How A Computer Model Prices the Value Of Good Health and Moderates Drug Costs

Many western cultures resist the notion of putting a dollar figure on a human life, but as health care costs - and, especially, pharmaceutical prices - rise to insupportable levels this approach helps determine a framework for delivering care. JL


Denise Roland reports in the Wall Street Journal:

QALY, for “quality-adjusted life year” puts a dollar figure on a year of healthy life, calculates how much health a drug restores to a sick patient, then prices drugs accordingly. The concept originated with economists to compare the cost-effectiveness of health-care option. (It) uses a three-point scale, with one signifying no health problem and three representing severe debilitation applied across five components of quality of life: pain, mobility, ability to take care of oneself, ability to carry out daily tasks and mental health. (There is) a maximum value, $150,000, for each QALY a drug can add.
The makers of the cholesterol-lowering drug Praluent, which first went on sale for $14,600, offered to sell it for as little as $4,500, after rebates. A new migraine drug called Aimovig, expected to cost up to $10,000 a year, went on sale for $6,900. And Zolgensma, a lifesaving gene therapy for children that its maker said might cost up to $5 million, was priced at $2.1 million.
Behind all the price restraint was a complex economic model invented decades ago to determine how to price health care fairly. These days, a little-known Boston nonprofit group is using it to shame drug manufacturers to lower their prices.

The Institute for Clinical and Economic Review, an outgrowth of Harvard Medical School with no political affiliation or official policy-making role, has latched onto the concept, called the QALY, for “quality-adjusted life year.” It puts a dollar figure on a year of healthy life, calculates how much health a drug restores to a sick patient, then prices drugs accordingly.
With public and bipartisan political pressure mounting over high drug prices, including from the Trump administration and Democratic presidential candidates such as Elizabeth Warren, pharmaceutical companies have started paying attention. Novartis AG set the price of its lifesaving gene therapy Zolgensma at the limit suggested by ICER, as the Boston group is known. Dave Lennon, president of the Novartis unit that makes it, says ICER had brought transparency to drug-price analysis. “Whatever pricing we believe will be appropriate for a product will be compared to what ICER did,” he says.
The model, pioneered by U.S. and Canadian economists in the 1960s, has been used for years in slightly different form in many countries, including Canada and the U.K. In the U.S., drugmakers long have opposed such pricing systems, arguing they could lead Medicare to refuse to pay for expensive drugs and cut patients off from new treatments.
American insurance companies, however, have begun embracing the approach, and some pharmaceutical companies say they will at least compare their own pricing assessments with ICER analyses.
“What has been quite a surprise is the rapidity with which [ICER’s model] has gone from an academic assessment to one that is starting to influence decision-making,” says Robert Dubois, chief science officer of the National Pharmaceutical Council, an industry-sponsored think tank.
Last year, Sanofi SA and Regeneron Pharmaceuticals Inc. cut the net price for their cholesterol drug Praluent to be in line with ICER’s recommendations for high-risk patients: a range of $4,500 to $8,000. “ICER’s independent view of value was something we were willing to align with,” says Kyle Hvidsten, head of global health economics and value assessment at Sanofi. The companies later cut the list price to $5,850.
When Novartis and Amgen Inc. were gearing up last year to sell their migraine drug Aimovig, Wall Street analysts predicted they would price it between $8,000 and $10,000 a year. The companies ultimately went with $6,900, a number recommended by ICER.
Unlike much of the rest of the world, the U.S. generally doesn’t exclude medicine on the grounds of cost from its publicly funded health-care programs, Medicaid and Medicare. Because of that, drugmakers can typically charge much more than elsewhere in the world.
That is where QALY (pronounced QUAL-ee) comes into the picture. It works like this: One year spent in perfect health equals one QALY. A year with some kind of health problem that affects quality of life would be worth less than one QALY. How much less depends on the severity of the problem.
Consider a 55-year-old, whose life expectancy might be another 24 years. If that person is in perfect health, those 24 years would mean 24 QALYs.
For someone suffering from untreated rheumatoid arthritis, though, those 24 years could be marked by extreme pain and loss of mobility and translate to just 10 QALYs. If a certain drug reduces the pain and improves mobility, it might add back another five QALYs, for a total of 15. ICER works out the QALY benefit by reviewing the available data on the drug and translating the outcomes into QALYs.
ICER has affixed a maximum value, $150,000, for each QALY a drug can add. That is based on various health-economics studies into how much Americans are willing to pay for health care and how health-care expenditure compares to per-capita income around the world.
Because the arthritis drug adds five QALYs, the maximum cost should come out to five times $150,000, or $750,000. That cost is then spread over the 24 years the patient is expected to use it. That comes out to $31,250 per calendar year.
That same approach—with varying maximum values—is used widely in other developed countries, including Canada, Britain, Ireland and the Netherlands. In those countries, the calculations help determine which drugs their government-funded health systems should cover and at what cost.
That gives such government buyers leverage over drugmakers in price negotiations and has proved effective at significantly lowering drug prices. Branded prescription drugs in England can cost less than half of what they do in the U.S.
The approach also can cut off patients from new drugs if they are priced above the maximum those governments have set.
England has just emerged from a yearslong standoff with Vertex Pharmaceuticals Inc. over the cystic fibrosis drug Orkambi. The National Health Service, the U.K.’s free-for-everyone, government-funded health-care system, in 2016 used a QALY-based assessment to determine that the drug’s £104,000 ($132,000) a year price tag was too high.
It refused to pay for it. Negotiations on a compromise took nearly four years. Last month, the two sides announced a deal, without disclosing the final price.
Concerns like those are at the heart of the U.S. government’s unease with QALY-based methodology. The Obama administration banned its use in the Medicare program in the 2010 Affordable Care Act.
“This is a cultural issue,” says Steve Miller, chief clinical officer at Cigna Corp. , an insurer. “This is America not wanting to put a value on the price of a life.”
The Trump administration also has been wary, although a still-fuzzy proposal being considered by the White House to peg some prices to those paid elsewhere in the world would reference some countries that use QALYs.
Michael Sherman, chief medical officer of insurer Harvard Pilgrim Health Care, welcomes ICER’s perspective. “We are [already] putting a price on a year of life,” he says. “We just let the pharmaceutical companies choose it.”
In the U.S., insurers don’t have the option that makes cost-per-QALY analyses so effective in curbing drug prices in other countries: the ability to walk away. They are prohibited from refusing to pay for treatments solely on the grounds of cost.
They can, however, nudge customers toward better-value drugs by throwing up barriers, such as higher copays, for pricier ones. They also can use those levers to extract bigger discounts from drugmakers. Some are using ICER’s cost-per-QALY reports to help with that.
New York state’s Medicaid program last year used ICER’s assessment on Vertex’s Orkambi—the same drug that took nearly four years for England to agree on a price for—to support its own finding that the cystic fibrosis drug was too expensive. It asked the company for a bigger rebate. Vertex has so far refused to lower its price, but talks continue. The Veterans Health Administration also uses ICER’s reports to inform its coverage decisions.
CVS Caremark, the pharmacy-benefit-manager arm of CVS Health Corp., offers self-insured employers, which don’t have to cover all drugs and treatments, a list of medicines that excludes ones with a cost-per-QALY exceeding $100,000, unless they are considered breakthrough drugs.
“People are finding the QALY concept to be more and more acceptable,” says Troy Brennan, chief medical officer of CVS Health. “As these kinds of approaches get adopted…pharma will have to change its view on what best pricing is.”
Hedge fund billionaire John Arnold, a prominent advocate of lower drug prices, has helped ICER gain influence. He has granted ICER $27.6 million since 2015 through the foundation he runs with his wife, Laura Arnold, a former corporate lawyer. Arnold Ventures is ICER’s single-biggest funder, contributing 69% of its funding for 2018, according to an ICER spokesman.
“Enough people are paying attention to these reports that if a pharma company comes out with a price outside the range, it can cost them market share,” says Mr. Arnold. ICER “has started real conversations about paying for value.”
Many drugmakers, though, say QALYs are too blunt a tool for measuring the value of drugs and don’t take into account a new medicine’s novelty or its effect on the lives of caregivers, not just patients. Critics also say the values used in QALY calculations are arbitrary and unscientific.
“You win or you lose, based on some arbitrary, nontransparent, non-peer-reviewed report,” says Terry Wilcox, executive director and co-founder of Patients Rising, an industry-funded group that campaigns for improved access to drugs.
The ICER spokesman says that before each planned report, the organization engages with manufacturers, patient advocacy groups and doctors, seeks public comment and shares its economic models with drugmakers. He says the reports eventually appear in peer-reviewed journals.
The QALY concept originated with a network of American and Canadian economists who, in the late 1960s, started developing ways to compare the cost-effectiveness of different health-care options. Those studies inspired Alan Williams, a British economist, to try to create a universal method for scoring someone’s health.His team decided to use a three-point scale, with one signifying no health problem and three representing a severe debilitation. He applied that across five core components of quality of life: pain, mobility, ability to take care of oneself, ability to carry out daily tasks and mental health.
He then surveyed thousands of Britons to affix a quantitative value to each of the 243 “health states” created by that scoring system. It remains the basis of the system used to test prices in Britain.
When Britain decided to inject more money into its National Health Service in 1999, it created the National Institute of Health and Care Excellence, or NICE, to advise how to best spend the extra money, using Dr. Williams’s approach. The drug industry fought NICE from the start, arguing it would block access to drugs.
NICE concluded that one of the first drugs it evaluated—a flu treatment called Relenza—was too expensive for the NHS to cover, prompting the drug’s maker to threaten legal action. A year later, NICE recommended Relenza for use in high-risk patients.
NICE eventually adopted a QALY methodology, stipulating £30,000, or about $38,000, as the maximum value of every additional QALY a drug might add to a patient’s life. That level remains in place today.
Of the roughly 800 drugs the agency has evaluated since its founding, around one in seven have been turned down. For the rest, NICE has either recommended the drug at its asking price or after the manufacturer offered a discount.
Steve Pearson, who teaches at Harvard Medical School, did a yearlong stint at the U.K. agency in 2004. Back in the U.S., he set up ICER in 2006 as an academic research unit inside Harvard Medical School. He tailored the U.K. approach to the market-driven U.S. health system, including adjusting for the higher overall cost of American health care.
Initially, ICER focused not on drugs but on pricey procedures such as new forms of radiation therapy for cancer. Its focus shifted in 2013, when Gilead Sciences Inc. ’s hepatitis C drug Solvadi—the first $1,000-a-pill drug—hit the market.
ICER found that Solvadi was cost-effective but would strain state Medicaid budgets because of the high number of eligible patients. It suggested that insurers prioritize those most in need. Since then it has evaluated dozens of new drugs, often concluding they are too expensive.
“Cost per QALY is not a goal in of itself,” says Dr. Pearson. “The goal is to have independent information available to catalyze the kinds of discussions that should be happening in broad daylight—because they involve difficult decisions that involve patients—and not behind closed doors.”