Volume 13 * Number | + Z010
`VALUE IN HEALTH
`
`Good Research Practices for Measuring Drug Costsin
`Cost Effectiveness Analyses: Issues and Recommendations:
`The ISPOR Drug Cost Task Force Report—Part|
`
`Joel W. Hay, PhD,! Jim Smeeding, RPh, MBA,? Norman V. Carroll, RPh, PhD,? Michael Drummond,PhD,*
`Louis P. Garrison, PhD,? Edward C. Mansley, PhD,® C. Daniel Mullins, PhD,’ Jack M. Mycka, BS,®
`Brian Seal, PhD, RPh, MBA,” Lizheng Shi, PhD, MS?°
`‘Departmentof Clinical Pharmacy, Pharmaceutical Economies & Policy, University of Southern California, Los Angeles, CA, USA; “JestaRx
`Group, Dallas, TX, USA; 3School of Pharmacy, Virginia Commonwealth University, Richmond, VA, USA; ‘Centre for Health Economics,
`University of York,York, UK; *Pharmaceutical Outcomes Research & Policy Program, Department of Pharmacy, University of Washington,
`Seattle, WA, USA;‘Merck & Co., Inc., North Wales, PA, USA; ’Pharmaceutical Health Services Research, University of Maryland School of
`Pharmacy, Baltimore, MD, USA; 2>MME LLC, Mentelair, Nj, USA; Sanofi-Aventis Pharmaceuticals, Bridgewater, NJ, USA; "Department of Health
`Systems Management, Tulane University School of Public Health and Tropical Medicine, New Orleans, LA, USA
`
`ABSTRACT
`
`Objectives: The assignmentofprices or costs to pharmaceuticals can be
`Good Research Practices—Use of Drug Costs for Cost Effectiveness
`Analysis {DCTF) subgroups met to develop core assumptions and an
`ecucial to results and conclusions that are derived from pharmacocco-
`outline before preparing six draft reports. They solicited comments on the
`nomic cost effectiveness analyses (CEAs). Although numerous pharmace-
`economic practice guidelines are available in the hterature and have been
`outline and drafts from a core group of 174 external reviewers and more
`promulgated in many countries, these guidelines are cither vague orsilent
`broadly from the membership of ISPOR at two ISPOR meetings and via
`the ISPOR website.
`:
`about how drug costs should be established or measured. This is parricu-
`Results: Drug cost measurcments should be fully transparent and reflect
`larly problematic in pharmacocconomic studics performed frem the “soci-
`etal” perspective, because typically the measured cost of a brand name
`the ner payment most relevant to the user’s perspective. The Task Force
`pharmaceutical is not a tue economic cost but also includes transfer
`recommends thar for CEAs of brand name drugs performed from « soci-
`etal perspective, either 1} CEA analysts use a cost chat more accurately
`payments from some membersof socicry (patients and third party payers)
`to other membersof society (pharmaccutical manufacturer stockholders)
`reflects truc societal drug costs (e.g., 20-60% of average sales price), or
`in large part as a reward for biomedical innovation. Moreover, there are
`when that is roo unrealistic to be meaningful for decision-makers, 2) refer
`numerous and complex institutional factors that influence how drug costs
`to their analyses as froma “limited societal perspective.” CEAs performed
`from a payer perspective should use drug prices actually paid by the
`should be measured from other CEA perspectives, both internationally
`and within the domestic US context. The objective of this report is to
`relevant payer nec of all rebares, copays, or other adjustments, When such
`price adjustments are confidential, the analyst should apply a cypical or
`provide guidance and recommendations en how drug costs should be
`average discount chat preserves this confidentiality.
`measured for CEAs performed from a numberofkey analytic perspectives.
`Methods: ISPOR Task Force on Good Research Practices—Use of Drug
`Conclusions: Drug transaction prices not only ration current use of medi-
`Costs for Cosr Effectiveness Analysis (Drug Cost Task Force [DCTF]) was
`cation but also ration future biomedical research and development. CEA
`appointed with the advice and consene of the ISPOR Board of Dircctors.
`researchers should tailor the appropriate measure of drug costs to the
`Members were experienced developers or users of CEA modcis, worked in
`analytic perspective, maintain clarity and transparency on deug cost mea-
`academia,
`industry, and as advisors to governments, and came from
`surement, and report the sensitivity of CEA results to reasonable drug cost
`measurement alternatives.
`several countries, Because how drug costs should be measured for CEAs
`Keywords: cost effectiveness analysis, drug costs, drug research and devel-
`depend on the perspectives, ive Task Force subgroups were created 10
`develop drug cost standards from the societal, managed care, US govern-
`opment, health-care market segmentation, health-care reimbursement,
`payer perspective,
`" ment, industry, and international perspective. The ISPOR Task Force on
`
`based on the key cost effectiveness analysis (CEA} modeling
`Background to the Task Force
`perspectives and their experience as developers or users of CEA
`The ISPOR Task Force on Good Research Practices—Use of Drug
`models for that particular perspective. These individuals were
`Costs for Cost Effectiveness Analysis (DCTF) was recommended
`recognized as scientific leaders in the field, who worked with that
`by the ISPOR Health Science Policy Counci! on December 13,
`perspective in academia, industry, and as advisors to governments,
`2004 and approved bythe ISPOR Board of Directors on May 15,
`and who camefromavariety of countries and health-care settings.
`2005, Joel Hay and Jim Smeeding were appointed as Task Force
`Because howdrug costs should be measured for CEAs depend on
`leaders by the ISPOR Board. The core members of the Task Force
`the perspectives,
`five Task Force subgroups were created to
`who became the leaders of the Task Force subgroups were chosen
`develop drug cost standards fromthe societal, managed care, US
`government, industry, and international perspective. Therefore,
`this Task Force Report is given in six parts. Part I:
`issues and
`recommendations; Part I: a societal perspective; Part
`Ill: a
`managed care perspective; Part 1V: US government perspective;
`Part V: industry perspective; and Part V1: international perspec-
`tive. The Task Force Report refleecs che authors’ own experiences
`
`Address correspondence to: Jocl W. Hay, Department of Clinical Phar-
`macy, Pharmaceutical Economics & Policy, University of Southern Cali-
`fornia, CHIP# 140}, 1540 E. Alcazar Street, Los Angeles, CA 90089-9004,
`USA, E-mail jhay@use.edu
`10.111 44}.1524-4733.2009.00663.x
`
`© 2009,International Society for Pharmacoeconomics and Outcomes Research (ISPOR)
`
`1098-3015/10/3
`
`3-7
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`DEPOSITION
`EXHIBIT
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`Biogen Exhibit 2206
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`IPR 2018-01403
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`Hay etal.
`
`companies would quickly discontinue pharmaceutical R&D. Bur
`patent protection creates clear political, economic and social
`tensions, because certain drugs could be provided to some
`patients and/or payers at a price that would cover the marginal
`costs of production, but are not high enoughto generate optimal
`profits to the innovative manufacrurer. As has been the case of
`AIDS drugs in Africa, patients get sick and die without access to
`existing medications partly to protect
`the patent monopoly
`reward system to ensure pharmaceutical innovation for future
`generations.
`It is often in the interest of both the pharmaceutical manu-
`facturer andits consumers to allow price discrimination among
`different market segments. That is, the pharmaceutical manufac-
`turer, particularly when holding patents on brand name drugs,
`can often make more profits and also make their products more
`accessible to more market segments by charging different prices
`to different consumers, based on the consumers’ different
`demand elasticities (willingness-to-pay). This strategy is most
`effective when such price discrimination is confidential or parallel
`imports are restricted, because this minimizes the potential for
`supply leakage berween market segments,
`Drug price discrimination is most cbvious in comparing
`prices for the same brand name pharmaceuticals in different
`countries (e.g,, the price of a hypertension drug in Canada, the
`United States, Mexico, and China}. Although many health-care
`providers can price discriminate across market segments,
`this
`strategy is often challenged politically, because consurners in the
`richer (higher priced) market segments usually resent having to
`pay more for the same pills as consumers in the poorer (lower
`priced} market segments. Unlike hospira! or physician services,
`pharmaceuticals are generally available as tangible and tradable
`products, and when drug price discrepancies become too large
`between different market segments (or countries) there will be
`substantial arbitrage through legal,
`illegal, or grey market
`re-importation activities,
`Measurement of drug costs depends firstly on the perspective
`of the analyst. Depending on the country or region, the drug cost
`burden is ultimately shared in varying degrees between govern-
`ment or other third party payers and patients. There are drug
`supply chain intermediaries (e.g., wholesalers, retailers, etc.) who
`receive payments for maintaining inventories, productdistribu-
`tion, and dispensing. There can also be demand-side intermedi-
`aries {e.p., pharmaceutical benefits managers, group purchasing
`organizations, etc.) who receive payments for negotiating price
`discounts or rebates and managing drug product lists and for-
`mularies. At cach step of these demand and supply chains, drug
`acquisition costs may vary in complex and nontransparent ways.
`Given this background, drug valuation (costing) for economic
`evaluation is complicated. The complexity is compounded when
`one considers thar each economic evaluation is carried out from
`a specific perspective (e.g., hospital, government payer[in a large
`or small country], managed care organization, patient, societal,
`ete.) and the various perspectives reflect tangibly different objec-
`tives, impacts, allocation priorities, market power, and demand
`elasticities. At the societal perspective level, particularlyin coun-
`tries with large domestic innovative pharmaceutical
`industry,
`there is a clear tension between encouraging pharmaceutical
`innovation with brand name drug prices thar are substantially
`higher than marginal drug production costs and encouraging
`less-expensive medications to reduce health-care costs.
`For managed care organizations, or for smaller countries
`without domestic innovative pharmaceutical industries, there is
`little direct incentive to encourage pharmaceutical innovation,
`because such innovation disproportionately benefits other con-
`sumers, payers, or countries. In these organizations,it is prefer-
`
`4 d
`
`eveloping drug costs for use in CEA models and publications, but
`is not intended as a comprehensive review of the literature.
`The Task Force held its first meeting at
`the ISPOR 10rh
`Annuai International Meeting in Washington DC in 2005 and
`held open forums and/or group leader breakfast meetings at the
`ISPOR 8th Annual European Congress in Florence in 2005, at
`the ISPOR 11th Annual International Meeting in Philadelphia in
`2006, and at the 14th Annual International Meeting in Orlando
`in 2009, The Task Force reviewed other ISPOR guidance docu-
`ments that were developed co inform good scientific conduct
`[1-3]. The Task Force subgroups held teleconferences and used
`electronic mail to exchange outlines and ideas during the subse-
`quent months. The ISPOR Task Force on Good Research
`Practices~-Use of Drug Costs for Cost Effectiveness Analysis
`{DCTF} subgroups mer to develop core assumptions and an
`outline before preparing draft subgroup reports. Several telecon-
`ferences af the Task Force subgroup leaders were held to discuss
`the draft reports, incorporate feedback, and makerevisions. Each
`part of the Task Force Report was prepared by Task Force
`subgroup cochairs and members and circulated to 174 Task
`Force primary reviewers (who were self-identified from a broad
`range of perspectives). After this review, new drafts was prepared
`by the Task Force subgroups and made accessible for broader
`review by all ISPOR members. Comments for these reports by
`Task Force primary reviewers and ISPOR membership are pub-
`lished at the ISPOR website. All opinions reflect those of the
`authors and not necessarily their affiliations.
`
`Introduction
`
`The primary purpose of economic evaluation (specifically, CEA
`as recommended in numerous international payer guidelines [4])
`in health care is to provide valid and reliable information to
`health-care policymakers and decision-makers regardingthe rela-
`tive value of alternative health-care interventions. The key ratio-
`nale supporting these economic evaluationsis that the market for
`health-care interventions is so severely distorted by insurance
`coverage, third-party payments, information failure, taxes, sub-
`sidies, and numerous competition barriers that prices do not
`serve the normal economic function of guiding efficient resource
`allocation. Unlike a competitive market, in health care, Adam
`Smith’s “invisible hand” of price signals is so severely withered
`and atrophied that it must be replaced by the virtual reality glove
`of the economic analyst to ensure that scare resources are allo-
`cated appropriately [5].
`Although there are many areasof health care where prices are
`distorted, perhaps no area is subject to more complexity, confu-
`sion, imprecision, misunderseanding, or conflicting methods than
`that of what price measurements to use for the cost of pharma-
`ceuticals in economic evaluations [6]. The fundamental reason
`for this is that pharmaceuticals are launched into the market only
`after lengthy governmental review of safety and efficacy(e.g., the
`US Food and Drug Administration or the European Medicines
`Agency}. Prescription drugs are only sold by licensed medical
`professionals under strict regulations regarding allowable usage
`indications, patient populations, and appropriate marketing.
`Pharmaceutical research, development, and innovation are
`rewarded and encouraged primarily through patents,giving the
`innovative manufacturer {the patent holder)
`a
`time-limited
`monopoly over drug pricing for the patented drug. Because
`parencs
`reward
`innovation
`by
`transferring brand-specific
`monopoly profits (the excess of drug price over drug marginal
`cost} from consumers to innovator pharmaceutical producers,
`they distort competitive drug prices with the specific intenc of
`encouraging future drug R&cD. Withour patent protection, drug
`
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`ISPOR Drug Cost Task Force Report Overview
`
`5
`
`able to take maximum advantage of one’s local monopsony
`market power to drive drug prices as low as possible for both
`payment and evaluation purposes. Because such organizations or
`countries cannot impact R&D innovation substantially, it is in
`their interest to “free-ride” on larger payers and countries whose
`drug payments do have a significant impact on drug manufac-
`turer profits and R&D incentives.
`Frank Ramsey showed in 1927 thar a monopolist facing
`segmented markets (e.g., consumers with high income/high insur-
`ance coverage vs.
`low income/low insurance coverage) would
`achieve both higher profits and higher social welfare by setting
`prices in each market segment
`inversely proportional
`to the
`market segiment elasticity of demand [7,8]. It is beneficial to both
`pharmaceutical producers and many consumers to engage in
`market segmentation; but becauseit is difficult to prevent leakage
`from lower-priced markets to higher-priced markets, the phar-
`maceutical
`industry engages in extraordinarily complex and
`often secretive negotiations with different customers with the
`explicit purpose of preventing richer market segments from
`knowing the actual transaction prices in the more demand-elastic
`market segments.
`For example, in the United States, the Medicaid programis
`required by law to receive the lowest manufacturer price avail-
`able to private and certain public purchasers for single source
`drugs. Nevertheless,
`this transaction price is fully disguised
`through secret volume rebates paid from the pharmaceutical
`manufacturers to the state Medicaid programs. Thus, even
`though they are all directly involved in the purchase and sales of
`Medicaid drugs, Medicaid patients,
`retail pharmacists, drug
`wholesalers, and other intermediaries have no idea what the real
`transaction prices are for the Medicaid drug purchases.
`Similar secretive price discounting mechanisms, often trig-
`gered by volume targets, formulary placement and multidrug
`purchasing from the same manufacturers, as well as rebares for
`formulary placement, make it extremely difficult to know what
`any given government or third-party payer actually pays for
`specific pharmaceutical products, Moreover, there is no require-
`ment
`to make such information publicly known. Generally
`speaking, those organizations with the greatest marker power
`(e.g,, single-payer government health-care systems) and those
`with the highest demand elasticity will capture greater discounts
`from publicly quoted or published prices, while those with the
`least market power and lowest demand elasticity will achieve
`smaller discounts and pay close to fall price.
`It should be kept in mind that the traditional method for
`rewarding pharmaceutical R&D through patent protection and
`monopoly prices for new drugs is the result of historical prece-
`dent and instirutional
`inertia. It
`is an imperfect system for
`rewarding biomedical
`innovation;
`often
`allocating scarce
`resources towards “me-too” patentable new molecules rather
`than towards genuine innovations, although leaving critically
`important innovations {e.g., low-dose aspirin for heart disease or
`generic antibiotics for ulcers) to languish for years without being
`widely researched or adopted due to inability to obtain patent
`protection and to profit from valuable innovations [9].
`Moreover, it is vitally important to provide adequate incen-
`tives for biomedical
`research in general and pharmaceutical
`R&Din particular. There is consensus among health economists
`that the societal returns to biomedical R&D are on the order of
`10-100 to 7 [fO,22]. Cutler er al. have recently estimated that
`within the US population, averagelife year gains from 1987 to
`2000 were approximately 1 to 2 years and the average quality-
`adjusted life year (QALY) gains were 3 to 4 years [12]. Valuing
`these QALY gains az a societal willingness to pay of $150,000,
`and assuming that 2 In 3 of these gains are due to medical care
`
`innovations [13],
`improvements, mostly due to biomedical
`implies that medical care gains added $90 trillion, or approxi-
`mately $2.7 erillion annually to the societal wealth of the US
`population during this time period. The global value of biomedi-
`cal innovation would be several times larger than these estimates.
`Several alternatives to the patent system have been proposed
`to reward biomedical R&cD [6-8,14]. These include userlicenses,
`government patent buyouts, rewards or tax-funded pharmaceu-
`tical R&c¢D. Whether such alternative mechanisms can be imple-
`mented to incentivize pharmaceutical R&D without requiring a
`monopoly pricing structure for brand name pharmaceuticals,it
`would be feasible to use marginal cost (or generic) drug prices in
`economic evaluations of pharmaceutical interventions, particu-
`larly when done from a societal perspective. In fact, given that
`the monopoly profits awarded to drug manufacturer patent-
`holders is not a true cost, but rather a transfer payment from one
`member ofsociety to another [15], there is a strong argumentto
`exclude these profits from drug costs when conducting economic
`evaluations from a societal perspective.
`In fact, one can demonstrate that government buy-outs of
`drug patents with all drugs being sold at generic pricing levels
`could achieve a much better outcome for government programs,
`private consumers, and third party payers without damaging the
`incentives for pharmaceutical R&D, Currently, the brand name
`pharmaceutical spending on R&D is about $60billion [16]. US
`federal drug spending is $81 billion 417]. Each year, the US
`federal government could buy out all drug patents (by fully
`subsidizing the private costs of pharmaceutical R&D) and still
`save money because it would be able to purchase all drugs at
`generic prices. US consumers would additionally benefit by more
`than $100 billion per year if all drugs were generic.
`Beyond these theoretical concerns,
`there are institutional
`complexities and opaque payment structures in every country
`and health-care financing system that make drug cost measure-
`ment difficulr even when the analytic perspective is straight
`forward and clear. For example,
`in the US managed care
`environment, a particular medication could experience a dozen
`or more different transaction prices depending on whereit is in
`the supply chain from manufacturer, to wholesaler, to retailer, to
`patient, and where it
`is in the payment/reimbursement chain
`from manufacturer to managed care organization, to pharma-
`ceutical benefits manager, to patient, to rebate coupon. Although
`this report is not an exhaustive compilation ofall of the com-
`plexities and variations in drug transaction costs, it docs give
`examples from many of the typical scenarios that CEA analysts
`will encounter around the globe. More importantly, it provides
`guidance and recommendations based on the authors’ and
`reviewers’ experience and understanding of what works best,
`
`Purposes of the Report
`
`The purposes of this Task Force Report are: 1} to develop a
`coherent set of guidelines for those developing or reviewing drug
`cost measurements in CEAs; and 2) to develop a formatfor good
`research practices in drug cost measurement that is useful for
`decision-makers from various perspectives. The intended audi-
`ence is research analysts who perform CEA analyses for healeh-
`care decision-makers as well as health-care decision-makers who
`are responsible for local or national formularies, Others who
`may find this document useful
`include members of the press,
`patient advocacy groups, health-care professionals, drug and
`other technology manufacturers, and those developing guidelines
`for their settings. The panel
`recognizes thar the methods for
`measuring and reporting drug costs continue to develop. This
`
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`Hay et al,
`
`6.
`
`prices in either the base case or sensitivity analyses of phar-
`macoeconomic models. It is also appropriate to include
`longer-term trends in applicable drug prices {net of general
`inflation) for chronic disease medications.
`ISPOR should publish a website where current DCTF rec-
`ommendations for drug costing are updated as important
`new information becomes available.
`7. Population-based estimates of drug costs should incorpo-
`rate predicted adherence and persistence with drug therapy.
`§. When done from a patient/consumerperspective, the total
`net out-of-pocket payments for medications should be used
`as the drug cost measurement.
`Implications of extreme
`changes in marginal or average drug costs on patient drug
`utilization (e.g., completion of deductible expense limits,
`reaching maximumcoverage benefits, Medicare-type cover-
`age “doughnut holes,” etc.) should be fully evaluated and
`explained.
`9. For international comparisons, drug units should be stan-
`dardized in terms of volume/veight of active ingredient,
`regardless of package and dosing frequency or strength
`variations across countries.
`10. Drug costs should be measured in local currency per unit of
`active ingredient and should be converted to other curren-
`cies using Purchasing Power Parity indexes or a currency
`exchange rate relevant to the decision-maker.
`11, When using drug prices fromdifferent years, the consumer
`price index (preferably the medical care componentprice
`index or the pharmaceutical componentprice index) for the
`local currency should be applied before the currency
`conversion.
`
`Acknowledgments
`We acknowledge the valuable assistance of Daniel Kim, Dorothy
`Novilus, and the ISPOR staff.
`
`Sourceof financial support: None.
`
`References
`
`tw
`
`wr
`
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`Weinstein MC, O’Brien B, HornbergerJ, et al. Principles of good
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`HayJ. Application of cost effectiveness and cost benefit analysis
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`7 Ramsey FP. A contribution to the theory of taxation. Econ }
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`§ Danzon
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`9 Hay J, Yu W. Brug patents and prices, can we achieve better
`outcomes? In: Triplett J, ed. Measuring the Prices of Medical
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`diseases:
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`at what
`
`price? Nature
`
`6 r
`
`eport highlights areas of consensus as well as areas where con-
`tinued methodological developmentis needed.
`The Good Research Practices for Measuring Drug Costs in
`Cost Effectiveness Analyses Report is published in six parts based
`on analytic perspective. The next five articles in this issue of
`Valve int Health report the issues and recommendations for phar-
`maceutical pricing from the different perspectives, including: 1)
`Societal [18]; 2) Managed care [19]; 3) Medicare, Medicaid, and
`other US Government Payers [20]; 4) Industry [21]; 5) European
`countries and other international country perspectives [22],
`These perspective-specific analyses are presented to provide guid-
`ance and recommendations on how to obtain and use appro-
`“priate drug cost measurements when conducting economic
`evaluations of health-care interventions for different health-care
`decision-maker audiences.
`is over-
`task force report
`We recognize that
`this initial
`represented by topics relating to US payment and reimbursement
`issues, This happened despite strong efforts by the task force to
`recruit ISPOR members from all countries and regions andis not
`meantto give offense to anyone. The task force membersserve as
`volunteers, and because of a large number of drug payment
`policy issues coming forward in the US context recently, there
`were more people motivated to address these topics. We certainly
`hope and expect that this is just the first chapter of an ongoing
`effort to assess drug cost evaluation issues globally and thar
`future reports of the DCTF will be comprehensively representa-
`tive of global drug evaluation concerns, whether they be different
`countries,
`regions, stakeholder perspectives, methodological
`approaches, or other issues. We certainly encourage any reader
`who sees gaps that need to be addressed to join the DCTF and
`add their perspective in future reports.
`
`General Recommendations
`
`Abthough mostof the Task Force’s recommendations are specific
`to each of the analytic perspectives thar we focused on, there are
`some general recommendations that we believe apply to drug
`cost measurement in any cost effectiveness analysis setting or
`application.
`
`1. More clarification of the “societal perspective” is needed.
`‘For CEAs of brand name drugs performed from a societal
`perspective, either CEA analysts:
`i} use a cost that more
`accurately reflects true societal drug costs (e.g., 20-60% of
`average sales price), or whether that is unrealistic and nor
`meaningful for decision-makers; orii} refer to their analyses
`as conducted from a “limited societal perspective.”
`2. Drug cost values and measurements should be transparent
`and made available to any reader or user of a CEA, with the
`data sources and rationale fully documented.
`3. One-way and/or threshold CEA sensitivity analyses should
`demonstrate how muchhigher/lower drug costs would have
`to be to alter pharmacoeconomic model conclusions.
`4, CEAs performed from a payer perspective should use drug
`prices actually paid by the relevant payer net of all rebates,
`copays, or other adjustments. When such price adjustments
`are confidential, the analyst should apply a generic average
`discount that preserves this confidentialicy. As a corollary of
`this, when done from a government perspective, drug costs
`should be net of any sales tax, value-added tax, or other
`taxes that are direct revenue offsets to the payer. Program
`eligibility and coverage issues should be clearly stated or
`referenced.
`5. For drugs that are off-patentorlikely to be off-patent in the
`near future, it is appropriate to consider multisource drug
`
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`ISPOR Drug Cost Task Force Report Overview
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