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
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.
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.”
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 patients
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.
This article is available online at:
Contributor
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.
