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Paying an Arm and a Leg for a Month of Life?

Imagine for a moment that you are an oncologist caring for a 53-year-old man with metastatic cancer, a person whose tumor has spread to lung and liver.

With standard chemotherapy, this man can expect to live around 12 months.  That standard treatment isn’t all that expensive in today’s terms, only $25,000 and his insurance company will pick up the entire tab since he is already maxed out on his yearly deductible and co-pays.

But wait!  Before prescribing the standard treatment, you find out there is a new chemotherapy on the market, one that costs $75,000 (in other words, fifty thousand dollars more than usual care) and has no more side effects than that standard treatment.

How much longer would patients like this have to live, on average, for you to feel that this new chemotherapy is warranted?

That’s not an easy question to answer.  But it’s not an impossible one either.  Clearly if the treatment would provide only, say, 1 day of additional survival on average, that would not amount to $50,000 well spent.  Just as clearly, if this man could expect 10 years of additional life, no one would deny him this new treatment.

So when, between 1 day and 10 years, does it become a tough call whether to prescribe this new treatment?

In a recent study published in Health Affairs, my colleagues and I presented Canadian and U.S. oncologists with a scenario very like the one I described above.  The median respondent to our survey indicated that the $75,000 drug would need to extend life expectancy by an average of 6 months to be worth prescribing, an answer that suggests that oncologists think that it is worth spending about $100,000 to extend patients’ lives for a year.  Of course, oncologists’ opinions were scattered widely.  Some said that a week or a month would be enough time to justify this drug.  Others thought that, with medical care being so expensive, we need to demand more out of expensive drugs—a year of survival, maybe even two.

An interesting result then:  No consensus among oncologists about the price of life, but a pretty strong sense that anything more than $100,000 for a year of life is starting to get a bit expensive.

But I’ve only told you about half of our study.  Because you see, when we mailed this survey to oncologists, we conducted an experiment.  In a second group of physicians, we said that the new chemotherapy costs $150,000.  This treatment, in other words, wasn’t a mere $50,000 more expensive than standard treatment; it was $125,000 more expensive.  With this much more money at stake, oncologists should demand even more out of this drug, right?

As it turns out, the median respondent to our survey once again indicated that they would prescribe the drug if it extended patients’ lives by an average of 6 months.  For these oncologists, in other words, it was worth spending about $250,000 for a year of life.

What’s going on here?

The oncologists responding to our survey were essentially insensitive to the price of treatments when telling us how they would think about new chemotherapies.

I spoke about this experiment with a pharmaceutical executive once, a man who ran the oncology division of a major pharmaceutical company.  He told me: “Oh yes, we know that oncologists are not very price sensitive.”  That’s one reason why his company is able to charge so much for its new treatments.

How much?  Six figure treatments are becoming common in oncology.  Some studies tout new drugs that cost more than $100,000 for a course of treatment, and which extend people’s lives by maybe 2 months on average.  That amounts to $600,000 per year of life.

I don’t pretend to know the price of life, or have unique insight into how we ought to decide whether expensive new treatments are worth their costs.  But I do know that at some point, we need to demand more from these ultra-expensive medicines or we are going to spend our way into fiscal oblivion.

Peter Ubel is a physician, behavioral scientist and author of Pricing Life: Why It’s Time for Health Care Rationing and Free Market Madness. He teaches business and public policy at Duke University. Peter’s new book, Critical Decisions will be available in the fall of 2012. You can follow him on his personal blog.

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Jason@MegadynejamadanJonathan HsteveDeterminedMD Recent comment authors
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Jason@Megadyne
Guest

Its a tough issue to understand, making it a really complex problem to solve. It’s going to take everyone’s involvement to make these absurd prices reasonable.

jamadan
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jamadan

How can we even have this conversation without considering the pricing practices of the pharma company? How much of the $75K actually reflects the real cost of manufacturing the drug versus profit goals for the pharma company? And how much would the drug actually cost if the drug were open to other manufacturers so the pharma company doesn’t have exclusive right to charge whatever they feel like knowing competition won’t drive down the costs? And we’re willing to tell someone they can’t live that extra 6 months because the pharma execs need their bonuses? We can’t transform healthcare until we’re… Read more »

Nate Ogden
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Nate Ogden

“First, the effect would be to shift the tax burden even more away from the wealthy and onto the middle class and lower middle class.” Depends how you tax consumption and what consumption you tax. I would exempt healthy food for example from all taxes. I would also tax cigs and alcohol at a much higher rate then everything else. Yachts would also be at a higher rate then cars. The things the poor should be buying would have a very low tax rate, the things they should not much higher. The key for me is everyone pays the same… Read more »

Barry Carol
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Barry Carol

Nate – I suspect that we will ultimately wind up with both a consumption tax and an income tax at the federal level. I’m not a fan of consumption taxes alone for a couple of reasons. First, the effect would be to shift the tax burden even more away from the wealthy and onto the middle class and lower middle class. Second, the size of the tax needed to replace the income tax and FICA taxes would be huge. The FAIR tax was billed as a 23% tax on most purchases but it’s actually 29.9% if calculated the way state… Read more »

Margalit Gur-Arie
Guest

Nate, out of order because the comments are running on top of each other up there, I would like to request one thing. You keep referring to folks on welfare in most of your replies and since you have a low opinion of them it is easy to engage in hyperbole regarding free loading bums. I am not talking strictly about people on welfare. I am talking about the overwhelming majority of Americans who cannot possibly afford to pay out of pocket for cancer treatment when their time comes. Most of us are “poor” when you look at it this… Read more »

Nate Ogden
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Nate Ogden

“You keep referring to folks on welfare in most of your replies and since you have a low opinion of them it is easy to engage in hyperbole regarding free loading bums.” And you refer to rich people and payers as greedy in most of yours. What your asking is for me to stop demonizing free loaders so you can attack people that work for a living. The overwhelming majority of Americans don’t need to worry about paying for cancer treatment out of pocket because the greedy profitiers you despise provide them insurance. Private health insurance and those who work… Read more »

Margalit Gur-Arie
Guest

The entire premise of this post is that we should not pay an arm and a leg for a month of life.
Are you suggesting that your payer buddies, who are not “providing” anything at all, except complexity and heartburn, are happy to cover one month of life regardless of costs for all currently paying customers?

If so, we indeed need to have a different conversation.

Nate Ogden
Guest
Nate Ogden

“who are not “providing” anything at all, except complexity and heartburn” At least your not arguing hyperbolically. What is the job of payors? They accept claims from providers, verify eligibility, benefits, and legitimacy of claim then make payment. Your saying they don’t do that? You can’t even make logical arguments your grasping so desperately to support your failed dogma. “are happy to cover one month of life regardless of costs for all currently paying customers?” No I am not, not sure where you even get such a crazy idea. I’ll say it again clearly; Your demand to eliminate profits will… Read more »

Margalit Gur-Arie
Guest

Nate, as much as you would prefer to talk about redistribution of wealth as it pertains to health care services, this is not the question raised here. This is not about entitlements. It’s about 99% of Americans and it is about private payers as much as it is about public ones. Should people that work and do contribute to society be able to get that extra month if they so choose, or should “society” make that decision for them, if all their hard work and contribution did not translate into enough wealth to purchase the extra month on their own?… Read more »

Nate Ogden
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Nate Ogden

“Should people that work and do contribute to society be able to get that extra month if they so choose,” If when they are healthy they buy insurance that covers the extra month of life and pay the premium for that right then yes they should receive everything they paid for. People should not be allowed to forgo insurance, not pay into the system, then demand that those that did the right thing buy them an extra month of life. Those on public healthplans should not get the extra month of life. “It’s hard-working Americans against the greedy and selfish… Read more »

Nate Ogden
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Nate Ogden

at least your upfront that your practicing blatant class warfare. Just wish people like you would stop including me in your class. Only 20% or so of people agree with you, hardly a fight of or for the 99%.

Barry Carol
Guest
Barry Carol

Nate – For the record, I would be willing to do away with the major tax deductions and preferences in exchange for lower marginal income tax rates on ordinary income. This includes: (1) the mortgage interest deduction, (2) the tax preference for employer provided health insurance, (3) the deduction for state and local taxes, (4) charitable contributions, (5) the personal exemption for the taxpayer and his or her spouse (but not the children) and (6) tax capital gains and qualified dividends at the same marginal rate as ordinary income or 28%, whichever is less. While I no longer benefit from… Read more »

Nate Ogden
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Nate Ogden

Why would you keep a deduction for people choosing to have kids? They already get the advantage of free public education and all sorts of other support. If you choose to have kids you should pay for it, someone that chooses not to have kids shouldn’t be taxed more for not consuming more public resources.

I think we need to ask what is your contribution and what is your burden.

Ideally I would prefer we not tax work at all, much rather we tax consumption.

Barry Carol
Guest
Barry Carol

Nate –

While I’m no fan of President Obama’s policies, especially toward business, the main reason for his relatively low federal income tax rate is that he contributed $172K or over 20% of his adjusted gross income to charity. For what it’s worth, Governor Romney contributed close to that percentage of his $21 million of AGI to charity as well.

I view charitable contributions as a voluntary tax that allows the donor to select the beneficiaries of his or her generosity.

Nate Ogden
Guest
Nate Ogden

they shouldn’t be tax deductible. To many sham charities meant to only enrich those that run them. If someone wants to be charitable do it post tax.

Nate Ogden
Guest
Nate Ogden

like this; Sen. Hillary Rodham Clinton and former president Bill Clinton have operated a family charity since 2001, but she failed to list it on annual Senate financial disclosure reports on five occasions. The Ethics in Government Act requires members of Congress to disclose positions they hold with any outside entity, including nonprofit foundations. Hillary Clinton has served her family foundation as treasurer and secretary since it was established in December 2001, but none of her ethics reports since then have disclosed that fact. The foundation has enabled the Clintons to write off more than $5 million from their taxable… Read more »

Margalit Gur-Arie
Guest

Yes, Barry, I am referring to Israel. Just because it’s small, it doesn’t mean that the principle cannot scale. We are now implementing changes in the US based on models that were tested in much smaller environments. If we can learn from Mayo and Kaiser, we should be able to learn from small countries too. As to Maryland and price negotiations in general, they keep disappointing because we do everything half way (trying to be polite here). Exempt payers from antitrust and exempt providers from antitrust and pharma and devices too. Get them all in one room, including the government,… Read more »

Barry Carol
Guest
Barry Carol

To follow up on the MD all payer system, when it first went into effect in 1977, Medicare and Medicaid agreed to pay more than they did previously so private insurers could pay less. However, cost shifting to private payers was either still in its infancy back then so the gap wasn’t nearly as high as it is now. For Medicare and Medicaid to pay more today so private insurers could pay less would be a non-starter in the current federal and state fiscal environment.

Barry Carol
Guest
Barry Carol

Regarding Maryland’s all payer system, I don’t think MD has done much better controlling healthcare costs than other states in recent years though their system has been in place since the late 1970’s. As you probably know, it only applies to hospital charges, not physician fees, drugs or other healthcare costs. I’ve heard Maryland doctors note that there is a crazy system now that allows hospitals to build facilities like imaging centers on an existing hospital campus but have it designated as “unregulated space.” Then we see the ridiculous site of a hospital inpatient being loaded into an ambulance, transported… Read more »

Barry Carol
Guest
Barry Carol

Margalit – Are you referring to Israel? It’s roughly the size of New Jersey in square miles and has 7.6 million people vs. 8.8 million for NJ. I don’t think it’s an apt comparison for the U.S. nor are the Scandinavian countries. Germany would be more appropriate from a healthcare system standpoint. If we want payers to negotiate more forcefully with providers, especially hospitals, then give them an anti-trust exemption for the purpose so they can negotiate as a group like the Swiss insurers do. If we want to see hospitals compete, let’s have disclosure of contract reimbursement rates and… Read more »

Margalit Gur-Arie
Guest

Bob, I use the term “negotiate” because I do believe manufacturers deserve a chance to be heard and explain their costs. I also used the term “an offer they cannot refuse”. I agree with you that prices should be set at a national level, and not just for drugs, but I think there should be sellers at the table were decisions are made, so we don’t make disastrous decisions. This model exists today in Maryland for hospitals and in other countries for most everything. I do believe pharma is different than Google and Microsoft because R&D is much more expensive… Read more »

bob hertz
Guest

Good ideas above, but why do even left-wingers in America tend to use words like “negotiate” when they discuss drug prices? It is possible to find out the cost to manufacture a drug. (I consider research a sunk cost, just the way that Microsoft and the rest of American industry books it.) If the cost of production is $10 for a monthly supply and the drug company is charging $100, well, that is not unknown in American industry, and if competitors can come in for less then good for them. But if the drug company is charging $1,000 on a… Read more »

Paolo
Guest
Paolo

A $10 million prize may not be enough to pay for research on newer drugs. Besides, a fixed prize per drug would only encourage pharmaceuticals to simply generate as many new drugs as possible of questionable value with minimal research. A more useful prize system would set the prize amount based on the actual expected VALUE of the drug. If a new drug is expected to help N people add Y years to their lifespan, the prize value should by N x Y x V, where V is the implicit value of one year of life. But that is equivalent… Read more »

Nate Ogden
Guest
Nate Ogden

It cost hundreds of millions if not more to get a drug through trials and into the market. It cost pennies to make it. You can’t ignore R&D. Not only R&D for that drug but you also need to factor in the failed drugs. For an accurate analysis take Pharma profit minus marketing and some excess salary and a portion of that is what could be cut out of the market. “Google and Microsoft spend billions on research, yet charge relatively little for their products.” Office cost over $300 and is full of bugs. Server and SQL cost in the… Read more »

Nate Ogden
Guest
Nate Ogden

Drug manufacturing costs are relatively low at only 17% of sales, but research and development investments are a higher percentage of sales than in virtually any other industry, including the electronics, aerospace, and automobile industries.[7] It is estimated that only one out of nearly 10,000 chemically synthesized molecules investigated as drug candidates actually becomes an approved drug.� During the 1990s, the average length of time required for drug development and government approval reached 15 years in the U.S.[10]� As the length time to bring a drug to market has increased, so have the costs, economic risks and uncertainties.� One study… Read more »

Barry Carol
Guest
Barry Carol

Margalit – Many of the big blockbuster drugs have either already gone off patent or will do so over the next several years including Lipitor and Plavix, the two largest sellers, by mid-2012. Lipitor is already off though still in its six month exclusivity period. The issue driving drug spending higher these days is the ultra high cost specialty drugs. I’ve heard drug companies claim that the price of these drugs is roughly the same in other developed countries as it is in the U.S. We already have an oligopoly of three drug wholesalers negotiating with the drug companies. If… Read more »

Margalit Gur-Arie
Guest

Barry, having lived most of my life in one of those “socialist” countries, I can tell you with certainty that no one is “more accepting of death” and no one is concerned with burdening their fellow citizens when staring death in the face. It is a myth.
I can also tell you with 100% certainty that what providers receive as compensation in those countries is only a fraction of what they receive here, (hospitals in particular), and that price variations are minimal and that administrative costs are also a fraction of what they are here. That’s how money is saved.

Margalit Gur-Arie
Guest

Barry, I seriously doubt that magnanimity has anything to do with the VA drug pricing, and it has nothing to do with the prices negotiated by European countries for their citizens. It’s all about power in numbers. When you negotiate on behalf of 311 million people, you can make offers that cannot be refused by the other side. I do agree though that expensive drugs may turn out to be a net saving to the system overall, and I am not trying to vilify pharma. They do what a business needs to do, and we should do what we need… Read more »