FORBES PHARMA & HEALTHCARE | 4/24/2014 @ 1:00PM |1,911 views
Robert Pearl, M.D.
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.
How One Drug Might Earn Its Maker A 2,500% ROI
Take sofosbuvir, a new drug used to treat Hepatitis C. It’s marketed as Sovaldi by Gilead Sciences.
As a more effective treatment of Hepatitis C than those available today, this drug will be a positive addition to the physician’s armamentarium. Its effectiveness at ridding the body of this virus justifies a higher price than the treatments available today.
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. Since the robot’s introduction, academic medical centers (university hospitals) train their surgical residents almost exclusively in its use. Gone or going are the more traditional methods. Unless patient expectations change or expanded competition is permitted, this will ensure that the manufacturer sees a large revenue stream for decades to come.
The result: This device will drive up health care costs significantly in the future, while clinical outcomes remain relatively unchanged.
Minimally Different Drugs Launched At Maximum Prices
Even when a new product is essentially the same as an old one, manufacturers use their patent protections and market control to drive up revenues. A great example is an injectable drug for a medical problem called “wet macular degeneration.”
Manufactured by Genentech, Avastin is an FDA-approved drug for cancer treatment. It slows the growth of new blood vessels that feed a tumor.
A while back, a thoughtful group of ophthalmologists recognized that if this drug could limit blood-vessel proliferation to stop tumor growth, it might also be useful in slowing the overgrowth of blood vessels inside the back of the eye – the cause of wet macular degeneration.
These physicians tried injecting a very small dose of Avastin at about $60 per treatment with excellent clinical results.
But here’s where it gets interesting. Genentech recognized the same opportunity at about the same time. And instead of recommending Avastin as an effective treatment, Genentech created Lucentis, a new drug with a biologically active component identical to Avastin.
Once Genentech received FDA approval, it priced Lucentis at $2,300 a dose, never showing that it was superior to Avastin at $60 a treatment.
Ophthalmologists across the country were outraged. Adding insult to injury, Genentech tried to embargo sales of Avastin for non-oncology practices. Not surprisingly, when the National Eye Institute tested Lucentis against Avastin, it found essentially no difference for a drug priced 40 times higher. Change Is Possible, Not Easy
There are legitimate reasons why some drugs and devices are very expensive. But it’s common for manufacturers to hike up prices even when the magnitude of improvement is minimal.
If we’re serious as a nation about making health care more affordable while increasing quality outcomes, we’ll need to rein in these practices.
We can begin by demanding that drug companies disclose the true cost of development as part of the FDA approval process. Regulatory agencies could then use that information to evaluate the appropriateness of the price.
The FDA could also require all new agents and devices to be tested against existing approaches so that pricing and incremental value can be measured. Finally, we can make all of this information available and transparent to patients, so they can make the best decisions for themselves.
Health Care Is Different From Retail, Needs To Be Treated As Such
Outside of health care, people can choose whether to pay inflated prices for a patent-protected technology or minimally better products. But patients don’t have that same choice – at least not without facing potentially serious health consequences.
No doubt, patent protection for drugs and devices needs to protect the company and the investments it has made. But their economic gain must be balanced against a certain level of social responsibility. Unfortunately, that balance doesn’t exist today and change will be hard to accomplish in this current political environment.
Elected officials receive large campaign contributions from “Big Pharma,” preventing legislative change. Hospitals hype new technologies to attract more patients, even when the benefit is marginal and cost is exceedingly high. And at the first sign of resistance, drug companies spend millions on direct-to-patient advertising while continuing to wine and dine doctors (even with the implementation of the Sunshine Act, which is designed to prevent these practices). However, there may be a flicker of hope. Recent public disclosures of new Hepatitis C medication prices have sparked national debate. Congressional leaders are starting to question drug manufacturers’ pricing schemes. And maybe this time, greed has exceeded reason. Maybe there will be regulatory backlash. But
and employers will need to demand it.
Americans should understand that these exorbitant health care costs are not free. They come out of their paychecks and reduce the amount of public services the government can provide.
Our health care system is broken and – given the drug pipeline aimed at maximizing prices and profits – the problems will get worse if change doesn’t happen soon.
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As a CEO, practicing physician and business school professor, I have a unique perspective on the business of health care and the culture of medicine. My passion is helping people understand the interactions and consequences of these powerful forces. I am the CEO of The Permanente Medical Group – the largest medical group in the nation – and CEO of the MidAtlantic Permanente Medical Group. In these roles, I am responsible for 9,000 physicians, 35,000 staff and the medical care of 4 million Americans living on both the west and east coasts. I am chair of the Council of Accountable Physician Practices (CAPP), a board-certified plastic and reconstructive surgeon, a clinical professor of surgery at Stanford University, and on the faculty of the Stanford Graduate School of Business where I teach courses on strategy, leadership, and health care technology. I received my M.D. from the Yale University School of Medicine and completed my residency in Plastic and Reconstructive Surgery at Stanford. Follow me on Twitter @RobertPearlMD.