Take, for example, the macabre bit of trivia that smokers save taxpayers money on Medicare and Social Security by dying younger and more quickly than non-smokers. If it were only about money, we ought to be encouraging smokers to keep lighting up.
But that’s not who we are. We value well-being, which means that the benefits of healthcare are unquantifiable, at least in America. We have not come to terms with how or whether to put a price on life.46 We believe that paying whatever it takes to treat or prevent pain, disability, and untimely death is the right thing to do. Not every country can afford that luxury, but putting money over life in a country as wealthy as America is heartless and contemptible.
Yet we know that our inability to say “no” to effective medications on the basis of cost makes us vulnerable to price gouging and other unfair practices. And we know that drug companies know this too, calling into question whether they are charging a fair price, even as we struggle to define what fair is.
Some argue that pegging prices to the cost of drug development is fair. They call for pharmaceutical companies to disclose what it cost them to develop each drug. Others propose charging for a drug only if it works, although in practice we often do not know if a drug is working for a specific patient. Both of these suggestions are more or less feasible to implement, but they’re not as simple—and maybe not as fair—as they might seem at first blush.
Greater transparency from pharmaceutical companies might sound reasonable and might even help make drug development more efficient. But if drug prices are to be based upon transparency, we need to be clear that they should factor in all R&D costs and other expenses across the entire industry that led to the breakthrough—all the related drug development programs that fell short and all the invested capital lost on entire companies that quietly failed. I suspect that, in the end, that kind of holistic transparency would not serve to expose some vast imbalance between what went into a drug’s development and the price tag it carries on the pharmacy shelf. On the contrary, it would likely confirm what can already be discerned by simply looking at the overall industry’s bottom line: The industry’s overall 10-20% profit margin is not egregious and doesn’t support claims of systemic price-gouging. We’d likely end up right where we are and should be, with prices of branded drugs—generally speaking—reflecting the cost of running the industry as a whole (see Chapter 11).
Despite the evidence, some still believe that the industry’s profits are too high. It has become a popular pastime of politicians and pundits to talk about slashing big pharma profits. That might make for a splashy tweet or headline, but let’s get into the numbers on this. Let’s say that some price controls are put in place, to the tune of a 20% drop in US branded drug prices. That alone would cut the biopharmaceutical industry’s profits in half. Leaving aside the facts that companies and labs would go out of business, thousands would lose their jobs, and innovation would grind to a crawl, what impact would that have on patients’ ability to afford medications? Is a 20% reduction in the price of a $30,000 cancer treatment going to make it affordable for a patient who has to pay a 20% copayment out of pocket? If a patient can’t afford $6,000 but with a 20% discount will “only” have to pay $4,800—does that make it affordable? What about patients without insurance? Instead of $30,000, they would have to pay $24,000. Without proper insurance, cutting 20% from drug prices makes them “more affordable,” but not actually affordable.
If the goal of price controls is to allow patients to afford the direct costs of a branded drug, then the price cuts would have to be much deeper. But the profit numbers tell us that there isn’t actually room to reduce branded drug prices by an amount that would make a significant difference for individuals who need them—not without destroying the industry completely.
This is not to say that individual companies couldn’t be more efficient or that some executive salaries aren’t excessive. There are inefficiencies in every industry and every company, but shareholders are already motivated to push companies to cut any obviously unnecessary expenses. Taken as a whole, it does not appear that the pharmaceutical industry is engaged in some kind of systematic, widespread price-gouging or profiteering.47 The numbers simply don’t bear that out. And, equally importantly, price controls would not result in branded drugs suddenly being vastly more affordable to the people who need them.
So, here we are. Many Americans can’t afford the new, name-brand medicines that their physicians prescribe for them, and that is indeed outrageous. But if the answer isn’t more transparency, top-down price setting by Congress or some federal agency, or other, more obscure international price-pegging stratagems that have been proposed (discussed in Chapter 10), what is the answer? How do we fuel innovation and invest in our society’s health without denying treatments to people who need them but can’t afford them? In what direction should our outrage be directed, and how do we fix this?
* * *
28Sneak peek (since we’ll discuss more in Chapter 4): whenever a patient can’t afford a drug prescribed by her physician, it’s because her insurance company doesn’t want her to. And that’s if she even has insurance. Except for the very wealthy, no patient can be expected to access modern medicine without the benefit of insurance. The same applies to access to branded drugs. Universal health insurance is essential to the Biotech Social Contract.
29“Hep C Drugs: Is Your Plan Really Benefiting From Your PBM’S ‘Deal’?,” National Prescription Coverage Coalition, accessed Oct. 15, 2019, http://nationalprescriptioncoveragecoalition.com/hep-c-drugs-is-your-plan-really-benefiting-from-your-pbms-deal/
30Eric C. Schneider and David Squires, “From Last to First—Could the U.S. Health Care System Become the Best in the World?” The New England Journal of Medicine, July 14, 2017, http://www.nejm.org/doi/full/10.1056/NEJMp1708704.
31On the contrary, the US enjoys faster approvals of innovative drugs, giving many US patients access to important medicines, such as cures for hepatitis C, years before they are used widely in Europe.
32PDCI Report Series, Generic Drug Prices: A Canada US Comparison (Palmer D’Angelo Consulting Inc., 2002), http://www.who.int/intellectualproperty/events/en/R&Dpaper2.pdf;
OJ Wouters et al., “Comparing Generic Drug Markets in Europe and the United States: Prices, Volumes, and Spending,” Milbank Quarterly 93, no 3 (2017): 554-601, accessed Oct. 15, 2019. doi: 10.1111/1468-0009.12279,
https://www.ncbi.nlm.nih.gov/pubmed/28895227;
Irene Papanicolas et al., “Health Care Spending in the United States and Other High-Income Countries,” JAMA 319, no. 10 (2018): 1024-1039, accessed Oct. 15, 2019. doi: 10.1001/jama.2018.1150,
https://jamanetwork.com/journals/jama/article-abstract/2674671;
Shanoor Seervai, “The Truth About Waiting to See a Doctor in Canada,” The Commonwealth Fund, October 30, 2018, https://www.commonwealthfund.org/publications/podcast/2018/oct/truth-about-waiting-see-doctor-canada.
33To be fair, some European countries employ their own price control schemes to extract discounts from the brand manufacturer after a drug goes generic rather than relying on competition among many generics manufacturers, but the effect of using such price controls is that they don’t find out how much lower their prices could have been for a given generic had they encouraged competition, as is the norm in the American generics market.
34“Generic Drugs,” US Food & Drug Administration, accessed Oct. 15, 2019, https://www.fda.gov/drugs/buying-using-medicine-safely/generic-drugs;
OJ Wouters et al., “Comparing Generic Drug Markets.”
35Bridie Taylor, “Treatment of Hepatitis C Has More Than Doubled Since 2013. Yet 99% of People Are Still Being Denied the Life-Saving Cure,” World Hepatitis Alliance, July 28, 2016, http://www.worldhepatitisalliance.org/news/jul-2016/treatment-hepatitis-c-has-more-doubled-2013-yet-99-people-are-still-being-denied-life.
36ORC International Poll, Poll 4 (March 8, 2017), distributed by CNN, http://i2.cdn.turner.com/cnn/2017/images/03/08/rel4d.-.budget.pdf.
37Vinod Thomas, “Will More Infrastructure Spending Increase US Growth?” Brookings (blog), Dec. 13, 2016, https://www.brookings.edu/blog/future-development/2016/12/13/will-more-infrastructure-spending-increase-us-growth/.
38According to IQVIA, in 2018 the US spent a net $344 billion on all drugs, retail, and non-retail drugs, branded and generic. Based on list prices, the total was $479 billion, but one has to subtract $135 billion (~28%) for rebates, discounts, and other pricing concessions. Generic drugs made up 90% of all scripts and about 22% of all spending; branded drugs represented 78.7% of all drug spending, which comes to $271 billion. The US GDP was $20.5 trillion in 2018, which means that the US spent 1.3% of GDP on branded drugs and 1.7% of GDP on all drugs. The US spent $3.65 trillion on healthcare. All drug spending as a % of total healthcare spending is $344 billion/$3.65 trillion = 9.4%. For just branded drugs as a percent of healthcare spending, it’s $271 billion/$3.65 trillion = 7.4%. See: http://fortune.com/2019/02/21/us-health-care-costs-2/. For GDP spent on roads, drinking water, and wastewater infrastructure, see: https://www.cbo.gov/publication/52463
Erik Sherman, “US Health Care Costs Skyrocketed to $3.65 Trillion in 2018,” Fortune, Feb. 21, 2019, http://fortune.com/2019/02/21/us-health-care-costs-2/.
Chad Shirley, “Spending on Infrastructure and Investment,” Congressional Budget Office (blog), March 1, 2017, https://www.cbo.gov/publication/52463.
39Gary Claxton et al., “Payments for Cost Sharing Increasing Rapidly Over Time,” Peterson-KFF: Health System Tracker, Peterson Center on Healthcare and Kaiser Family Foundation, April 12, 2016, http://www.healthsystemtracker.org/brief/payments-for-cost-sharing-increasing-rapidly-over-time/#item-start.
40Health economists would also take into account money saved on fewer work days missed, fewer hospital procedures, doctor’s visits, etc. In this case, I’m referring to how health economists determine how much more society should spend on a drug net of all those savings given a particular QALY-based benefit.
41 This is referred to as the Standard Gamble, but there are other ways of estimating a QALY value for a particular condition.
Wikipedia Contributors, “Quality-Adjusted Life Year,” Wikipedia, The Free Encyclopedia, accessed Nov. 25, 2019, https://en.wikipedia.org/wiki/Quality-adjusted_life_year.
42Overview of the ICER Value Assessment: Framework and Update for 2017-2019 (ICER, 2019) https://icer-review.org/wp-content/uploads/2017/06/ICER-value-assessment-framework-Updated-050818.pdf.
43William S. Smith, “The U.S. Shouldn’t Use the ‘QALY’ in Drug Cost-Effectiveness Reviews”, STAT, Feb. 22, 2019, https://www.statnews.com/2019/02/22/qaly-drug-effectiveness-reviews/.
44Chie Hoon Song and Jeung-Whan Han, “Patent Cliff and Strategic Switch.”
45Rob Wright, “Allergan’s Brent Saunders Shares a Social Contract,” Life Science Leader, Sept. 1, 2017, https://www.lifescienceleader.com/doc/allergan-s-brent-saunders-shares-a-social-contract-secret-0001.
46Not entirely true. The EPA set the value of a statistical life at $10 million in 2016, FDA just under at $9.5 million, and the Department of Agriculture at $8.9 million. So they don’t agree on the value of a life, except that it’s pretty high.
Dave Merrill, “No One Values Your Life More Than the Federal Government,” Bloomberg, Oct. 19, 2017, https://www.bloomberg.com/graphics/2017-value-of-life/.
47Indisputable price-gouging—like price-jacking of an old generic drug—does happen, but on a comparatively small scale. These practices, and others I’ll discuss, can and should be eliminated (I argue for ways to end this practice in Chapters 8, 9, and 13, and the FDA has already implemented some fixes), because such tactics don’t benefit society and therefore should be discouraged.
4
America’s Health Insurance System Breaks the Contract: A Call for Reforms
I’ve described the drug industry’s end of the Biotech Social Contract and the central yet underappreciated role of valuable generic medicines. But what about society’s end of the deal? That’s where health insurance comes into play. For society to bear the cost of new drugs and other healthcare fairly, everyone in America must have health insurance, and that insurance must actually cover the treatments that doctors appropriately prescribe.
But, unfortunately, that’s not what we have today. I’d go so far as to argue that what we have today—a patchwork of government-run and private insurance schemes that often offer inadequate coverage—is not actually insurance at all. Through these programs, the sick subsidize the costs of the healthy, and that’s a problem. At the core of the problem is a trick insurers play on sick and vulnerable Americans that causes them to choose between denying themselves the care they need or bearing a disproportionate share of the cost.
It’s a con game, really, and it is built on the premise that unless a patient is responsible for a share of his or her healthcare costs—through copayments or deductibles—they will seek out unnecessary treatments and services. That’s how insurance companies justify copayments and premiums, but there is mounting evidence that patients cannot discriminate between frivolous spending and life-saving treatments, which means that a lot of people can’t pay for treatments they need, so they don’t get them, or they endure severe financial hardship if they do.48
The out-of-pocket costs borne by the sick are enormous. In 2018, Americans paid $61 billion in deductibles and copayments for drugs and another $310 billion for physician visits and other services—and billions more in premiums.49
Many people who have insurance still can’t afford healthcare, which means they aren’t truly insured against the costs of illness. Adding insult to injury, insurance companies have even found ways to get patients to pay more for drugs than biopharmaceutical companies charge, keeping the difference for themselves. And millions are entirely uninsured.
But I’m getting ahead of myself. Let’s take a step back and understand what insurance is supposed to be, how it is supposed to work, and what the main forms of healthcare insurance are in America.
How Insurance Is Supposed to Work
Insurance spreads individual risk across many people, sometimes all of society, and it works by having large numbers of people contribute small, regular payments, called premiums, into one pool from which an individual can draw upon to make large payments, as needed, should something catastrophic happen. You don’t use insurance for things that are regular and predictable, such as paying for lunch every day. But you can insure yourself against just about anything else that is unexpected or for which timing is unpredictable and that cause us some degree of anxiety—from disastrous events like floods, fires, and car accidents to less-devastating inconveniences like malfunctioning appliances and damaged sports equipment.
To both reduce our anxiety and keep insurance premiums minimal, society seeks to prevent catastrophes from happening. In the case of fires, we create standards and regulations designed to reduce risk and employ fire marshals and inspectors to enforce them. It costs builders more to meet these standards, which leads to higher housing costs, but the alternative—cheaper houses that catch fire more often, more spent on fire departments, and everyone praying that the fire trucks don’t get stuck in traffic—is worse.
In some cases, individuals also have a role to play in mitigating risk and helping to prevent something catastrophic from happening to them. To reflect that and encourage individuals to behave responsibly and not expose themselves to unnecessary risks simply because they have insurance, insurance often requires individuals to participate in the costs that ensue from a catastrophe. This is called a deductible.
For example, if you have car insurance and are in a minor car accident, you might have to pay
the first $500 for repairs, and your insurance plan will cover anything above that. The idea is that this deductible will incentivize you to drive carefully, if not for your own safety, then to avoid incurring the cost associated with an accident. And if your car does suffer minor damage, maybe a ding in a side panel, the deductible might nudge you to just leave it be.
Insurers often work with individuals to help them reduce their risk. For example, flood insurance companies might educate homeowners about sensors that automatically shut off water to the house when they detect flooding. A company might even offer financial incentives to the homeowner for having sensors installed, like money back or discounts on premiums.
Some insurance plans are nice to have, such as insurance on an expensive pre-paid vacation that refunds you if weather turns bad. Other types of insurance, such as home insurance, are optional but feel necessary. Still other types, such as car insurance, are mandated by law.
Why might the government mandate that people buy insurance?
In all but one state, you can’t own a car without car insurance (hello, New Hampshire). What makes this good policy is that, even if you don’t care about your own well-being, if you’re at fault in an accident with another car, the victims have the right to the assurance that your insurance plan will pay their medical bills and repair their car.
Health insurance is increasingly becoming a legal requirement. In Massachusetts, every resident must be covered by a health insurance plan. This isn’t quite the law of the land throughout America, though that’s what the Affordable Care Act (ACA, aka Obamacare) attempted to do by offering people both subsidies to help them afford insurance premiums, as well as levying a financial penalty on those who don’t buy insurance.
The Great American Drug Deal Page 5
