Managed Care Compels Evaluations of Cost Effectiveness

November 1, 1995

This column focuses on an area that is critical to all medical oncologists: the pharmacoeconomic analysis. Why should you take note of this?

This column focuses on an area that is critical to all medicaloncologists: the pharmacoeconomic analysis. Why should you takenote of this?

  • If you are responsible for treating patients on managedcare contracts, you must understand how to interpret the increasinglyprevalent reports of cost effectiveness of established and newtherapies. If you use the least expensive treatment with the sameor better outcome, you will have helped fulfill the goal of themanaged care revolution in medicine.
  • If you are responsible for overseeing the managed carecontract for your group/institution, you should be using the resultsof published pharmacoeconomic analyses to gen-erate practice guidelinesfor the diseases you treat. In this way, your group will be abetter partner for insurers and will have an advantage in competingfor contracts.
  • If you are a clinical investigator, you must be aware thatif you are fortunate enough to develop a much better, more curativetreatment for a disease, it will most probably be widely usedonly if you can document the cost-benefit in terms of QALYs saved.You have the responsibility to understand not only the terminologybut also the technology of these studies.

Dr. Ramsey describes well the new paradigms in clinical practiceand investigation that will be the foundation of medical oncologyin the decades to come--Cary Presant, MD, Series Editor.

A few years ago, pharmaceutical companies had a simple motto:Design a product that performs better than the competitors inclinical trials and the medical world will beat a path to yourdoorstep. Today, the credo has changed: Design a product thatis effective and lowers the cost of care, and managed careplans will consider adding it to the formulary.

Managed care is revolutionizing the pharmaceutical industry inseveral ways: Companies are performing cost-effectiveness studiesof new drugs, changing their marketing and price setting strategies,and ceasing development of drugs that offer only a marginal improvementin benefits over currently available agents within a medicationclass.

The reasons for these changes relate to the change in decisionmaking regarding use of drugs, from its traditional source-physiciansand patients-to managed care firms themselves. Managed care insurersare expected to reimburse approximately 45% of all outpatientprescriptions in 1995, and 70% by the year 2000.

Physicians caring for patients in these plans often face restrictionsfor prescribing drugs that are "formulary" approved.Patients must make a substantial copay for nonformulary prescriptions.

Formulary decisions that traditionally were heavily influencedby the requests of individual physicians are now shifting to themanaged care organizations' pharmacy and therapeutics (P&T)committees, which often have a very different set of priorities.Unlike individual physicians, these P&T committees focus heavilyon costs in their approve/disapprove decisions for new and existingdrugs.

Cost-Effectiveness Analysis

In addition to costs, many progressive managed care firms arefocusing on outcomes in new drug evaluations.

Outcomes refer to the drug's impact on the patient's quality andquantity of life, rather than intermediate endpoints such as cholesterolor blood pressure. Since quality of life is less easily defined,outcomes studies are usually more difficult and expensive to undertakethan traditional effectiveness analyses.

The simultaneous evaluation of costs and outcomes is known ascost-effectiveness analysis. Many manufacturers are now performingcost-effectiveness analysis on their new products during phaseIII trials. In these analyses, costs include both the cost ofthe drug and of the drug's impact on the overall cost of patientcare.

If a new chemotherapy agent requires frequent monitoring for hepatictoxicity, for example, the cost of the liver function tests wouldbe counted as a cost of therapy using the new drug. Cost savings,such as reduced hospital days, would reduce the overall cost ofthe drug in cost-effectiveness analyses. The net economic impactof the new product (additional costs less cost savings) is alwayscompared with the cost of established therapy.

In cost-effectiveness analysis, effectiveness can be defined ina number of ways. Traditionally, years of life gained has beenthe benchmark measure of effectiveness. Because life-years giveno accounting of the impact of a new drug on quality of life,most researchers agree that some form of quality adjustment isnecessary. The most common measure is known as the quality-adjustedlife-year (QALY).

To determine QALYs, standardized interviews are used to ask studypatients about the impact of a new intervention on their qualityof life. A score ranging from 0 (death) to 1 (perfect health)is computed from the patient's responses, then multiplied by thelife expectancy gained from the intervention. This value is theQALY score.

Since prolongation of life does not apply to therapies for manymild illnesses, other measures besides QALY scores are often usedin outcomes study. These include generic scales of quality oflife, patient profiles, and disease-specific measures of cognitiveand physical function.

A New Field: Pharmacoeconomics

The pharmaceutical industry's interest in cost-effectiveness analysishas not been lost on academic medical centers. Several universitiesnow have developed programs in the new field of pharmaco-economics.Graduates of pharmacoeco-nomic programs, who work in industryand academics, perform sophisticated cost-effectiveness studiesthat determine how new drugs "rate" with existing drugs.

Pharmacoeconomists will typically present cost-effectiveness dataon a new product, along with the more traditional safety and efficacydata, to the FDA. The FDA now recommends that manufacturers performcost-effectiveness analysis for all new drugs and devices. Manyindustry leaders expect that this will become a requirement ina few years.

Managed care plans are another major consumer of these cost-effectivenessanalyses. Pharmaceutical companies will present favorable pharmacoeconomicdata on new products to managed care plans, in hopes of convincingthe insurer that the product's cost would be offset by savingsin other areas.

Finally, pharmaceutical companies sometimes use cost-effectivenessdata to help set a price for a new product. The price of a fullcourse of treatment might be set equal to, for example, the savingsachieved by spending fewer days in the hospital as a result ofusing the product.

Drugs of the Future

Another major area of impact of managed care on the pharmaceuticalindustry relates to the types of products that will be developedand marketed in the future. Many industry leaders predict that,in the future, manufacturers will cease to market multiple "metoo" drugs (eg, new brands of NSAIDs or fluoro-quinoloneantibiotics), because managed care firms will not be willing topay premiums for newer drugs within a medication class that haveonly marginal increased safety and efficacy benefits.

Pharmaceutical activity is increasingly focusing on the conceptof "disease management" in which companies
market programs to treat diseases, rather than simply promotingindividual drugs.

With this strategy, entire programs aimed at improving patienteducation and compliance are bundled around a "core"medication. Drug companies may sponsor an 800 number that doctorscan call to receive expert advice and information related to aparticular problem.

The disease management trend reflects an industry shift toward(1) outcomes-based rather than safety- and efficacy-based productmarketing and (2) marketing that capitalizes on products thatoffer clear differences in treatment compared to competitor'sproducts.