Wednesday, March 30, 2011

Can the “miracle of the free market” really work when it comes to drug prices?

The Washington Post’s front page yesterday reported on the furor over the “stunning” $1500 per dose price tag for a newly approved drug to prevent babies from being born prematurely. The drug, sold under the brand name, Makena, reportedly uses compounds that previously were available for $10 to $20 a shot. The article says that if all eligible women receive the drug, $4 billion would be added to the national health care bill.

The company that makes the drug argues that “the price is reasonable, given that it is spending more than $200 million to develop the drug and conduct follow-up studies that the Food and Drug Administration demands,” according to the Post. The company also promises to ensure that every woman who would benefit from the drug will be able to get it.

As of this morning, the website of the of the Pharmaceutical Research and Manufacturers Association had no comment on the Makena controversy, but a 2005 speech by then-PhRMA president Billy Tauzin makes the industry’s case that R and D costs are the reason why new drugs cost so much:

“Only 1 in every 5000 compounds gets all the way from the lab through FDA approval. For those that do, the average research cost comes to about a billion dollars. It takes about 14 years of research and clinical trials to bring a drug to market. At that point, the company only has six years at most left on the patent to try to recover their costs. Of those drugs that make it all the way to market, how many manage to recover their costs? Only three out of ten. As the math makes clear, it’s the handful of blockbuster drugs that foot the bill for all of our industry’s R&D – an investment that last year came to almost $39 billion. Let’s put that in context: That’s more than the operating budget of the National Institutes of Health… It’s 19 times as much as pharmaceutical companies were spending in 1980, when I first came to Congress. .. This kind of research is possible for one reason, and one reason only – because of the miracle of the free market system, and its ability to pull together the needed resources.” Now that really would be a miracle drug.”

The problem with PhRMA’s argument, though, is that it doesn’t seem to apply to Makena. “The main study used to demonstrate the drug’s effectiveness was a $5 million project conducted by the National Institutes of Health — paid by taxpayers” writes the Post, and the drug is based on compounding pharmacies, which were previously widely available at very low cost but were of questionable purity and consistency.

So what should a policy-maker do? Eat the cost and pay the $1500 per dose? But wait—unlike other parts of the health care sector (like physicians), drugs generally are not subject to government price controls. Deny eligible women access to the drug? Pass the cost on to everyone else?

I understand that price controls are a blunt instrument that can do more harm than good. A 2008 position paper I co-authored for ACP, published in the Annals of Internal Medicine, compared U.S. health care to other countries’ systems, including how different systems control costs. It concluded that “Cost savings can be achieved through the use of government power to negotiate prices . . . but may result in shortages of the services that are subject to price controls, delays in obtaining elective procedures, cost shifting, and creation of parallel private sector markets for health care services for those who can afford to buy services from sources not subject to price controls.”

Yet as the pricing of Makena demonstrates, not giving government the power to negotiate prices, may result in shortages, delays in obtaining care, cost-shifting, and different access for those who can afford to buy the drug and those who can’t.

Maybe Makena is an outlier, and PhRMA is right that the “miracle of the free market system, and its ability to pull together the needed resources” is the engine behind the development of beneficial new drugs. But you have to wonder, as appears to be the case with Makena, when there is no competition for the drug, when the number of people who will benefit is great, when the taxpayers footed most of the bill for the R and D that led to the drug’s development – and yet there is no ability for the government to condition coverage on negotiating a reasonable price.

Today’s questions: Should the federal government be able to regulate or negotiate prescription drug prices? And what does the Makena controversy say about the broader argument that “the miracle of the free market,” not more government regulation, is the answer to the country’s access and cost problem?


Roy M. Poses MD said...

Health care has not been and never will be an ideal free market. There is too much uncertainty about diagnosis, prognosis, and effects of treatment; there is too much information asymmetry - patients rarely have enough understanding of the medical and technical issues to act like informed, coldly rational consumers; and it is too difficult for patients to make decisions unemotionally in the face of possible disease, morbidity and death. Kenneth Arrow explained this all in the 1960s. (See our blog post on Health Care Renewal:

That is why patients need physicians who are pledged to put their best interests first to guide them and help them make decisions.

In retrospect, the movement to try to pretend that health care could be a free market, and hence to suggest that physicians should be businesspeople first, not professionals, was crazy. But it certainly has been profitable for certain people and organizations, and that may be why it has been going on since the 1970s. (See this blog post:

Given that health care cannot be a free market, it is not unreasonable to try to make it more fair through prudent government regulation. Furthermore, whereas government control of drug prices might be hard to justify, why shouldn't government negotiate prices when it is purchasing drugs on behalf of others?

In fact, it was crazy that Medicare Part D prohibited government from negotiating prices. Would we authorize defense spending but then say the government should pay whatever the defense contractors ask? In retrospect, part D now seems like a pure bit of favoritism bestowed on the pharmaceutical companies.

Steve Lucas said...

You may also like to review the March 10, 2011 AP story Preterm labor drug skyrockets to $1,500. This article notes that the total cost of this drug during pregnancy can reach $30,000.

Troubling to me is that PHARMA rolls out this “free market” concept anytime it will add to their bottom line. My reality is that most primary drug research is done by the NIH and then handed over to the drug companies for further development. They are just as quick to hide behind FDA approval when a problem arises with a drug.

Today we have junk medicines and devices being supported by junk science. When the business guy starts having problems with the range and size of your sample, you do have a problem.

America is the most lucrative medical market in the world and we have seen the associated gamesmanship to extend patents and eliminate competition.

While no system is perfect, other parts of the world do not seem to be short of medical treatments with price controls. This specific drug was being compounded in small quantities, so returning to the old price will not necessarily mean the loss of this drug.

The free market has pushed down the price of many common drugs. Think WalMart, CVS and your local grocery. We need regulation to stop the drug companies from gaming the system to take advantage of situations like this, and orphan drugs in general.

Steve Lucas

Robert J. Sobel, M.D. said...

Thanks for bringing up this particularly illustrative example of how dys-regulated drug pricing is in this country. The disconnect between enforced fee schedules on medical professionals, fixed reimbursement for procedures, lab tests, and imaging, and the free-for-all that is the brand-generic dichotomy is quite drastic. This is the most egregious aspect of the status quo, as it diverts resources to the new, whether it is proven or not, marginally effective or a true advance. The established is squeezed, becomes less lucrative, and proceeds the way that history has already proven (volume-driven with a bias toward expensive interventions). The backlash of further cost reductions, extra bureaucratic steps, and the threat of overt rationing by government entities (to add to current payor discretion) saves little. The arguments for the cost-effectiveness of generics fail to look at the whole picture. If we froze the system, costs would stabilize. If we want continued innovation, we need a better way.

The only way to stabilize drug costs and facilitate innovation, is to prorate the price of the new. Old drugs should be defended, and reimbursed for their proven value. New drugs should be introductory priced, lobbying the regulatory board at periodic intervals. Patients and doctors should be protected from the third party hassles, which would be markedly reduced in a system of Regulated Royalties.

I have plenty of incentive to put good thought into the care of my patients, to balance lifestyle advice and pharmaceutical intervention. I need not be pushed around by the cost-driven entities telling me one thing then another about my decisions. My patients will give me all the feedback I need, and I'll read the few remaining sources of unbiased information to hone my clinical knowledge. If reimbursement keeps up, we stay in business and patients stay away from costly complications. If not, the core of primary care is lost to the dream of accountable care entities. No bureaucratic reform on health care providers will solve our cost dilemma, in the setting of unfettered drug and new technology pricing.

Bob, this is a topic where the ACP could actually help us. Being a specialty neighbor to my own medical home just does not seem a worthy construct, so I can then beg the hospital for my part of the bundle. We shall see.

Robert J. Sobel, M.D. said...

The latest is a 50% discount. The FDA giveth and it taketh away. The dys-regulation of the artificial dichotomy goes on.

At the same time, the Supreme Court is hearing appeals on metoclopramide and whether the generic can use preemption, as they had no authority to change the FDA label. The questions show that even our supreme court justices struggle with the fallout of Hatch-Waxman and the lawsuits it has spawned. If indefinite liability is appropriate, then it seems impossible to decide who to sue. We will see how they rule.

The granting of indefinite exclusivity is a guarantee of who is responsible. The role of a fee structure that does not involve the current over-extension of third parties into the basic practice of medicine (which agents to prescribe) is an urgent necessity. The current fiasco is now ARBs, as Cozaar generic is now the exclusive generic (double meaning intended, as it seems the third parties want it for everyone). Ditto the nasal steroids. The games are an urgent threat, and keep evolving.

A true free market would be driven clinically. Medicare could make the urgent turnaround it needs, by judiciously applying a "regulated royalties" pricing structure to replace the Part D fiasco that imported the managed care excesses of the private industry and is now 25 + % of Medicare. We could correct the SGR on the savings. FDA approval would be the first basis. Data could be obtained from a stable pharmacy distribution system (local remains the historical choice and most logical) that is passive (not interventional) and may even leave room (with the ease of new technologies) for small neighborhood pharmacies to thrive. The neighborhood concept in medicine should be used a lot more literally: A pharmaceutical distribution system that keeps supply steady, is ready for disasters, protects the old, and develops and introduces the new more carefully.

The freedom from the daily hassles would be quite a gift. I guess our current system is too entrenched for my idea to get any traction. It is an ongoing shame that we can't do better.

Tarah said...

So firms have split the difference through the sale of technology licenses and participation in technology-sharing compacts that pay huge dividends to the economy as a whole--and thereby made innovation a routine feature of economic life. Can relationship banking affect too?