Ben Pope responds to Eric Bender’s article, “Cost of Cancer Drugs: Something Has to Give” (Managed Care Magazine).
Ben Pope, Ph.D., works with a group of scientists and engineers who aim to cure diabetes. Cross-trained in biology and engineering, he leverages and develops technology across multiple disciplines to elucidate the molecular bases of human nutrition towards therapeutic development.
I am often puzzled by the enormous sale prices of modern art, partly because I prefer baroque, but also because I am cheap and not in a position to buy much of anything. To me, six inches of duct tape and a banana are worth a few cents, but to certain modern art patrons, the combination was worth more than two years of income for most Americans. Despite my lack of appreciation, the monetary value of this artwork, as with all exchanged goods and services, was determined by the negotiated price someone was willing to pay.
In a 2018 article, Eric Bender argued that cancer drugs aren’t worth the price we pay for them and recommended legislative measures be taken to align prices with the values drugs provide. In support of his arguments, he shared insights from government and industry professionals and cited facts and figures on the trajectory of the drug market. Medicine can and should be broadly accessible, but some of the points raised by Mr. Bender and his interviewees lacked economic sense. His criticisms and proposed reforms were strangely restricted to drug companies, failing to highlight payer inefficiencies, increasing costs of care beyond drugs, and misguided policies that perversely incentivize increased spending. Below, I counter Mr. Bender’s points and propose that healthcare reform efforts should refocus to include healthcare coverage and provider efficiency in addition to drug pricing.
Are drug prices increasing at unsustainable rates?
Lee Newcomer, MD, a retired senior vice president for Oncology, Genetics, and Women’s Health at UnitedHealthcare, is quoted by Mr. Bender, claiming, “Cancer drugs are a prime example of a level of growth in healthcare costs that is unsustainable for the country as a whole.” This claim is difficult to support since the percentage of US healthcare costs spent on prescription drugs is relatively stagnant at approximately 10% and net drug prices have been flat the last couple of years.
If drug prices aren’t growing at unsustainable rates, at what rate are they growing and why? As evidence for increasing prices of cancer drugs, Mr. Bender cited an analysis indicating that inflation-adjusted prices increased 100-fold from 1965 to 2016. Referencing several interviews, Mr. Bender attributes increases in drug prices to price-gouging by drug companies. In one such interview, Peter Bach, MD, director of the Center for Health Policy and Outcomes at Memorial Sloan Kettering Cancer Center says “Drug companies themselves are very active in exacerbating the problem, as you would anticipate, because higher prices equal higher revenues equal higher share price equal happier senior execs and shareholders.”
But, the drug industry’s profit margins, historically fluctuating in the teens, don’t make the top ten and are consistent with industries that similarly rely on trained specialists, such as accounting and legal services. Though not mentioned by Mr. Bender, the cost of drug development also rose 20-fold from 1970 to 2010. The residual fivefold increase in prices relative to development costs (i.e. 100-fold price increase / 20-fold cost increase) would be decreased further by normalizing the different time periods analyzed for each measurement. The bottom line is that higher revenues are funding increasingly expensive innovation and more of it.
Are pharmaceutical company profits built on classic free market competition?
Mr. Bender goes on to contend that drug company “profits are not built on classic free market competition” and uses this point to justify price controls on drugs. Mr. Bender’s point about competition is correct, but this is only half the story. The prices cited by Mr. Bender were recorded at the time of FDA approval, when the drugs were patent-protected. Patents are granted by the government to inventors that advance technology in new, non-obvious, and demonstrably useful ways. They incentivize innovation by creating temporary monopolies that allow inventors to commercialize new technology without direct competition. In a monopolized market, profits can be maximized by restricting the supply of a product such that the marginal willingness to pay (and thus the negotiated price as in the modern art example) exceeds what it otherwise would be in a competitive market. In reality, patent-protected drugs still compete with alternatives that work in a similar manner but are different enough to circumvent the patent as we’ve seen with statins and GLP-1 drugs for diabetes. Where there are multiple drugs in the same drug class, profits are somewhat constrained by competition. Still, patent-protection explains why new drugs are so expensive at the time of FDA approval, and the profits they enable explain why investors and companies are willing to bear the risks of drug development.
After FDA approval, the typical life of a patent is approximately 15 years, after which exact replicas made by generic competitors can enter the market and decrease prices by as much as 90 percent. For example, in today’s dollars the cancer drug paclitaxel (Taxol) cost over $1,800 for a three-week treatment when it was FDA approved in 1992. Now, the same treatment costs less than $200, an 89 percent drop. So, while new, patent-protected drugs are very expensive and less accessible due to temporary monopolies, those same drugs will become inexpensive and broadly accessible via free market competition in a few years when the patents expire.
Although this system generally produces favorable results for society, Mr. Bender correctly condemns business practices that jack up the price of generics or extend monopolies, as occurred in the case of Gleevec. To eliminate loopholes, legislation should be introduced to ensure that drugs go generic on schedule via mechanisms like “contractual genericization” described by Peter Kolchinsky in The Great American Drug Deal. Someday, we’ll achieve all that is possible with medicine, and when the last drug patent expires, we’ll all be much healthier, longer-lived, and no longer spending very much money at all on drugs.
How can we make new drugs accessible for more patients now?
While current drug prices are sustainable for the economy, reflect the increasing cost of drug development, result from intentional incentives that are advancing medical technology, and will eventually produce inexpensive cures for the rest of time, the current cost of treatment remains prohibitive for some and a significant financial burden for many others. So how can the full benefits of our current medical technology be more equitably distributed?
Mr. Bender argues that the answer lies in price controls for drugs, even if those controls prevent the development of future drugs. He again quotes Peter Bach, MD, who argues, “Ultimately, society has to decide how much it wants to pay to save people’s lives. Right now we’re not willing to say no, and the question is at what point will we say no. When we do it, we’re coming for the drugs first.” This stance is short-sighted for at least two reasons. First, for what noble purpose are we going to trade the prospect of eradicating the diseases that will otherwise afflict our children? Our outlook in the midst of this COVID-19 pandemic would certainly be much worse without knowing that scientists are developing potential cures. Second, drugs account for less than 10% of healthcare costs, with 70% composing service-related costs including doctors’ appointments, procedures, and hospital stays. The relatively small fraction of total healthcare costs that we spend on patent-protected drugs is like an investment into future generic drugs that will reduce spending on hospitals and services. Considering that hospitals and surgery become more expensive each year and don’t go generic like drugs, we’ll spend more and more on healthcare services forever if we don’t invent drugs to keep us out of hospitals. The only thing that drug price controls would do is temporarily reduce spending but permanently suppress innovation that could leave us spending far more on healthcare services over time.
Reforms meant to solve affordability should focus on improving the design and efficiency of healthcare coverage as well as the efficiency with which hospitals and medical providers operate. As Mr. Bender rightfully points out, the main reason that care is unaffordable is because insurance companies are shifting more costs to patients in the form of deductibles and copayments. Astonishingly, all $61 billion in out-of-pocket costs (i.e. costs in addition to monthly premiums) that Americans paid for drugs in 2018 could be eliminated by increasing premiums by just over 2%.
Instead of increasing premiums, a second option is to balance restrictions on copays and deductibles with reforms that incentivize the reduction of healthcare costs. In this scenario, it may be possible to achieve affordability without increased premiums or reduced profitability. Opportunities for cost reduction have been discussed and include inefficiencies in healthcare administration, which cost the US two and a half times more than we pay for all prescription drugs. Unintentionally, the “Medical Loss Ratio” law, which specifies the percentage of insurance revenues that can go toward company operation and profit, also contributes to pricing inefficiency. Under this law, an insurance company’s potential profits increase when total healthcare costs increase, creating a disincentive for cost reduction. An effective policy would incentivize insurance companies to negotiate the lowest possible prices for care while preserving quality.
In the long run, the health benefits of generic drugs are affordable and worth the price we pay for them. Removing incentives for drug development through price controls of patent-protected drugs will only ensure that future generations suffer from the same diseases that afflict us and the new diseases that will come. Drugs are the one aspect of healthcare that controls their own cost to society by going generic, and regulations aimed at drugs should focus on ensuring that they continue to go generic without undue delay.