usmbguest5318
Gold Member
Are prescription drug and medical procedure prices in the U.S. merely a matter of producers/retailers charging what the market will bear?
Well, it looks that way. For instance (see the linked article for precise figures and other procedures and meds):
To figure out whether the prices are justified, one must consider the economics of the pricing models of various genres of procedures and medications patients may require or desire. There are quite a few of them, so what follows, then, is a look at a few of the easier pharmaceutical economic scenarios to assess.
Additional reference on drug prices [3]:
Notes:
Well, it looks that way. For instance (see the linked article for precise figures and other procedures and meds):
- Branded Cancer Medication:
- US: $6.2K;
- New Zealand (NZ): $990;
- Switzerland (SWZ): $3.6K
- Spain: $3.35K
- Maternity Costs -- Normal; C-Section:
- US: $10K; $15.2K
- NZ: $0; $0 (unless one wants a private obstetrician)
- SWZ: $8.3K; $10.7K
- Spain: $2.2K; $2.8K
- MRI:
- US: $1.15K
- NZ: $1K
- SWZ: $138
- Spain: $154
- Hospitalization Cost per Day (cost of merely being in a hospital):
- US: $4.3K
- NZ: $2.5K
- SWZ: $0
- Spain: $481
- Bypass Surgery (this the surgery itself, not the other "stuff" that one needs in along with it):
- US: $75.3K
- NZ: $40.4K
- SWZ: $36.5K
- Spain: $16.5K
To figure out whether the prices are justified, one must consider the economics of the pricing models of various genres of procedures and medications patients may require or desire. There are quite a few of them, so what follows, then, is a look at a few of the easier pharmaceutical economic scenarios to assess.
- Pricing/Price Increase Scenario 1: New, highly effective drugs that are extraordinarily expensive
Drug example: Sovaldi (Hepatitis C treatment)
Economic Consideration(s):
Sovaldi (sofosbuvir) was released in December 2013 at the cost of $1,000 per pill, or $84,000 for a course of treatment. This is a shocking price, and scrutiny about its justifiability was entirely justified. But by conventional standards, even at that price, the drug is cost effective because it cures a disease that has severe health consequences and poor existing treatments. One might ask how so....
Researchers often use a cost-effectiveness ratio (CER), defined as costs divided by benefits, to analyze the efficiency of various treatments. To properly judge a new treatment, they use an incremental CER, to compare the costs and benefits of the new treatment with the next best alternative. To standardize these analyses, they measure benefits as “quality-adjusted life years” (QALYs). Think of a QALY roughly as a “year of life in full health,” or the equivalent number of years in poor health you’d be willing to trade for that year of life in full health.
Although there is no official threshold in the U.S. for our willingness to pay for a new treatment, economists typically consider upper bounds of $50,000-$200,000 per additional QALY to be cost-effective. One study estimated the incremental CER of Sofosbuvir as $54,000 per additional QALY, putting it firmly in the range of cost-effective treatments.
Solution Discussion:
In terms of the welfare of society as a whole, Sofosbuvir is a good use of resources. This is exactly the type of drug we (as a society) value and for which we should be willing to pay large sums. The company that developed it profits from the rest of the patent life (typically 7-12 years) of very high prices, then makes very little money once the patent expires and generics rapidly enter. Quite simply, today’s profits finance tomorrow’s miracles. Another way to consider the impact of patent protection, particularly from a temporal perspective, it is that the promise of big money on drugs that will be released is why there are cheap ones today.
But immediate and drastic budget problems result from such high prices for such a prevalent disease, especially one that is not spread evenly across the population. For example, New York State prison spending on hepatitis C drugs increased more than 350% in the last two years, from $9.4 million in 2014 to a projected $44 million in 2016, and state Medicaid budgets and private insurers are similarly strained. To decrease the immediate budget impact, many payers are limiting the drug to the sickest patients.
As a society, we must decide whether waiting 12 or so years for the drug to go off patent is worth it, or whether we should buy it now. That decision will affect not only this drug but also investment in future drugs like it. There is a substantial moral component as well, because any delays will likely fall disproportionately on poor and vulnerable populations. Be that as it may, the money has to come from somewhere. In a well-functioning health finance system, that money would come from reducing funding for less cost-effective (or even completely ineffective) interventions, and there are mechanisms for doing so, but they remain largely theoretical.
For other Hep-C solution ideas, see "Treating Hepatitis C: Policy solutions." It's possible that those ideas can be extrapolated to and modified for other medications. The problem, of course, is that one cannot be sure about that without the performance data that the FDA and the producer's production data. Too, one can only make such a call on a drug-by-drug basis because even though producing any of them is "just chemistry," some chemicals (drugs) do their thing fine and "that's that" and others do their thing fine, but mess up something else, which then necessitates that another compound be married to it to counteract that harm the "operative" compound effects. (It's almost ironic that in some ways, drug design and development is like cooking and baking.)
- Pricing/Price Increase 2: New, not very effective drugs that are expensive
Situational and Drug Examples: Pfizer’s across-the-board price increases; most any Alzheimer's disease drug;
Economic Consideration(s):
Part of the pricing observed in the marketplace likely reflects the usual give and take of pricing and market power (supply and demand combined with marketing efforts and their outcomes), compounded by the fact that patients are insulated from the full cost of the drugs (and other health care) by insurance. As economists note, this moral hazard means that people generally use and/or use evermore costly, medical goods and services when insurance covers their cost than when it does not. Last year, prices for branded drugs rose nearly 15%.
Solution Discussion:
For relatively ineffective drugs, the goal would be to make consumers more price conscious, and improve their ability to discriminate between drugs of great benefit and drugs of limited benefit. One way to do this is by providing consumers with more information about both total costs and benefits (value transparency). Another way is to change the prices consumers face in a way that correlates with the clinical value of the drug (for example, value-based insurance design).
- Pricing/Price Increase Scenario 3: Dramatic price increases for formerly inexpensive generic drugs
Drug Example: Daraprim (anti-parasite medication used to treat toxoplasmosis)
Economic Consideration(s):
A drug manufacturer acquired this 62-year-old drug and raised its price from $13.50 per tablet to $750 per tablet. The business strategy of acquiring old, neglected drugs and turning them into high-priced “specialty drugs” is not unique to Daraprim. The strategy works because there is too little competition for each medicine, that is, too few manufacturers make each molecular entity (compound) in the drug. The Office of the Inspector General found that from 2005-2014, 22% of the top 200 generic drugs reviewed had price increases greater than the inflation rate of brand-name drugs.
Solution Discussion:
Generic medicines have no patent-based barriers to entry, and in theory, higher prices and profits would prompt more manufacturers to make a given drug. In a perfect market, if we still saw only one manufacturer for many drugs, the answer would likely have to do with the fixed costs of making that compound (factories, research into how to produce it, quality control), and with actions taken by the monopolist to reduce competition, such as deterrent pricing. [1] As prices rise, theoretically more firms should enter, but not if they can’t do so quickly enough to take advantage of the higher prices. Manufacturers face a three-year wait for the FDA to review a generic drug application; thus an expedited review process could encourage more market competition among generics and lower prices.
- Pricing/Price Increase 4: Price spikes for generic drugs during shortages
Drug Examples: Naloxone (reverses heroin or narcotic overdose), the rabies vaccine (treats an otherwise fatal disease), and digoxin Fab (reverses digitalis overdose).
Economic Consideration(s):
A recent study in Academic Emergency Medicine documented 1,800 instances of drug shortages from 2001-2014. Of these, 321 were critical medicines used in emergency departments, and about 1 in 10 had no substitute. What causes these shortages, many of which are among generic drugs? The generics often have multiple manufacturers, which should lead to redundant capacity. There are a variety of proximate reasons for the shortages -- for instance, production problems and too little capacity expansion -- but only one underlying one, profitability. That these shortages are common and recurring militates for there being an incentives problem: manufacturers have little incentive to invest in the redundancy needed to parry shortages.
Solution Discussion:
From a societal perspective, for life-saving medications, the cost of investing in the redundancy required to avoid shortages is likely worth the (substantial) cost of that redundancy. A number of regulatory or market-based approaches to fix the incentives problem could be tried: fines for manufacturers whose drugs are in short supply, bonuses or higher prices (temporarily) for those manufacturers that step in when another manufacturer falters, mandates of specific kinds of redundancy (multiple facilities), or subsidies for the second manufacturer of a given product to enter the market. [2]
Additional reference on drug prices [3]:
- It's not just Valeant and Shkreli gouging drug prices
- Trends in Pharmaceutical Expenditures: The Impact on Drug Benefit Design (Pre-Obamacare analysis from May 2008) [4]
- A Need for Government Intervention? Prescription Drug Prices and Retail Mark-Ups
- A Systematic Review of Reference Pricing: Implications for US Prescription Drug Spending
- The High Cost of Prescription Drugs in the United States Origins and Prospects for Reform
- The High Cost of Prescription Drugs: The Price of Success?
- Prescription Medicines: Costs in Context -- This is "Big Pharma's" POV
- Facts about Rising Drug Costs
- The Effect of Acquisitions on Pharmaceutical Drug Prices [5]
- Prescription Drug Accessibility and Affordability in the United States and Abroad
- Longitudinal Trends in U.S. Drug Shortages for Medications Used in Emergency Departments (2001-2014)
- "Easy Reading"
Notes:
- There are several models for how this happens.
- None of the noted direct solution approaches are great, IMO, but they approaches. Each of them has downsides of which I don't generally approve. All the same, there still needs to be a solution. Sometimes, at least in terms of positive economics, there are no good solutions. That happens when the information available to producers is too imperfect (not the same as 100% imperfect) for them to reliably anticipate revenue/profit streams from the effort (resources) they must invest to produce an item.
- I don't expect anyone here to fully read all the reference documents. Checking out the abstract, introduction and conclusions/discussion sections of them should be adequate. If one is of a mind to refute an author's conclusions, well, then one needs to read the whole thing.
- This paper is here for individuals who have an interest in considering and discussing the before-and-after O-care aspects of drug pricing. See the bibliography of this document for additional pre-2010 sources of high quality information.
- OT: Observation about the paper....I included this paper, in part, because it illustrates the level of analysis a 21-22 year-old exhibits. It's astounding to me that some, many perhaps, truly grown people, 30+ year-olds, routinely don't do the same for topics that capture their interest. Worse, however, the POTUS doesn't.
