TIME Cancer

Hospitals Furious at Cancer-Drug Price Hikes

Some of the nation’s hospitals are seriously ticked off at Genentech, the San Francisco biotech firm, for implementing a stealth price hike for three critical cancer drugs. On September 16, Genentech told hospitals and oncology clinics that as of October 1, they can only buy Avastin, Herceptin and Rituxan—three of the biggest weapons in the cancer arsenal—through specialty distributors instead of general line wholesalers they’ve been using for years.

The shift means hospitals will lose out on standard industry discounts—which Genentech and its distributors will then pocket. “Our blunt estimate: It will cost $300 million more in the U.S. overnight in what folks are paying for these lifesaving drugs,” says Pete Allen, group senior vice president, sourcing operations, for Novation, a health care services company that negotiates drug contracts. Novation estimates the hospitals it represents will take a $50 million hit—and that’s before the costs of additional inventory, handling and paperwork the hospitals might also incur.

Sales of Avastin, used to treat colorectal, ovarian and other cancers, hit $6.6 billion last year. Sales in what the company calls its HER2 breast cancer franchise—Herceptin, Perjeta and Kadcyla— rose 14% to nearly $7 billion.

“As a result of the decision to change its distribution system, Genentech’s use of specialty distributors is resulting in unprecedented price hikes, the results of which will harm the patients we serve,” said Dr. Roy Guharoy, chief pharmacy officer at Ascension Healthcare, a Catholic, nonprofit health system with some 1,500 locations, in a statement.

Genentech—owned by Roche, which had $50 billion in sales last year—says the switch to specialty wholesalers will improve the efficiency and security of the supply chain. The company says its newer cancer drugs, such as Perjeta, Kadcyla and Gazyva, are already supplied this way, which allowed it to reduce the number of distribution centers from 80 to five. “We do believe this is the best distribution model for these medicines,” said Charlotte Arnold, the company’s associate director of corporate relations. “We understand that there maybe a business impact on hospitals.” The company wouldn’t explain the specifics of why the specialty model is better.

Hospitals aren’t buying the company’s rationale. “I haven’t talked to anyone who thought this was a safer way to distribute these drugs,” says Bill Woodward, senior director of contracting at Novation. “There is nothing about these drugs that would make them safer to be in the specialty channel.” Most of the major wholesalers, in fact, already have specialty distribution arms although one general firm, Morris & Dickson, had to create a specialty arm to remain a Genentech distributor. It’s a difference without a distinction, say the hospitals, except that Genentech earns more money.

The financial cost to the hospitals comes first through the loss of rebates from the big wholesalers. But more importantly, hospitals also lose to ability to negotiate what are called cost-minus discounts with their wholesalers that, depending on the cost of a drug, amounts to a 2%-to–5% price reduction. The cost of this “back-end” funding had been borne by Genentech; now the hospitals will have eat it.

Ascension says it is already seeing significant net price hikes. A 400 mg dose of Avastin jumped from $2,382.28 on October 12 to $2,511.36 on October 14, a nearly 8% increase. Similarly, a 500mg dose of Herceptin rose to $3,878.89 from $3,586.52. Even worse for the hospitals, they can’t pass this increase on to insurance companies—since the list price remained the same, as far as insurers are concerned there’s been no increase.

Ascension has flatly alleged that Genentech is reclassifying Avastin, Herceptin and Rituxan as “specialty” drugs to enhance profits moreso than improve the supply chain. Specialty drugs usually fall under the FDA’s Risk Evaluation and Mitigation Strategy (REMS) program, established for compounds like the testosterone drug AndroGel that may have unusual side effects; or for drugs that are unusually expensive. According to Ascension, in 1990 only 10 specialty drugs existed. By 2012 that number jumped to nearly 300 compounds. “The end result is large price hikes unaccounted for in our 2015 budgets, and it will mean that already scarce resources will need to be stretched,” says Guharoy.

The hospitals are already being forced to deal with rising prices for all kinds of drugs. According to Ascension, its drug costs have risen $36 million in the past year. With 2015 pharmacy budgets already set, Genentech’s new distribution model threatens to bust hospital budgets before the year has even started.

Genentech tried a similar switch in 2006, but outraged customers forced the company to rescind the program. This time Genentech seems like it’s digging in. “We understand there may be some adjustments,” said Arnold of Genentech’s testy customers, noting that the company was “working to educate them” about the benefits of the new system.

Judging from the bile level, that could take awhile.

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