Are We Valuing Prescription Drugs Appropriately?

That is the title of a new Health Affairs Forefront article by Peter Neumann and Joshua Cohen. An excerpt is below:

One reason economic analyses may yield estimates that are too low is that they ignore the downstream declines in drug prices that occur when competitors enter the market and especially with the introduction of generic or biosimilar competition. Omitting such projections presumes that launch prices continue forever, akin to estimating the long-run cost of owning a house by pretending that its mortgage payments are everlasting.

Erroneously assuming that launch prices persist indefinitely mistakenly implies the need for lower launch prices to ensure that the aggregate amount paid for that drug over the long term is not too high. When combined with price declines that typically follow loss of market exclusivity, the lower recommended launch prices yield average drug life-cycle prices that are too low—that is, prices that understate the value of the drug’s benefit. More realistic assumptions about drug price declines following the loss of market exclusivity would lead to higher recommended launch prices.

Consensus panels have endorsed the idea of accounting for life-cycle drug pricing, but most cost-effectiveness analyses exclude such assumptions because of uncertainty about the timing and consequences of generic entry, or presumably because such assumptions would support even higher drug prices. But while the path of genericization may be unpredictable, assuming brand-name prices will remain unchanged misrepresents—and often overstates—a drug’s long-term costs.

The article also discusses issues related to appropriate discount rates, spillover impacts, and the need to incorporate patient risk preferences (i.e., GRACE) into value assessment. Read the full article is here.