Coming to grips with $300,000 drugs


In our previous story on this topic, we reviewed some of the basics about orphan drugs. In brief, orphan drugs are aimed at extremely rare diseases; defined as afflicting fewer than 200,000 patients in the U.S.1 Out of approximately 7,000 known rare diseases, 95% still have no approved therapies.2

The prices charged for many orphan drugs are extremely high – up to $500,000 per-year per-patient, with over $100,000 per year average costs.3 Collectively, about 30 million Americans are impacted by a rare disease.2


Next, we will look at what this means to the organizations that are primarily responsible for paying for these crucial, but very expensive drugs: insurance companies and self-insured employer groups (often assisted by PBMs). What can they look forward to? What tools and strategies are available to ensure that these medications are properly used? Are there limits to how much they should pay?

Expect continued expansion

We should expect to see continued rapid expansion in the numbers and cost of orphan drugs. There are several reasons why.

First, at the broadest level, they represent a larger turn by the pharmaceutical industry toward biologic drugs. This is an historic shift driven partly by advances in science, to be sure, but also by strategic considerations around how to maximize profits and protect market exclusivity.1 See our extended discussion on this here.

Second, speaking specifically to orphan drugs, recall that the Orphan Drug Act offers drug makers several incentives to encourage their participation in this market. These include longer market exclusivity, a faster and cheaper approval process, plus significant tax breaks.3

These advantages mean that orphan drugs are cheaper to bring to market than regular drugs. One study found that development costs for orphan drugs in Phase 3 (the final phase before FDA approval) were only half that for non-orphan drugs.4

But perhaps even more important – and profitable for drug makers – the act allows drug makers to deduct up to half of their research and development costs. Once these tax breaks are factored in, costs for Phase 3 orphan drugs are less than one-quarter for non-orphan drugs.4

Let’s think about that: some of the most expensive drugs in the world have the lowest development costs. This brings a moment of great clarity: The question isn’t so much why drug makers are increasingly turning to orphan drugs. It’s why on earth would they make anything else?

This graph illustrates the fast growth and continued upward trajectory expected for orphan drug sales:


While the logic around how low development costs drive production seems obvious enough, there does not appear to be a causal link between the cost of development and the prices for orphan drugs. Experts at the Tufts Center for the Study of Drug Development say that rare-disease drug prices simply reflect supply and demand. When treatment alternatives are few, or nonexistent, companies can charge whatever the market will bear. And so they do.5

From development to covered benefit

Once a new orphan drug is developed, it must be approved by the FDA. After this happens, there is an essential intermediate step before it actually becomes eligible for reimbursement under the terms of a benefit plan. This is the process where pharmacy benefit managers and other payers have their Pharmacy and Therapeutics (P&T) committees review the new drugs.

Studies show that while orphan drugs go through the same review process as any drug, they do tend to go through the process a bit faster. This is because usually there are no competing therapies in the class, or perhaps there are only older, less effective therapies.6

The next step after P&T committee approval is to situate the drug within the plan design structure for each group. This is when decisions are made that determine how to treat each drug as a covered benefit for things like cost and patient liability.6

Generally speaking, we find that it is highly unlikely that a plan would exclude an FDA-approved orphan drug from its formulary, for the simple reason that there are no alternatives. One observer goes so far to say that he “…is not aware of a case” where a plan did not cover an FDA-approved orphan therapy.6

Of course, there is not always universal agreement on the cost-effectiveness of every new drug.

For example, Xalkori® (crizotinib) is an anti-cancer drug that originally received orphan status from the FDA for the treatment of a rare type of advanced (metastatic) non-small cell lung cancer, and has just this year also received breakthrough status and an additional indication for another rare type of advanced lung cancer.7 Orphan and breakthrough status are usually indicators pointing to an innovative, effective new drug.

But the United Kingdom’s National Health Service doesn’t cover Xalkori. In one study, on average, patients taking Xalkori enjoyed just 4.5 months additional “quality-adjusted life-years” – at an added cost of $87,000 compared with standard care. For the British, at least, this was judged to be insufficient grounds for inclusion in their national health service formulary.3

In the U.S. we lack a national-level authority that makes these kinds of cost/benefit decisions. However, just because a drug is covered does not mean that payers cannot reserve the right to apply stricter utilizations controls for specific drugs.8 We’ll talk more about that in the section called “What can be done.”

Economics of coverage

Humanitarian considerations aside, there are at least two sound economic reasons why most plans accept most orphan drugs for reimbursement.

The first reason is that members with rare diseases tend already to have high claims costs.6 These can include frequent episodes of acute care — office visits, ER, hospital admissions, home care, etc. This means that even a very costly new therapy could be a ‘net lower cost’ alternative, especially if the therapy helps to reduce acute care costs. Depending on the situation, the plan may even find it worthwhile to be very proactive in persuading network physicians to prescribe the new medication.6

Gattex® (teduglutide) is an injectable drug used to treat adults with short bowel syndrome (SBS). Gattex is extremely expensive, with treatments costing more than $295,000 a year.3

There are about 15,000 SBS patients in the U.S. Of these, between 3,000 and 5,000 SBS patients will benefit from Gattex.3 If most of these people received treatment, the aggregate annual cost would be around one billion dollars.

On the plus side, Gattex helps SBS patients absorb nutrition naturally, through food, instead of having to receive it parenterally (i.e., through a vein). Parenteral nutrition costs more than $100,000 a year. In this way Gattex may help save overall health care expenses.3

While $1 billion is certainly a lot of money, those patients are spread across hundreds of insurance companies, Medicare, and other payers. The odds are that most plans will have only a few, or even no cases. So the total cost, both in aggregate and for any one payer, is actually fairly manageable, especially if Gattex does save money in other ways.3

Rising indications

One trend we noted in the previous article is for the number of indications for each drug to expand. This is when a drug is initially approved for an orphan condition, one with perhaps a few thousand patients. But then, they go on to receive FDA approval for additional indications, some orphan, some not, sometimes including much more common conditions. But they can still claim the exclusivity and tax advantages of an orphan – not to mention their high prices.1

This is part of a conscious strategy by the manufacturers to manage the product life-cycle of these drugs. As such, there are many examples of “orphan” drugs whose sales come primarily from treating more common conditions:1


Under these conditions the costs are going to mount. The question now turns to potential management strategies.

What is the impact?

Because the number of patients using orphan drugs is so small, the impact on the bottom line has historically not been significant in overall terms. Up until the very recent past, orphan drugs represented only a small fraction of overall drug spending for payers like PBMs –perhaps less than one-half of 1%.3

But this number is changing fast.

Recall that in our previous article on this topic, we discussed how there is a sharp breakpoint for orphan drug prices once the number of patients drops below 10,000. This graph shows the dramatic increase in prices for drugs in this category (green dots are diseases with 10,000 or fewer patients):



The industry term for these kinds of drugs is “ultra-orphans.” While there is not an official threshold for where these begin, most sources put it around 10,000 or 20,000 people. (Compare to regular orphans, designated by law in the U.S. at populations of 200,000 or fewer.)

Here is the critical point: when OptumRx looked at its own claims data for ultra-orphans (defined as ≤ 10,000 patients in the U.S.), they found that these drugs represented 2% of total claims costs – that’s much higher than the total for all orphan spending given above (.5%).8

Looking further ahead, an international consultancy predicts that worldwide sales of orphan drugs will grow to over 20% of total sales in just the next 5 years.4

These kinds of prices and spending totals are sure to force payers to focus their attention on controlling orphan drug costs. The question is, how?

What can be done

Employers and PBMs tend not to use management approaches specifically designed for managing orphan drugs. Rather, orphan drugs are most likely to be subject to the same cluster of economic forces, management tactics and benefit designs used to control the costs of biologics, injectibles, or other expensive specialty products.9

We’ll look at a few of these here.


Competition does present some mitigating effect on costs in the rare disease market. Already today, there are a few conditions such as Gaucher’s disease, where a number of alternative treatments are available. In the presence of highly competitive markets, drug makers are forced to offer rebates up to 50%.2 Looking further ahead, there are indications that competition will continue to grow as more drug makers seek to enter the market.

Where competition does exist, a plan may choose a preferred therapy, possibly based on manufacturer rebates. The plan could then use benefit design features such as reduced prior-authorization requirements or lower patient out-of-pocket charges drive utilization to the preferred product.6

Prior authorization

Prior authorization is one of the most important tools in the orphan drug management toolkit. Most health plans and PBMs require prior authorization before authorizing coverage of an orphan drug.9

Prior authorization is mainly used to determine that the proposed use of a drug matches its FDA-approved indication. Plans will look at the clinical data that accompanies each FDA approval, including trial design and results, formulation, and requirements for administration. These criteria provide the basis for prior authorization and continued use.9

It is interesting to note that payers can vary significantly in how they apply this clinical information and FDA labeling to restrict access to orphan products. For example, take two health plans: Plan A and Plan B. Both require prior authorization to obtain coverage for a specific orphan drug.9

  • For Plan A, prior authorization means getting a confirming diagnosis by a specialist. This leads to the approval to use the product.
  • Plan B’s also requires prior authorization in the form of a confirming diagnosis by a specialist. But Plan B’s approval criteria go on to account for FDA-approved labeling and patient selection criteria and end points as used in the clinical trials.

This graphic illustrates the differences in the two types of prior authorization:


Let’s say Plan B determined that the drug in questions was intended for a patient who did not match the patient selection criteria from the clinical trials. They would deny coverage – even with a prescribing specialist's recommendation.

Payers such as self-funded employer groups can make their own decisions about how restrictive they want to be from a management standpoint, for example, by applying stricter policies for specific drugs.8 However, most employers and payers recently surveyed report using the less restrictive prior authorization policies similar to Plan A.9

In plans with formal medical policies as described for Plan B above, it is common to incorporate periodic reevaluation of patient status against measures based on clinical trial results to determine if a treatment remains effective.9



As costs continue to soar – not only for orphan drugs, but also for many specialty drugs, payers are increasingly making plan design changes that include higher out-of-pocket costs for patients.

In recent years, payers have shifted from fixed copayments (per prescription) to co-insurance (a percentage of the drug’s cost) to calculate member out-of-pocket expenses.6 Whether the technique involves a co-pay or co-insurance, many patients face out-of-pocket costs of 15% — 20% of a drug’s price.3

The mirror image of this effect is shown in payer costs. Industry experts say that, typically, commercial insurers who agree to cover an orphan drug will pay about 70%-80% of the total costs. Patients are required to pay the remainder.3


Inevitably, questions arise regarding how ordinary families can afford to cost share such expensive drugs. At 20% coinsurance, a drug that costs $200,000 per year would cost $40,000.

The first consideration will be the specific plan design in question. Depending on the plan details, individual costs could vary widely. How much or how little remains the responsibility of the member will depend on details, such as whether there is an out-of-pocket maximum, how much that is, and whether prescription drugs are included under the maximum.

Another consideration is exactly how a given drug is administered. When patients self-administer specialty drugs, or take them orally, the pharmacy benefit usually provides coverage. In contrast, when a health care provider administers specialty drug therapies, plans tend to cover the drugs as part of the medical benefit, which has a different approach to payment.

Addressing the amounts that are still the member’s responsibility might require the use of various other programs. For instance, many drug manufacturers offer assistance programs to help offset the cost of these drugs. Those programs may refer patients to secondary insurance plans or may connect them with nonprofit, rare-disease foundations that have funds to help patients cover the costs of treatments.3

For just one example of such an organization we can look at the National Organization for Rare Disorders (NORD). They provide assistance programs to help patients obtain life-saving or life-sustaining medication they could not otherwise afford. These programs provide medication, financial assistance with insurance premiums and co-pays, diagnostic testing assistance, and travel assistance for clinical trials or consultation with disease specialists.10

Genetic testing

One topic that routinely comes up when the conversation turns to orphan drugs is genetic testing. Genetic tests look for variations in a person's genes. Most agree that genetic testing holds immense promise for diagnosis and treatment. Ideally, accurate test results could confirm an inherited disorder, warn about an increased risk for a disease, and determine whether a specific drug is suited for use in a specific patient.11

Yet not everyone is convinced of the validity and usefulness of many of the newer tests that exist today. According to the American College of Preventive Medicine, some medical professionals feel that many of the genetic tests offered today come with little or no evidence of clinically proven value.11

Nevertheless, genetic testing with over 1,500 test available, is already big business, worth over $5 billion per year in 2010.10 One recent study found that the number of genetic tests performed were increasing by 14% per year, while the number of new tests is increasing by 25% each year.11, 12

Genetic testing is projected to cost between $15 billion and $25 billion by 2021 as genetic tests become more effective and more common.12

Types of tests

There are actually many different kinds of genetic testing. Some tests, for example, the routine screenings for newborns that check for the presence of certain inherited disorders, are considered so valuable they are legally mandated in many states.11

Diagnostic testing is also very valuable. These help to confirm or rule out a known or suspected genetic disorder in a symptomatic individual.11

But predictive testing is an example of a type of test that presents a serious problem in genetic testing, the "worried well." For most diseases, we’re still not exactly sure how genetic factors interact with lifestyle and environmental factors. So a predictive test might falsely reassure someone with an undiscovered risk factor or needlessly alarm someone with undiscovered protective factors.11

For example, people with a gene factor called ApoE4 have an increased risk of developing Alzheimer's disease. However, up to 75% of people who carry it never get Alzheimer's. In addition, there is no current treatment that can slow the disease. But many people have been tested and worry needlessly about developing the disease.11

Another form of gene testing is called pharmacogenomics. This combines the words pharmacology (the study of the uses and effects of medications) and genomics (the study of genes and their functions).13


Coverage for tests?

Insurers are increasingly being asked to cover the costs of genetic tests. In many cases, health insurance plans will cover test costs when they are recommended by a person's doctor.3

However, the main thing insurers are looking for when it comes to deciding whether to pay for genetic testing is clinical utility. In other words, can we make decisions and take action based on the test results?3

In the case of the ApoE4 test for increased risk of Alzheimer's mentioned above, the answer is probably “no.” Most people with the gene don’t get Alzheimer’s, and there’s no treatment if they do.

The opposite is true for women who have BRCA1 and BRCA2 mutations. These have been linked to a higher risk of breast and ovarian cancer, which definitely can be treated.3 In fact, for a specific type of breast cancer (HER2-positive), additional genetic tests can determine whether to use a highly targeted drug called Herceptin® (trastuzumab). In effect, only those with the right genetic profile can benefit from Herceptin, which is important to know because it is very expensive.

[Note: BRCA tests are now required to be covered under the federal Affordable Care Act if recommended by a healthcare provider.3]

Insurers are therefore motivated to cover some kinds of genetic tests, since they can directly impact the treatment being delivered to the member. And while it is true that many doctors remain skeptical of some tests, it seems likely that tests will continue – and continue to improve – as our understanding grows.

We can foresee a time – perhaps not so far away – when test results will routinely uncover mutations that can be treated, possibly with expensive orphan drugs. At that point, genetic testing will play an increasing role driving higher utilization and much higher costs.3


We can imagine at least two very different futures regarding orphan drugs. One path would see us following more or less along the same trajectory we are on now: more orphan drugs, higher prices, more indications, more spending, further cost sharing and other benefit restrictions. This hardly seems ideal.

Another path might see us, in effect, hit the reboot button. The purpose would be to allow us, as a society, to ask some basic questions about how the orphan drug market has evolved, and how it might be made better. This is the path advocated by a team at Johns Hopkins Medicine, in a commentary published in the November 2015 issue of the American Journal of Clinical Oncology.14

The authors believe that the cause of at least one problem with orphan drug costs lies with the loopholes inherent in the original Orphan Drug Act. They claim that drug companies are using these loopholes to reap millions of dollars in unintended and misplaced subsidies and tax breaks, all while fuelling skyrocketing medication costs.14

The team offers a series of specific recommendations aimed at restoring the original intention of the Act. In short, once a drug begins being used to treat more than 200,000 people, it should no longer receive government support or marketing exclusivity. Some other proposed solutions include pricing negotiations, clauses that automatically reduce market exclusivity periods once a medication achieves high sales, and even repayment of government incentives for sales for conditions not listed in the original FDA orphan approval.14

Most people would probably agree that whatever measures are eventually adopted, we need to strike a careful balance. We should first want to ensure that the spirit of the original act is upheld, by continuing to provide critical economic incentives for truly rare diseases.

At the same time, everyone has a vested interest in an orphan drug regime that is sustainable over the long term. This is the only way to ensure access and affordability for patients and payers.




  1. Modern Healthcare. Orphan drugs paying off for firms, despite pushback. May 31, 2014. Accessed at: http://www.modernhealthcare.com/article/20140531/MAGAZINE/305319960 on 06.17.2016.
  2. Pharmaceutical Commerce. The business of orphan drugs is booming. Aug 26, 2015. Accessed at: http://pharmaceuticalcommerce.com/brand-marketing-communications/the-business-of-orphan-drugs-is-booming/ on 06.17.2016.
  3. Genome. The High Price of Precision Healthcare. Jan. 8, 2015. Accessed at: http://genomemag.com/reimbursement/#.V1rcXU32aic on 06.10.2016.
  4. EvaluatePharma. Orphan Drug Report 2015. Oct. 2015. Accessed at: http://info.evaluategroup.com/rs/607-YGS-364/images/EPOD15.pdf on 06.10.2016.
  5. Genetic Engineering & Biotechnology News. The High Cost of Rare Disease Drugs. March 4, 2014. Accessed at: http://www.genengnews.com/insight-and-intelligence/the-high-cost-of-rare-disease-drugs/77900055/ on 06.16.2016.
  6. Specialty Pharmacy Times. Managing Care and Costs for Orphan Conditions. Feb. 09, 2015. Accessed at: http://www.specialtypharmacytimes.com/publications/specialty-pharmacy-times/2015/february-2015/managing-care-and-costs-for-orphan-conditions on 06.13.2016.
  7. FDA News Release. FDA expands use of Xalkori to treat rare form of advanced non-small cell lung cancer. March 11, 2016. Accessed at: http://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/ucm490329.htm on 06.13.2016.
  8. OptumRx internal analysis. Data from 2014-2016.
  9. American Health & Drug Benefits. Orphan Drug Pricing and Payer Management in the United States: Are We Approaching the Tipping Point? Jan/Feb 2010, Vol 3, No 1 – Regulatory. Last modified: July 24, 2012. Accessed at: http://www.ahdbonline.com/issues/2010/january-february-2010-vol-3-no-1/97-feature-97 on 06.20.2016.
  10. National Organization for Rare Disorders. Patient Assistance Programs. Accessed at: http://rarediseases.org/for-patients-and-families/help-access-medications/patient-assistance-programs/ on 06.17.2016.
  11. American College of Preventive Medicine. Genetic Testing Clinical Reference For Clinicians. Accessed at: http://www.acpm.org/?GeneticTestgClinRef on 06.20.2016.
  12. Personalized Medicine. Growth of Molecular Diagnostics and Genetic Testing in the USA, 2008-2011. 2013;10(8):785-792. Accessed at: http://www.medscape.com/viewarticle/813172_1 on 06.20.2016.
  13. Mayo Clinic Center for Individualized Medicine. Drug-Gene Testing. Accessed at: http://mayoresearch.mayo.edu/center-for-individualized-medicine/drug-gene-testing.asp on 06.13.2016.
  14. Johns Hopkins Medicine Press Release. 'Orphan Drug' Loophole Needs Closing, Johns Hopkins Researchers Say. Nov. 19, 2015. Accessed at: http://www.hopkinsmedicine.org/news/media/releases/orphan_drug_loophole_needs_closing_johns_hopkins_researchers_say on 06.17.2016.
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This article is directed solely to its intended audience about important developments affecting the pharmacy benefits business. It is not intended to promote the use of any drug mentioned in the article and neither the author nor OptumRx has accepted any form of compensation for the preparation or distribution of this article.

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