted. This would act as a burnt finger moment, preventing many innovators from taking risks. For the biopharmaceutical industry as a whole, the sum of this devaluation would be huge and significantly disincentivize further investment in innovative therapeutics.

In summary, pricing control is not just a matter of drug price but more about the sustainability of the biopharmaceutical ecosystem. It is true that appropriate drug pricing based on the cost-effectiveness is crucial for patient benefit but establishing a consensus on the rationale and method to determine the cost-effectiveness is required.