Insurers scrutinize drug costs after $84,000 Sovaldi surprise

By Caroline Humer and Deena Beasley

NEW YORK/LOS ANGELES (Reuters) - Shocked by the rapid adoption of a new $84,000 hepatitis C treatment, U.S. health insurers are trying to make sure they aren't blindsided by other drugs being developed and are looking for ways to limit their use from the day they are launched.

Manufacturer Gilead Sciences Inc says 30,000 people have received hepatitis drug Sovaldi so far, and that sales hit a record-breaking $2.3 billion within a few months. The treatment, typically 84 pills taken over 12 weeks, completely cures the disease in more than 90% of patients.

As many as 3.2 million Americans are infected by hepatitis C, and the cost of giving most of them Sovaldi would surpass $200 billion. Some insurers have already put conditions on who can get the drug, and states including California and Texas have slowed or put treatment on hold while they study what to do.

Insurers warned that these unforeseen costs will cut 2014 earnings and require rate hikes. Now, at industry conferences, in conversations with investors, and in private, they are pushing Gilead's rivals, a group that includes AbbVie Inc, Merck & Co and Bristol-Myers Squibb Co, to discount their own new hepatitis C treatments when they come to market starting this fall. Such a high-profile campaign by insurers before drugs are even approved is new.

They are also signaling they will restrict who can get coverage for new cholesterol drugs being developed by Amgen Inc, Pfizer Inc and a partnership of Regeneron Pharmaceuticals Inc and Sanofi SA.

By law, insurers cannot deny access to new drugs if they represent a real improvement for patients, leaving drug companies with the upper hand in most price discussions. When comparable competitors, or a generic version is on the market about a decade later, insurers have room to steer patients away from the new drugs, and pharmaceutical companies cut prices steeply and give big discounts.

But insurers have not faced such a highly effective drug aimed at a widespread disease that is so expensive and so quickly adopted. The previous record for a drug reaching blockbuster status was set in 2011, when hepatitis C therapy Incivek from Vertex Pharmaceuticals raked in $1.56 billion for the entire year. Sovaldi has sold more in a quarter of the time.

As a result, insurers are taking a harder line on which patients should get Sovaldi, based on the drug's clinical data.

Sovaldi is "game-changing" for insurers thinking said John Whang, president of Intelligence Reimbursement, a consulting firm that helps pharmaceutical companies set prices. The only way for them to respond is to control the volume of treatment used, he said.

PUBLIC SHAMING

In a sign of how serious the industry has become, the largest insurer lobby group last week took Gilead to task at a public conference.

"The company in this case is asking for a blank check and you can't give anyone anymore a blank check because it will blow up family budgets, state Medicaid budgets, employer costs and wreak havoc on the federal debt," said Karen Ignagni, president of America's Health Insurance Plans.

Gilead argues that Sovaldi's price is worth it, since it will replace even costlier spending on hospital visits and treatments for cirrhosis or liver failure. It has not budged on price for the hepatitis C drug, although Gregg Alton, Gilead's executive vice president for corporate and medical affairs, acknowledged that insurers are going to start negotiating.

U.S. drug spending reached a record $329 billion in 2013, driven by a double-digit increase in prices for new cancer, HIV and hepatitis C therapies. Express Scripts, the nation's largest pharmacy benefit manager, expects spending on such specialty drugs to rise an additional 63% from 2014 to 2016, driven by an 1,800% increase in hepatitis C drug costs.

Successful drugs can cost $1 billion to bring to market, including spending on research, development and marketing. Supporters of drug companies say big advances necessitate high prices.

"We are the only country in the world that pays exorbitant prices to provide innovation first here, but that's what we need and that's what the American people have come to expect," said Richard Burr, a Republican Senator from North Carolina who has spent decades working on bipartisan health bills.

LIMITING USE

Hepatitis C complications can take years to develop, which gives insurers and government health agencies leeway to determine when treatment should start.

Many insurers, which manage most of the 150 million people covered by employer-based plans as well as some government Medicare and Medicaid plans, require patients to get authorization before using Sovaldi. Some limit the drug to patients with a certain genetic type of the disease.

Express Scripts has been pushing for all but the sickest patients to wait for new therapies that are expected to compete head-to-head with Sovaldi late this year. It is also pressing rival manufacturers for low prices, hoping to avoid the shock of Sovaldi, which sped through trials and regulatory approval and caught insurers by surprise.

"In this particular case there was very little discussion pre-launch. But other companies are now already discussing potential future price points in response," said Steve Miller, Express Scripts Chief Medical Officer.

AbbVie and Merck both declined to comment on whether discussions with insurers about their new drugs were underway.

Gilead, which says it discussed the Sovaldi launch with insurers, is in talks over which patients should be treated with its next hepatitis C pill. That will be a two-drug combination that will eliminate the need for a companion drug that nearly doubles Sovaldi's current total cost.

Industry analysts expect the company will price it closer to Sovaldi's $84,000 than to the $150,000 cost of a combination of Sovaldi and a Johnson & Johnson drug that some doctors prescribe.

Mick Kolassa, chairman of pricing consultancy Medical Marketing Economics, in Oxford, Mississippi, who advises pharma companies, says insurers are being aggressive. "We are seeing some of them step up and flex their muscles," he said.

CHOLESTEROL DRUGS IN SIGHT

More scrutiny of new pricing is likely ahead as the country comes to terms with how it should pay for expensive drugs, according to John Castellani, Chief Executive Officer of leading drug industry lobby group Pharmaceutical Research and Manufacturers of America or PhRMA.

Sovaldi has shown that patients are bearing too much of the drug's costs because of rising co-payments, co-insurance and deductibles, he told Reuters, laying the blame on factors controlled by insurance companies.

But patient advocates are not choosing sides yet, which may have the effect of giving insurers room for action.

"I think the fault lies with both the for-profit insurers and the drug companies," said Anne Donnelly, director of healthcare policy at the San Francisco-based Project Inform, which advocates for hepatitis C patients. The system has not changed to reflect the impact of new effective, expensive drugs, she said.

The next big price battle centers on a new class of cholesterol drugs known as PCSK9 inhibitors, which help the liver to clear LDL cholesterol from the blood.

Large-scale studies show the new drugs can help patients who cannot tolerate, or get enough benefit from, the most widely-used cholesterol drugs, statins. The PCSK9 therapies are expected to cost thousands of dollars a year, far above the price of statins sold as generics.

Drugmakers are expected to push for the new medicines to be used by 7 million to 20 million people, or up to 30% of the 71 million Americans with high cholesterol. Insurers already are questioning whether the estimates of use are legitimate.

"There is really no need to take these new medications and spread them out across a larger community of people who will respond to existing treatments, many of which are generic," Aetna Inc's National Medical Director for Pharmacy Policy Ed Pezalla said in an interview.