New cancer drugs are very expensive – here’s how we work out value for our money

12 Sep 2015

The Senate Standing Committee on Community Affairs is expected to table its report on the “Availability of new, innovative and specialist cancer drugs in Australia” today. Initiated by South Australian senator Nick Xenophon, the inquiry, which was initially slated to report in late March, is focusing on timely access and affordability of cancer drugs, and how this impacts the quality of cancer care.

The Pharmaceuticals Benefits Scheme (PBS) spends over A$9 billion a year subsidising a wide range of drugs to ensure their affordability. But the growing number of expensive medicines has raised questions about its long-term viability. In 2012/13, for instance, spending on chemotherapy for the treatment of cancer increased by over A$250 million. Funding for cancer drugs now accounts for $1 in every $6 spenton the PBS, up from $1 in every $8 in the previous year.

And this amount is predicted to continue increasing: a recent round of applications for listing new pharmaceuticals included 11 cancer drugs, at an estimated cost of A$589 million. And a 2014 US review of cancer careidentified almost 1,000 drugs in development, suggesting a continuing flow of applications for listing on the PBS.

Value for money?

The remit of the PBS is to provide access to effective and safe pharmaceuticals at a price that provides value for money to the Australian taxpayer. It decides which new drugs it will subsidise based on recommendations from the Pharmaceutical Benefits Advisory Committee (PBAC). But how does the PBAC assess value for money?

It compares the costs and health benefits of a new drug to the costs and health benefits of the treatment it will replace if funded. Health benefits are represented by the number of “quality-adjusted life years” (QALYs) experienced by patients from the time they start treatment.

The QALY measure reflects improvements in quality of life, as well as quantity of life, or life expectancy. And since most health care is intended to improve quantity or quality of life, QALYs can be used to represent the benefits of most health-care interventions.

One QALY is the equivalent to a year of life lived without any form of ill health. You accumulate one QALY for every year you experience no ill health, and a fraction of one QALY for every year of illness. Using data collected from large-scale surveys of the Australian population, people experiencing illness are assigned a QALY value between zero and one.

A value of 0.5 is quality of life that’s half as good as living in perfect health, for instance, and zero is equivalent to being dead because no QALYs are accumulated after death. But quality of life declines over time for everyone; it just falls more slowly for people not receiving the intervention (in this case, cancer drugs).

The cost of cancer treatments need to be balanced against their benefits. Eric Gaillard/Reuters

The benefits of a new drug are defined as the additional number of QALYs experienced by patients receiving it, compared to the existing treatment option. We also estimate the difference in expected costs incurred by people receiving the new and current treatments.

Consider if a new drug could be used to treat 1,000 people every year who currently receive a different drug. Patients receiving the new drug are expected to gain an additional five QALYs compared to patients receiving the current drug, which is a total of 5,000 QALYs across the 1,000 patients.

But the new drug is estimated to cost A$100 million more to treat the 1,000 patients. How then should we use this information to determine whether the new drug provides value for money?

Opportunity cost

Well, we compare the gain of 5,000 QALYs to the lost opportunity (this is known in economics as an opportunity cost) of spending A$100 million on the new drug. In other words, if the new drug isn’t funded, could that A$100 million generate other benefits valued at more than 5,000 QALYs?

Of course, if the drug isn’t funded, the A$100 million might not be spent on health care at all, but on education, transport or defence. But it’s difficult to compare the benefits of spending across government sectors; it’s easier to assess whether the health of the population can be more improved if we allocated the A$100 million to another form of health care.

The money could be used to reduce public hospital waiting times, for instance, or on unimplemented health-care programs we know to be effective. But such comparisons are also difficult because these kinds of funding decisions aren’t informed by the same open assessment of value for money that informs PBS listings.

In the absence of transparent and consistent processes for assessing value for money, how are new pharmaceuticals assessed? The expected additional costs of the new drug (A$100 million) are divided by the expected gain in QALYs (5,000). This provides an estimate for the expected cost of producing one additional QALY (A$20,000), and a decision about whether this represents good value for money is made based on this figure.

In Australia, public summaries for each assessed pharmaceutical are published. Recent documents suggest new drugs are generally recommended if their expected incremental cost per QALY is somewhere between $45,000 and $75,000. Often, the price of a new drug is lowered until the cost per QALY becomes acceptable.

But the source of this “threshold” value is unknown as there’s never been any open discussion about the basis of defining it in Australia. One way to understand the value of gaining additional QALYs is to analyse health system data and estimate the average cost at which QALYs have been gained in the past. If a new drug is gaining QALYs at a lower cost, we can have more confidence that the health system is becoming more efficient over time.

Estimating the average incremental cost at which additional QALYs are gained in Australia will provide a stronger basis for assessing the value of new drugs. It will also inform health-care funding decisions more generally. Specifying the basis for assessing value for money would improve the transparency of decision-making, and allow Australian taxpayers to participate in an open discussion about the value of cancer drugs.

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