Rethinking Drugs Spend Part 2: The Cost of Innovation

As Europe contends with falling healthcare budgets and ageing populations, public officials like Thomas Schael are calling on the industry to help confront the challenge.

In part one of this series we covered Schael’s impressive achievements trimming spending on drugs. Commenting on Italy as a whole he noted his territory is making good progress. “At the moment we are reducing territorial drug expenditure (there was a drop of more than 9% in 2012 compared to 2011).”

However, after extracting €20m in efficiencies, one question is: are there any savings left to be rung out of the system?

“That’s a very complex question,” says Schael. “The main problem for the Italian pubic health system is that we can’t reduce expenditure enough in the regions to cover growing drug expenditure by hospitals.” Hospitals are where the majority of new and expensive therapies are prescribed, which stretches budgets. He indicates that spending is worryingly out of control. “For hospital drugs we generally spend nearly double what we budget.”

Main threats

The main threats for the Italian market and other developed countries at the moment are the sustainability of innovation and the efficacy of new drugs compared to the difference in price.

Schael does not bemoan the industry for high prices on innovative drugs. “They have to set high prices in order to pay back the R&D activity of course and there’s nothing wrong with that.” However, he believes that the current economic environment is out of alignment with this. “We don’t have the wealth in Italy, and I think it’s same for other European countries, to pay as much as they [the pharmaceutical industry] would like.” Schael outlines two key threats for European healthcare that he feels need to be carefully addressed. “The main threats for the Italian market and other developed countries at the moment are the sustainability of innovation and the efficacy of new drugs compared to the difference in price.”

New strands of innovation in biotechnology and personalised medicine are likely to exacerbate this problem, worries Schael. This creates a challenge for The Italian Medicines Agency (AIFA), which has responsibility for deciding which drugs get access to the Italian market and setting the maximum price. Historically, says Schael, “the very innovative drugs in Italy were introduced a little bit later than in other countries but at a much better price.” Italy’s membership of the Euro threatens this price advantage though, he thinks. “If a drug gets access in two or three countries in Europe then they’ll likely get market access nearly everywhere.” As a result, policy makers in Italy and the managers of public health systems fear where hospital drug expenditure will go in the near future.

Careful reflection

If a drug is available in the UK and not in Italy, the patient might say they are prepared to pay. It then ends up in the newspaper because they pay fifty or sixty thousand euros for a therapy.

Schael advocates careful reflection on the introduction of new drugs that offer only a marginal improvement on established therapies but come with a greatly inflated price tag. “We should really reflect on whether all new products are really so much better, to justify the high prices.” The problem here, says Schael is that the thick and fast flow of information between consumers means that if a drug is prescribed in one market, consumers in another inevitably demand it. “If a drug is available in the UK and not in Italy the patient might say they are prepared to pay. It then ends up in the newspaper because they pay fifty or sixty thousand euros for a therapy.”

Regulating the introduction of new drugs is difficult, Schael comments “because once you have a drug introduced in one country there will always be a citizen who says, for example, “you can get it in Paris, so why not here?”

Italy has a very different approach to other countries when it comes to reimbursement, maintaining a strict agreement with the pharmaceutical industry on overall expenditure. Schael explains that, “if we spend more than the set reimbursement budget, 50% of the overspend is paid back by the industry and 50% is covered by the public health system.” This system punishes industry for raising prices too much, by eroding margins if prices grow beyond a certain level. This gives rise to some degree of self-regulation in terms of pricing, says Schael. “If one company pushes too much the others will tell them to calm down.”

For innovative products, there is a pay for performance system, whereby AIFA will test a drug on a small sample and if it is ineffective then the drug will not be purchased. On the upside, Schael comments, “if it works, you get rich.”

Schael acquiesces that the structure of the system makes things difficult for the industry. “Pharmaceuticals companies have a difficult role in Italy […] because there is a complex decision system in order to get to market.” There are multiple stages of approval, including AIFA, regional healthcare systems, public health authorities and individual hospitals. In order to gain market access firms must therefore “work on different levels of decision makers,” says Schael.

Paying for performance

Schael believes that paying for performance is a good model. “When you are general manager all of your hospital doctors come to you to ask for drugs to be authorised.” As a result, for expensive therapies it’s helpful “to only pay if it works.” Schael is acutely aware of the complexity this type of arrangement brings, so he says “you have to have robust systems in place, otherwise the cost for monitoring exceeds the benefits you get for not paying when the therapy is unsuccessful.”

His advice to industry is to understand “that we have a flat if not decreasing budget for public health, so we can’t expect spending to grow as it has been for decades.” This poses what Schael calls “a big question” for pharmaceutical firms and their business models. They must now “guarantee,” he says, “that standard care costs less in order to free up budget room for innovation and new drugs.” In addition, Schael calls for the industry to be more transparent and to align its strategy with the objectives of government. “I would expect the pharmaceutical industry to be much more transparent and to support the objective of not growing overall pharmaceutical spending.”

Supporting innovation

Nowadays, innovation is much more fragmented

Commenting on the importance of continued innovation, Schael stresses that in areas such as oncology, “there’s been substantial progress over recent decades.” This is important, and something he of course wishes to continue, however his concerns relate to the proportionality of price increases to improvements in treatment efficacy. “What I’m concerned about is that oncological spending increases every year and I can’t see a proportional reduction in deaths among oncological patients.”

The nature of contemporary innovation means that it’s more difficult to determine which drugs to approve. Not only is, “the curve of innovation slowing down,” says Schael, but “we also have many more products trying to access the market.” Whereas in the past, the whole professional community would support the introduction of a new drug, nowadays, “innovation is much more fragmented.” With new drugs targeting smaller populations and a multitude of clinical opinions, Schael believes that it’s more challenging than ever to balance the overall objective of improving health with the plain fact of finite resources.

When it comes to drugs offering only a tiny improvement on the established therapy, Schael prefers a strategy of prevention. “I see prevention as much more effective than the latest drugs. If you invest in prevention then it will work out cheaper than trying to save three months of life for a person with a new drug.”

Rethinking drugs spend is a two part series based on interviews with Thomas Schael, ex-commissioner at the Public Health Authority of Naples, Italy. In Part One, Schael discusses Italy’s drug distribution system and explains how he dramatically cut spending on drugs. In Part Two, Schael gives his outlook on the major challenges for drug expenditure in Italy and Europe and offers advice to the pharmaceutical industry on how to work better with authorities.

Thomas Schael will be sharing more insights and actionables on drug expenditure and the requirements of Italian payers at the Payers' Forum Europe 2013. For more information on his presentation or to see which other European decision makers will be present, visit the official website.