Funding innovation for treatment for rare diseases: adopting a cost-based yardstick approach

Manufacturers justify the high prices for orphan drugs on the basis that the associated R&D costs must be spread over few patients. The proliferation of these drugs in the last three decades, combined with high prices commonly in excess of $100,000 per patient per year are placing a substantial strain on the budgets of drug plans in many countries. Do insurers spend a growing portion of their budgets on small patient populations, or leave vulnerable patients without coverage for valuable treatments? We suggest that a third option is present in the form of a cost-based regulatory mechanism.

This article explores the use of a cost-based price control mechanism for orphan drugs, adapted from the standard models applied in utilities regulation.

A rate-of-return style model, employing yardsticked cost allocations and a modified two-stage rate of return calculation could be effective in setting a new standard for orphan drugs pricing. This type of cost-based pricing would limit the costs faced by insurers while continuing to provide an efficient incentive for new drug development.