The Goose and The Elephant

Brian-KlepperAmerica’s drug and biotech industries are no doubt alarmed by the national firestorm that erupted when Turing Pharmaceuticals raised the price 55 times of its 62 year old lifesaving drug, daraprim. They must worry that CEO Martin Shkreli’s tone-deaf reactions to the public’s scorn could precipitate close scrutiny of broader drug industry dynamics. The last thing pharma wants is a vigorous, in-depth national discussion of pricing, value, what we can afford and how other advanced countries handle drug spending. All this could kill the golden goose.

Seeking distance from the furor, PhRMA tweeted that “Turing Pharma does not represent the values of PhRMA’s member companies.” Then BIO, the biotech industry’s association, rescinded Turing’s membership and returned its dues, the equivalent of booting Turing out of the country club.

You can hardly blame them. In the US, pharma has engineered a great sweetheart deal. Once a drug is FDA-approved, the law dictates that Medicare must pay whatever a manufacturer demands, without negotiating, and that pricing sets a reference for the rest of American drug prices. Peter Bach, MD, who leads Memorial Sloan Kettering’s Center for Health Policy and Outcomes, summed up our dilemma earlier this year:

[Drug] companies are taking advantage of a mix of laws that force insurers to include essentially all expensive drugs in their policies, and a philosophy that demands that every new health care product be available to everyone, no matter how little it helps or how much it costs. Anything else and we’re talking death panels.

The Turing dustup generated lots of comment from health economists and analysts about how drugs should be priced in free or regulated markets. Much of that is academic, though. The bottom line is that, striving for ever-higher earnings, drug companies large and small are relentlessly increasing pricing on old and new drugs because they can. They can because the industry successfully deployed lobbyists who persuaded a receptive Congress to heavily favor their interests, spinning laws away from regulatory controls and toward payment at any price. These circumstances, nurtured by pharma itself, make a 55-fold price increase possible and legal, if outrageous. And that’s the elephant in the room.

Giving drug companies free rein has resulted, in broad terms, in black box pricing untethered from any concrete reference points. Industry spokespersons argue in generalities about the cost of drug development and the threat that regulation would pose to innovation, tried and true hot buttons for the American sensibility. They conveniently ignore that US per capita drug spend is about double that in other developed countries, and that pricing for individual drugs can vary 10%-1,000%, with little apparent rhyme or reason.

Breathtaking examples of drug costs abound. One recent study showed that a Genentech cancer agent, pertuzumab, is priced at $713,219 for each Quality Adjusted Life Year (QALY) it provides. This exorbitant cost made it, in the researchers’ words, “unlikely to provide reasonable value for money spent in the United States compared with other interventions generally deemed cost effective.”

The American public, without necessarily understanding the mechanics, is openly agitated by the sense that we’re all being had. An August Kaiser Family Foundation survey found that almost three-quarters of surveyed Americans thought that drug pricing is “unreasonable.”

This widespread resent may make this an opportune time to raise a few related questions. First, should American health care be a commodity, in which companies set price at what the market will bear? Is it a utility, a public good, in which pricing is regulated to ensure that everyone has access and we develop the healthiest possible society? Or should it be a carefully balanced combination of the two, promoting both access and the fair returns on investment that are critical to innovation?

The US has long embraced the first, with the result that we pay double and subsidize innovation for the rest of the world. By contrast, most other developed nations have embraced a combination of commodity and utility. Their costs are half and drug firms continue to find their markets desirable.

Second, why does the US believe that the conditions under which we buy drugs, or any other health care products or services, are different than those in any other country? Health care is a universal need that has fostered global markets and many standardized practices. Why do we insist that our way of paying higher rates is preferable?

American health care is percolating with efforts to quantify value (i.e., cost per unit of quality). In oncology, for example, the American Society of Clinical Oncology (ASCO), the National Comprehensive Cancer Network (NCCN) and others have developed early “conceptual frameworks” that attempt to measure the value of drug treatments based on benefits, toxicities and cost. For commercial health plans, companies like ELAP and Reliant Health Partners are developing fair payment levels using the pricing of established reference systems.

It is high time for public and private US payors to consider both the measurable value of drugs as well as the accepted pricing of those drugs in other advanced economies. Approaches like these would offer new, sustainable, data-driven ways for American purchasers to value and pay for drugs. They would also definitively check drug companies’ insatiable drive for ever higher pricing, independent of value.

Brian Klepper is a health care analyst and a Principal in Health Value Direct.

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  1. Very nice sum-up piece, Brian. To your main question — whether it’s time to shift to viewing the healthcare industry (including pharma) as a utility — my view is a resounding YES. It won’t be easy politically or happen all at once. But I think that conception and framework is what we now have to advocate with consumers and policymakers. We’ll have to — and should — do it in uniquely American way, of course, with some significant preservation of the free market. But I, for one, don’t believe the system is sustainable beyond the next 20 or 30 years absent such a shift.