Inbar Fried and Andrew Beam

The debate surrounding who pays for healthcare is one of the most contentious issues in the United States, especially given the steadily rising costs. What is sorely lacking however, is a conversation on why healthcare in the US is so expensive. By most estimates, we spend much more on healthcare than any other nation. In our recent study1 we took a look at one drug whose high cost was enabled by a little-known piece of legislation called the Orphan Drug Act (ODA). In this post, we will provide some background and context for the reasons that motivated our study.

There have been many examples of out of control drug prices in the recent news. The most well-known ones include Mylan’s EpiPen and the now infamous Martin Shkreli’s Daraprim. However, the mechanisms that enable these high prices may not be common knowledge. As part of our research on other projects, we came across a Time magazine article from 2011 about a significant price increase of nearly 15,000%(!) for an injectable drug known as 17-Alpha Hydroxyprogesterone Caproate (17P) that is used as a prophylactic treatment for recurrent preterm delivery. The efficacy of this drug for delaying recurrent preterm delivery was initially demonstrated back in 1975.

17P is available in two forms—an unbranded “compounded” form and a name-brand version. A compounded drug is one that is “made to order” at a local compounding facility right before it’s given to the patient, while the name-brand version is available in a prepackaged, shelf-stable form. Under the Orphan Drug Act, the manufacturer of the brand name version of 17P (which is called Makena) was given an exclusive license for this market, which made the compounded version technically illegal for a seven year period granted as part of the orphan drug status. The monopoly on 17P allows the manufacturer to sell the Makena version for an extremely high price.

A Brief Overview of the Orphan Drug Act

It’s worth understanding a little bit about what the ODA is and what its original intent was designed to accomplish. In 1983, congress passed the Orphan Drug Act as a way to incentivize the research and development of drugs for rare diseases, defined as those affecting less than 200,000 Americans at any given time. Before the ODA, patient populations suffering from rare conditions were often left without effective therapies, because the cost of developing a drug outweighed what could be recouped in the potential market for the drug. The ODA was originally written for the benefit of patients, but has since been used in ways that were never originally intended. As we discuss in our study, one of these unintended consequences is the marketing of a high-priced branded drug, when a cheaper unbranded one already exists.

It is true that drugs are expensive to develop and bring to market, but exactly how expensive depends on who you ask. is also true that a drug company is entitled to recover those investments through sale of the drug. However, in the case of 17P most of the trials cited to receive the orphan drug designation were funded by tax payers, meaning the manufacturer had no such research costs to recoup. This doesn’t seem to be an appropriate use of the ODA, but instead is a backdoor way to corner the market for 17P in search of profit.

For more information on the ODA, check out this amazing Kaiser Health News series The Orphan Drug Machine. This article provides overview of the entire Makena/17P saga.

What we found

At DBMI, we have access to some truly amazing healthcare datasets, one of which is a large nationwide database of insurance claims. One of the founding principles of DBMI is that we can use data to make better and smarter healthcare decisions. And so, our task in this case was clear—we could use our insurance database to see just how expensive this drug had become and if this money was well spent.

The first thing we looked at was the price for each form of the drug (branded vs compounded), and we found a big difference. The average cost per pregnancy of compounded 17P was only $206, whereas the average cost for branded 17P was $10,917. Patients in these two groups were receiving the same active ingredients in their medications, but one group was spending over 5000% more.

We next looked at the rate of preterm birth in the two drug groups, which is the primary outcome for 17P. Did women who received the compounded form experience preterm birth at a different rate than those who received the brand name version? According to our analysis, there was no statistically significant difference in the rates of preterm birth between these two groups.

We looked for other ways in which these two groups might differ. We found no significant differences in important clinical factors such as the length of drug treatment, maternal age at delivery, or rate of stillbirths. Additionally, we found no significant difference in instances of infection possibly due to contaminated injections. However, our study was not designed to take a deep look at infections, so this result is not conclusive.

You Get What You Pay For? Not Always…

Although we are believers in the phrase that “you get what you pay for,” this study demonstrates an exception to the rule. In our study, we observed nearly identical outcomes for the two forms of 17P, but at widely disparate prices. The branded version costs approximately 5200% more than the compounded version. If you play this scenario out over many similar medications in our healthcare system, it’s not hard to see how drug costs can quickly get out of control.

We recognize that for a drug like 17P, the branded version does offer a higher quality assurance over its compounded alternative simply due to the nature of the manufacturing procedures for each product. To clarify, a branded drug must undergo multiple clinical trials proving its efficacy and safety to gain FDA approval. (Generic drugs need to meet the same FDA standards, but have fewer upfront research costs and thus do not require the catchy name and advertisements.) Meanwhile, a compounded drug is made-to-order for a specific patient. This is often done for patients who have allergies to an ingredient or require different dosages than the commonly available alternative. Although licensed pharmacists or other medical professionals are involved in the compounding of the drug, the drug is not FDA-approved.

The lack of FDA oversight does pose a risk, which was emphasized in the 2012 New England Compounding Center outbreak of fungal meningitis. The outbreak led to widespread concerns over compounded drugs, and has prompted stricter FDA regulations of compounding facilities, including the Drug Quality and Security Act. Hopefully this will lead to greater standardization and safety for compounded drugs.

Looking Ahead

In this study, we focused specifically on the effect of branded drugs and market exclusivity stemming from the ODA on rising healthcare costs. In 2014, the estimated cost of a mass-market drug was roughly $24,000, while that of on orphan drug was nearly $112,000. The market surrounding orphan drugs is expected to increase in value, with some speculations saying it will reach 21% of brand-name prescription drug sales by 2022.

Our study highlights one way in which an existing drug can be repackaged and sold for a much higher price, without much in the way of added value. We focused on a specific patient population, which allowed us to witness both the value and costs associated with abuse of “orphan” drug designations.

The seven years of market exclusivity awarded to Makena will end in 2018, but already patents stemming from a potential Makena auto-injector version threaten to extend Makena’s monopoly of the market. The government has the ability to change existing law and prevent misuse of orphan designations, with some talks having already begun. Meanwhile, drug prices will continue to rise. At least the Wu-Tang Clan will fight for us.


1Fried I, Beam AL, Kohane IS, Palmer NP. Utilization, Cost, and Outcome of Branded vs Compounded 17-Alpha Hydroxyprogesterone Caproate in Prevention of Preterm Birth. JAMA Intern Med. Published online October 02, 2017. doi:10.1001/jamainternmed.2017.5017