Dr. Andy

Reflections on medicine and biology among other things

Wednesday, November 09, 2005

The cost of medicines

An interesting article (probably not free full text) in the October 26th JAMA about why medicines cost so much. It is a good introduction for those who haven't thought much about the problem including my colleagues who drive around in Mercedes thinking the pharmaceutical companies should just lower their prices.

It does a good job pointing out many of the problems with the current system:
Six major problems with the patent system are (1) recovery of research costs by patent monopoly reduces access to drugs; (2) market demand rather than health needs determines research priorities; (3) resources between research and marketing are misallocated; (4) the market for drugs has inherent market failures; (5) overall investment in drug research and development is too low, compared with profits; and (6) the existing system discriminates against US patients. Potential solutions fall into 3 categories: change in drug pricing through either price controls or tiered pricing; change in drug industry structure through a "buy-out" pricing system or with the public sector acting as exclusive research funder; and change in development incentives through a disease burden incentive system, orphan drug approaches, or requiring new drugs to demonstrate improvement over existing products prior to US Food and Drug Administration approval
but finds many suggested solutions are equally problematic.

For example, one commonly suggested remedy is too require new drugs to demonstrate improved efficacy compared to currently available medicines not just to placebo. The idea being that many new meds are very similar to existing ones (think beta-blockers or statins). The authors point out that having several medicines in the same class may decrease costs by allowing insurance companies to bargain for good prices. In addition, there may be significant medical differences among medicines in the same class.

They have some good suggestions, including requiring post-approval comparison studies of the new medicine vs. established treatment, public funding for study of rare illnesses and something called patent "buy-out" in which the government pays off an inventor for the value of his invention (in this case a medicine) for the amount he/she could have expected to make in monopoly profits and then puts it in the public domain. In this case, the government would pay a pharmaceutical company what it would make from selling a given medicine and then allow generic manufacturers to make it and sell it near the marginal cost of production. This would have the benefit of making the medicine cheaper but still encouraging innovation. Of course how to determine the profit the company would make would be hard and the government would spend a lot of money (not to mention problems of international access).

Nonetheless, there could be significant benefits. For example Omalizumab (Xolair), an anti-IgE antibody for the treatment of asthma, is very effective but very expensive. Only a few asthmatics qualify for it. On the other hand the companies profits are limited because althought very expensive only a few patients use it. If the government paid Genentech/Novartis their expected profits from charging $15-20,000/year for 5% of asthmatics, they'd get the same amount of money. But if the cost came way down, a much larger number of patients could benefit. It seems like a win-win situation. The article notes downsides including difficulty in establish which drugs deserve buyout and calculating a fair price and the difficulty generating enthusiasm to pay a huge amount upfront. In addition, GlaxoSmithKline would be justifiably upset having to Xolair priced cheaper than Advair thanks to a huge government subsidy.

Apparently, the only time this has actually been done is in the case of the dagguerotype patent in France in the 1800s. This may be an example of something that makes sense to economists but is hard to put into practice.

Read the whole article if you are interested, it does a good job addressing the issue of drug costs in an even-handed way.

There were also a couple of interesting statistics in the article. In 2002 drugs accounted for just over 10% of health care spending, up from 5.8% in 1992 but similar to the proportion in the middle 1960s. Also, the average cost of brining a new medication to market is $800 million.

My own sense is that there needs to be effective price competition among medicines. Either consumers (maybe with health savings accounts) have to pay for a lot of the cost themselves so they make tradeoffs like "is $20 more a month worth it for once daily dosing?" or HMOs/insurers have to negotiate prices for specific meds in a class and charge more for patients who use other ones (I know they do this to some degree and it is pretty effective, since almost none of my patients is willing to pay a higher copay than necessary).

6 Comments:

At 3:15 PM, Blogger Suzi said...

One problem with requiring that a new drug show improved efficacy is that some drugs are better than others for certain people. My family has severe reactions to several families of drugs (sulfurs, phenobarbitol, and anything in the night shade family). If those were the best drugs out there and no one made another, my family and I would be unable to use the drugs because the reactions are life threatening.

I don't know what the answer is, but I'm not for limited drug production.

 
At 6:01 PM, Anonymous Wendy H. said...

As a former paramedic, premed student, and pharmaceutical representative, I think I have a somewhat unique perspective on all of this.

The problem is not, as I see it, research costs and so on, or at least that is only part of the issue. I am seeing drugs being sold nowadays that I was promoting in the mid-80s selling for four times what they cost back then. You *know* the drug companies have already recouped their R&D expenses on drugs that old, so why are they gouging patients *now*, at least on those medications? And this is Abbott Labs, which I can tell you from the inside, after seeing more dirty tricks than I can count from many of my competitors, is one of the more reputable companies.

A big part of the current cost of drugs is actually coming from the explosion of advertising on the part of the manufacturers, especially consumer-directed advertising. I'm sorry, but there is just no justifiable medical need that I can see to actively promote drugs of any sort right to the consumer, and I think that consumer pressure on doctors as a result cannot possibly lead to good medicine. The money spent on advertising is simply out of control. The industry *has* put some restrictions on what can be spent to wine and dine doctors directly to get them to write their drugs, but they've just channeled all of the difference and billions more into advertising directly to patients.

So now, if you won't write for what the patient walks in asking for, he decides you're a bad doc and goes down the hall to someone else who will give it to him, whether it's really the best medication for him or not. *No one* is winning with this system - except the drug companies.

There is also another layer to this problem that no one seems to be talking about, and that is the role of the pharmacies themselves in jacking up the prices. Chain drug stores have pretty much run the independant pharmacies out of existence. They act as if they are selling drugs at a discount, but the reality is, in my price comparisons, and knowing what I know about the gigantic discounts they get from the pharmaceutical companies, that they are actually charging *more* than the independants ever did. I've actually paid more at chains than independants for the very same prescriptions, but the difference is actually even greater because of the much larger price breaks the chains get from the manufacturers that they are *not* passing on to the consumer.

Hospitals, of course, are even worse about marking drugs up. I broke my finger in April, and I was charged more than $23 for one single tablet of Percocet, one of the oldest and cheapest drugs out there. It's appalling.

There is also way too much duplication of effort, too many "me too" drugs on the market, even within single companies. Abbott, for example, keeps coming out with more and more new formulations of erythromycin. Yes, there are differences, but they are small ones in this case, that come down more to delivery systems than any real difference in the drug. So you can take something now once a day without food as opposed to having to take it with food, for example. Yes, this is nice and convenient, to be sure, but is it really worth billions of dollars, and the patient or the insurance companies having to pay five to ten times more than one of the older formulations cost? Once they got from a four-times-a-day formulation that almost always caused stomach upset if not taken with food to a once or twice a day formula with enteric coating that protected the stomach, how many more variations on the theme are really needed? So now they're litterally down to just packaging variations. Either it's packaged in a pretty capsule with a bunch of itsy bitsy little purple and white pearlets that all dissolve separately or it's packed into a wax matrix through which the drug diffuses over time, or some such. Big deal.

So, you want to lower the costs of drugs? Start with outlawing advertising to the consumer, clip the manufacturer's advertising budgets overall, require more stringent truth in what advertising remains, and limit the markup pharmacies and hospitals can make on the drugs they sell, and right there, we'll see a huge drop in the costs.

 
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