Pharma & Healthcare 4/24/2014 @ 1:00PM
Robert Pearl, M.D. Contributor
Health care costs are dramatically higher in the U.S. than in the rest of the world. Yet our health care outcomes – from life expectancy to infant mortality – are average at best. There is little dispute over these facts.
The real debate comes when we ask why. While there isn’t one single answer, the rapidly rising cost of drugs and medical devices is a significant factor.
And the magnitude of this problem is likely to spike in the future if not properly addressed.
Pharmaceutical and medical device manufacturers have been criticized for their role in health care for over a decade. Little has changed. Americans pay significantly more for prescription drugs and medical devices than patients in the rest of the world.
The justifications for these extraordinarily high prices vary, but the industry is well aware that most patients have no choice but to pay whatever they charge.
Pricing Not Always Justified, Even For Better Products
Pharmaceutical pricing has long been a point of contention among manufacturers, patients and payers of health care (including insurers, employers and unions).
The U.S. drug patent system allows a drug discoverer to exclusively sell the new drug for an extended time period. Theoretically, this protection is designed to encourage new medical discoveries and enable a drug or device company to recoup its R&D investment.
Because the theory makes sense, drug manufacturers use it to defend their prices. Certainly, those higher prices could be justified for developing clinically superior products but, all too often, the added cost far exceeds the incremental benefit.
How does drug pricing work? It’s hard to say. Pharmaceutical pricing is opaque. Drug manufacturers aren’t asked to quantify their costs or compare them to projected sales and profits. Business school students learn that the price of a product isn’t determined by what’s reasonable but what the market will bear. A wide array of drug pricing examples would indicate that pharmaceutical and medical device companies hire a lot of business school graduates.
But at $1000 a pill, its pricing is exorbitant, monopolistic, and disrespectful to the purchasers and patients who will bear the brunt of the massive cost.
It is estimated that total treatment costs will range from $84,000 to $200,000 per patient, depending on treatment length. That’s 10 to 20 times the cost of today’s approach. Is this a reasonable return for the company?
Drugs this expensive are typically produced for those with rare conditions. These “orphan drugs” should cost more per patient because of the limited treatment population. But Hepatitis C is a very common disease. It affects nearly 4 million Americans, according to the American Liver Foundation. So, this can’t be the reason.
High development costs are another oft-cited explanation for extremely high drug pricing. Typically, manufacturers don’t disclose exact R&D costs but Gilead is reported to have paid $11 billion for Pharmasset, the drug company that developed the medication that led to Sovaldi. From this purchase price, we can estimate the R&D costs of this drug.
At Sovaldi’s price-point, Gilead is estimated to recoup its total investment in less than 18 months with revenue estimates of $269 billion over the drug’s lifespan.
That would be a 2,500 percent return on investment.
Manufacturers of luxury cars or yachts can rightfully charge wherever they choose, but when patients in need have no alternative option, that’s just wrong. Interestingly, two other drugs with similar therapeutic responses will be available in the near future. It will be fascinating to see how they’re priced.
Compounding the high price of many medications is the reality that patients in others countries don’t pay nearly as much as those in the United States. The reason is that most governments across the globe regulate drug prices. To date, the U.S. Congress has prohibited the practice here.
The result is that drug sales in the U.S. subsidize a disproportionate share of a drug company’s research costs and contribute to much of the company’s margin, regardless of where in the world it is headquartered. If we want our businesses to be globally competitive, this needs to change.
Aggressive Advertising Gives Manufacturers An Edge
Clinically superior products may very well warrant incrementally higher prices. But what of the increasing prices for products that don’t add much value?
Let’s compare the laparoscope to the prostate robot. First, the laparoscope.
In the past, removing a patient’s gallbladder required a large abdominal incision. Then along came a new technologically enhanced laparoscopic removal with remarkably better results. Suddenly, rather than making an incision under the entire right rib cage and cutting through the abdominal muscles, surgeons could remove the gallbladder with two tiny punctures and a telescope-like device.
Before, the surgeon would have to leave large rubber drains in place for several days to reduce the risk of infection. Average recovery times took up to six weeks. In contrast, gallbladder removal today is a routine, minimally invasive outpatient procedure that most people recuperate from in a week.
Laparoscopic surgery was a miracle advancement. Hardly the same story as the prostate surgery robot.
Mention “robot” to most patients and they’ll assume it’s a space-age advancement with major clinical benefits. It sounds sexy and, intuitively, its approach to prostate surgery makes sense. After all, the robot has steady hands and requires a smaller incision.
The problem is the outcome data doesn’t support the hype or the cost. The results – in terms of both cancer eradication and surgical complications – are similar to traditional alternatives, according to most studies. And for most surgeons, the robot-assisted procedure takes longer.
The price tag for this device is over $1 million, but that’s just the beginning. The company behind the robot designed it with disposable “arms” and built in an obsolescence factor that forces the hospital to replace each arm after 10 uses. The motivation isn’t safety. It’s profit. The manufacturer could have built a robot that could complete 100 procedures. But that would reduce profits dramatically.
If the robots add little clinical value yet significantly increase costs, why do so many hospitals tout them? The answer: Aggressive advertising.
By simultaneously marketing to consumers and hospitals, these devices were strategically positioned to help hospitals lure patients from their competitors. And, of course, it worked. Big billboards helped early adopting hospitals attract patients with the promise of a new “high-tech wonder.” Once a few hospitals jumped on board, others had no choice but to follow.