The value of specialty oncology drugs.

The high cost of specialty medications has been intensely scrutinized by lawmakers, patient activists, and the popular press (Kolata and Pollack 2008; Lee and Emanuel 2008; Willey et al. 2008;). Both supply- and demand-side factors push up the cost of these drugs (Goldman et al. 2006). Most are biologics, which are more costly to produce than traditional medications and are administered via infusion or direct injection, both of which involve substantial costs. On the demand side, many of these drugs provide treatments for disabling (e.g., arthritis, multiple sclerosis) or life-threatening diseases (e.g., cancer) that respond to few therapeutic substitutes. As a result, the willingness to pay for these drugs may be high. Among physicians, there is widespread belief that the benefits of specialty medications are low relative to their costs, with only 25 percent of oncologists believing that bevacizumab (Avastin), a recently developed therapy for metastatic colorectal cancer, offers a “good value” (Nadler, Eckert, and Neumann 2006). This skepticism is also shared by many public payers. For example, the United Kingdom's National Health Service (NHS) recently declined to cover bevacizumab after concluding that the documented improvement in median survival—about four and a half months, according to one major study (Hurwitz et al. 2004)—did not justify the drug's high cost, reportedly as much as U.S.$100,000/year (Kolata and Pollack 2008). We quantify the overall price and income responsiveness by estimating demand and income elasticities. We also use the estimated relationship between out-of-pocket costs, income, and utilization to determine how much (in dollar terms) individuals value the drugs in question, not simply how responsive they are to changes in out-of-pocket costs and income. Comparing patients' willingness to pay to the cost of the treatments allows us to estimate consumer surplus: the benefit to patients net of the amount paid. As Jena and Philipson (2007) observe, a drug's cost-effectiveness and consumer surplus are closely linked: the greater the consumer surplus, the higher the cost-effectiveness. We report three main findings. First, the decision to initiate therapy with these drugs is somewhat, but not highly, responsive to patient out-of-pocket costs. Second, among those who initiate therapy, the amount of use is fairly unresponsive to patient out-of-pocket costs. Third, the value of the drugs to users is on average equal to four times their total cost to payers and patients, although there is some evidence to suggest lower benefit ratios for oral drugs. Inference for the latter group of drugs, however, is complicated by much lower mean and maximum rates of cost sharing, which decrease the precision and generalizability of our findings. This suggests one limitation of the revealed preference approach in this context.