Monday, I linked to that New York Magazine story on over-priced drugs of marginal utility.

For me, it raises two questions:

First, of course: In a world of limited resources, how do we get to a better balance of cost and results for our healthcare system?  Does it make sense to spend a fortune on drugs that add little or nothing in terms of efficacy?  That’s the important question.  And it leads to questions like: should Medicare be allowed to negotiate drug prices?  Are our pharmaceutical companies swinging for the fences in search of breakthrough treatments — or, as suggested, in New York Magazine piece, are they now largely incentivised to make minor differentiations that will allow them to charge — and receive — a fortune for something that already basically exists?

Second:  Should I sell my drug stocks?  That’s a question of little importance, but it still interests me.  And it leads to questions like: will the government and private insurers eventually drive a harder bargain with the drug companies . . . even as we continue to provide loads of inventive for research and ever better health care?

I’m no expert in this, to say the least.

One of my friends who is an expert, and who has strong feelings he’s shared with me privately over the years, is our very own Guru.

Another is esteemed reader Kevin Knopf.   Let me first hand the mike to him, then to Guru.  (There will be no quiz.)


The drug cost problem is a very complicated one – multifaceted.  The New York Magazine piece touched on some of them, but certainly not all.

I’m a researcher in Cancer Pharmacoeconomics (the economics of cancer drug prices), with a masters of public health degree so I may see it from the liberal perspective.  But let’s consider some defense for the drug companies, to keep it fair.

#1  The US is a capitalist country.  The drug companies are behaving as they should in this system — maximizing profit and ROI.  Other corporations act the same way — Apple, JP Morgan, Goldman Sachs, Bain Capital, etc.

#2  Because all industrialized countries besides the US  have a single-payer system that holds down drug prices, much of the money for R&D ostensibly comes from the higher prices Pharma can charge their US customers.  This means the US health care system is financing other countries’ health care systems.  As a result, our corporations spend more on insurance premiums, which affects their profitability in the global marketplace.

#3 – Very early in the negotiations for Obamacare, President Obama met with Pharma executives and assured them they would not lose profit under Obamacare.
(Here I should point out that we physicians got no such promise.)

#4 – With the drying up of federal funds for medical research, particularly the NIH whose budget has been axed repeatedly by [the Republican] Congress, many drug companies are supporting development of our researchers with post-doc positions, and career tracks that formerly were in academia (via grants).  A whole generation of researchers are having their careers with PHARMA.  And, via partnerships with academic medical centers, they are supporting the careers of many physicians and researchers.

It gets more complicated after that.  If you have the time/inclination, I gave a ten-minute talk on health economics to a group of MIT alums, about how to fund cancer research, including pharmaceutical R&D.  My talk starts about six and a half minutes into this link.


In a free market economy, the buyer must experience the full effect of the price and then choose between alternatives.  But in our healthcare system, the game is to ensure that the buyer—the consumer—does not experience the full effect of the price.  And, of course, there often are no alternatives.  Even when there are, the drug makers game the system.

New cancer drugs are now being launched at more than $100,000 a year, even if they add on average 2 months to survival.  Drugs for orphan diseases (those with fewer than 200,000 affected) are usually priced at $250,000 to $400,000 a year.   Once the drug is approved and priced, the company must get it onto an insurance company’s formulary.  The standard approach for most insurance companies is to accept whatever price the company charges, believing it would be a political hot potato to deny kids with rare genetic disorders or cancer patients drugs that could help them. 

The insurance companies create three tiers of reimbursement.  Tier 3 usually means hundreds or a thousand dollars per month out of the consumer’s pocket by way of the co-pay.  But to keep this from deterring sales, the drug maker turns around and sets up a “reimbursement division” that “coupons” — literally sends the patient a check — to cover that out-of-pocket expense.  So the consumer may experience zero price effect.  And the drug companies do fine.  If the list price is $400,000 a year, the net after “couponing” might be $320,000 or $350,000, but even at that, the cost of goods sold is still about 11% — leaving plenty of profit!  Who pays for this?  It goes straight to the rest of the insurance policy purchasers (or the taxpayers):  cost shift to thousands (or millions) of people who have absolutely no say in the process.

Let’s take some examples:

1.  If a product has been on the market and there are numerous alternatives, you expect the price to go down.  (Take the cost of a cellphone, for example.)  Not in the pharmaceutical business.  Amgen (AMGN) and Abbvie (ABBV) both have antibodies against TNF to treat arthritis.  The big breakthrough is that ABBV’s antibody, Humira, can be taken every two weeks, whereas Amgen’s Enbrel is once a week.  Both products have been on the market for more than ten years and there are several other anti-TNF antibodies also on the market.  Nonetheless, AMGN and ABBV raise price every year more than 10% –that’s about 5 times the CPI—and it sticks.  AMGN has not seen in increase in unit growth of Enbrel for a few years, but sales of Enbrel keep growing double digits purely because of price, and that price increase goes straight to the bottom line, while the policy holders of insurance companies have to see double digit price hikes in their premiums.  Does Enbrel work twice as well as it did when first launched?  No.  Are there fewer alternatives?  No, there are many more.  Yet Enbrel is priced are more than twice its original price.  Why? Because the companies can get away with it.  There is no gatekeeper.  You just cost-shift to the group of people who have least say in the process.  Sure, they could try to switch plans, but all the plans are in on this.

2. Let’s take another example.  JAZZ pharmaceuticals.  Jazz sells Xyrem—GHB.  GHB was available over the counter in the health food stores until 1990 when the FDA figured out that high doses of GHB caused potentially fatal side effects and banned it.  Studies were going on in the 1980s that suggested GHB is useful for sleep disorders.  GHB, after all, is made in your brain—it’s a neurotransmitter.  In any case, a start-up company called Orphan Drug decided to conduct trials in “narcolepsy” patients, defined broadly as those with “excessive daytime sleepiness.”  Yes, there are a tiny number of people with the classic narcolepsy that causes them to fall over asleep in the middle of the day.  On the other hand, “excessive daytime sleepiness” is something probably most Americans have had at one time or another.  Orphan got GHB approved for narcolepsy by the FDA and JAZZ bought Orphan.  Initially, GHB was priced about $3,000 a year—an enormous mark up to the health food store price, but roughly in line with anti-depressants and other neuro-affective drugs.  The idea was to sell a little for narcolepsy and a lot more for a condition called fibromyalgia syndrome that affects millions of people.  The fibromyalgia trials succeeded, but the FDA rejected the application because the risk of fatalities from widespread use of GHB was too high.  In response, JAZZ jacked up the price of GHB to focus solely on the “orphan” indication of narcolepsy.  They currently price GHB at more than $45,000 a year!  In February 2014, they took a 12% price hike—that’s about 6 times the CPI.  How many people in America got 12% salary increases?  Well, JAZZ just took the price hike.  Is GHB patented?  No.  However, Jazz has a “patent” on their system of “limited distribution” to avoid fatalities (oh, there have been fatalities among patients on GHB sold by Jazz—maybe fewer than there would be) and Jazz is fighting the FDA to approve other applicants who want to sell GHB.  Is this capitalism?  No, it is cronyism—where you take an old drug and price it at astronomical levels to make big profits for Henry Kravis (one of JAZZ’s founders) by gaming the system.  It is the opposite of capitalism.

3.  Or let’s look at Horizon (HZNP).  Horizon sells prescription ibuprofen.  Yes.  Prescription ibuprofen. The high dose (800 mg) required by some patients for arthritis comes in a “prescription” tablet so that the doctor can monitor the patient for stomach bleeding side effects.  Can you buy a bottle over the counter and take four 200 mg tablets without a prescription?  Yes, you can.  Still, there is prescription ibuprofen.  There are numerous generic manufacturers.  A bottle for a month is about $6.  To combat the risk of stomach bleeding, you can also take over the counter famotidine or omeprazole.  Again, a month’s supply will cost about $4.  Take both and your cost is $10/month.  Horizon developed a single pill that staples ibuprofen to famotidine.  Does this improve the efficacy?  No.  It slightly decreases the efficacy.  Still, it improves compliance.  It ensures that the patient takes both.  I suppose it is too much to ask the patient to take pills from each bottle.  Still, there is nothing here that can’t be done better by taking the two pills.  Horizon was flogging their prescription ibuprofen-famotidine and making little money until a year ago when they jacked up the price from about $100/month to $500/month and now about $800/month.  Yes, $800/month versus $10/month for medically the same thing.  Again, the plans approve this as a “tier 3,” but Horizon “coupons” the patient so his out of pocket is–$10/month!  Who pays for the rest?  You and I do.  The strategy of Horizon is to troll for doctors who will write prescriptions for their drug combination and to set up a “specialty pharmacy” that ensures that the patient gets the Horizon version and not a generic or over-the-counter equivalent, even though medically speaking, they are all the same.  The result?  Revenue and profits are exploding and HZNP has gone from $2/share to $13/share.  All for gaming the system.The only entity that does not allow itself to be gamed is the government:  Medicare and Medicaid do not allow “couponing.”  Horizon has dropped Medicare patients as a result:  doesn’t even focus on them.  Why do doctors write for this combination when there are generic equivalents?  The doctor does not pay for it—she never sees the price—and the doctor worries that the patient might get a stomach bleed without the famotidine component.  It is an understandable concern, but really, the patient can accept some responsibility, take two pills instead of one, and save the system $790/month.

So this is a big portion of the American drug industry:  set prices anywhere you want . . . raise them yearly at five to six times the CPI . . . “coupon” the person who otherwise would experience the pain of the price and seek cheaper alternatives . . . and shift costs to the rest of us who have absolutely no say in the process and who see the cost of our healthcare go up well in excess of the rises in our compensation.  Stiff the American public and tell them you are doing them a good turn.

Meanwhile, just FYI, the UK has the NICE committee and Germany has the IQWIG committee, both of which do draw the line–a line is always drawn explicitly or implicitly–about how much benefit (in terms of years of quality life saved) is required to get reimbursement in those countries.  The responsible adult thing is to admit limitations of resources and draw some lines (ration).  The infantile approach is to be entirely emotional and insist that no lines ever be drawn.  We all will die, so there’s one big line.  The UK and Germany have made very sensible moves.  I hope we do, too.



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