Roy Misses the Value Proposition

During a Presidential election cycle, facts are often the first casualty.

Avik Roy argues that the GOP needs a “clear plan to tackle the high and rising price of branded prescription drugs.” He calls it a Republican “blind spot.” And he’s right – but for the wrong reasons.
According to Roy, “Even 66 percent of Republican voters said high drug prices should be a top policy priority, compared to 60 percent who said the same of repealing Obamacare.” What he doesn’t share (or more likely doesn’t know) is that for most Americans, “the price of drugs” means the co-pay they hand over at the pharmacy when they pick up their prescriptions. That’s not a drug-pricing problem; it’s an insurance industry problem. It’s so easy to blame Big Pharma. That’s the real blind spot.

Mr. Roy quotes from a recent Kaiser Family Foundation poll which says 72 percent of their sample find “drug prices” generally unreasonable. But he doesn’t share that the same exact percentage (72 percent) said they find their drugs affordable. If Mr. Roy is reporting one he should report the other. It’s an issue of probability versus reality and the cost of hep C treatment cost.

Mr. Roy discusses consumer purchasing of iPhones and compares it to healthcare. His assumption that consumers can make choices through transparent pricing is false since, in healthcare, there are pesky things called therapeutic outcomes. Even if consumers have pricing information its not good enough to make an appropriate “purchasing  decision” since they don’t necessarily have or understand the information which drives positive outcomes. This is despite pharmaceuticals being the only segment of healthcare (compared to physician and hospital services ) where pricing and outcomes are the most transparent.

Also, Mr. Roy fails to mention that pharmaceuticals are the only segment of healthcare where the costs plummet after a period of time (brand vs. generics). Today’s expensive medicines are tomorrow’s very inexpensive generics. Today’s hospitalizations, alas, are tomorrow’s even more expensive hospitalizations. Modern medicines continue to provide value in perpetuity – what value does a site of care, like a hospital or an insurer or PBM provide?

Mr. Roy fails to mention that hospitals actually manipulate and increase drug costs by buying up physician practices and shifting site of care. According to Sloane Kettering data, a medicine administered in a hospital setting is 150 percent more costly that one administered in physician offices.  Hospitals make more money by shifting site of care while vilifying drug companies! They also artificially pad their bottom lines by taking advantage of the 340B program – but he fails to mention that as well.

Of course, drug pricing is a complicated matter — which is why the pharmaceutical industry should focus on a few basic points when making its case.
Roy argues there’s no relevant connection between the pharmaceutical industry’s investments in R&D and pricing. That’s intuitively and factually wrong.

Since 2000, drugs firms have spent over half a trillion dollars developing new medicines. And research costs for the last year alone totaled more than $51 billion. That’s up from $15.2 billion in 1995.
These are extraordinary spending levels, even compared to other research-intensive industries. In fact, the pharmaceutical sector spends five times more on R&D than aerospace, and 2 ½ times more than the software and computer industry. This is the kind of investment that pharmaceutical innovation demands, and it’s reflected in the economics of advanced drugs.
Big Pharma also needs to do a better job explaining just how many failures firms endure searching for the next breakthrough medicine. Drug companies must develop hundreds of compounds until they find one suitable for testing on humans. Of those rare compounds that make it to phase-1 human trials, fewer than 12 percent win approval from the FDA.

That’s why bringing just one drug to market costs an average of nearly $2.6 billion and takes more than 10 years, according to researchers at Tufts.

If drug companies were open and honest about their frequent and expensive failures, they could quash the myth that pharmaceutical research is obscenely lucrative.

Consider the controversy surrounding the hepatitis C drug Sovaldi. When the medicine came on the market, it quickly became known in the press as “the $1,000 pill.” This may be a great sound bite, but it’s hardly accurate.

In reality, insurers and benefit managers negotiated discounts that reduced the price of Sovaldi by 20 to 50 percent. But they didn’t pass the full discount on to the consumer. Instead, insurers and pharmacy benefit managers pocketed the money to pad their bottom lines and executives’ wallets. Last year, CVS Caremark Corporation, one of the biggest benefit managers, paid its CEO over $32 million.

For many patients, particularly those without insurance coverage, Sovaldi’s manufacturer supplied a coupon ensuring that co-pays for the drug wouldn’t exceed $5.

But Mr. Roy’s key error is focusing on price as the denominator of the conversation. That’s wrong too, in fact it the fundamental error that allows people like Hillary Clinton and Donald Trump to blame for the biopharmaceutical industry for rising health care costs. The true denominator is value.
Consider one pre-Sovaldi “best practice” treatment for Hepatitis C, the drug Pegasys. This requires one injection a week for 48 weeks — and very few patients see the treatment through to completion, so much of that treatment, both physician time and drug cost, is wasted. Nor is it that much cheaper: At about $7,000/month, the full course of treatment is over $70,000 — barely less than cost of the three months needed for Sovaldi to work a cure.

And the price of not using Sovaldi is very high. One in three patients with the Hepatitis C virus eventually develops liver cirrhosis, and managing these patients is costly. A “routine” liver transplant (where the liver is from a cadaver) costs close to $300,000; a “living donor” transplant is even more expensive.

Thanks to Sovaldi, a pill that cures the disease when taken once a day over 12 weeks will eradicate the need, the risks and the costs of liver transplantation. Such radical innovation deserves to be both lauded and rewarded.

But it’s so much easier to place blame than say thank you. When it comes to pharmaceuticals, we have to learn to understand the value proposition. It’s not just the price of the product –it’s the price relative to the value the product provides to individuals and society.
In short, drugs aren’t the cause of rising health-care costs — they’re the solution. Demonizing new treatments distracts from the real problem in the US biopharmaceutical industry: top-down cost-centric policies that focus on the near-term, short-changing long-term patient outcomes, and so endanger “sustainable innovation” by denying fair reimbursement for high-risk investment in R&D.

But it’s so much easier to just place blame. Easy and wrong.  Avik Roy should know better.