Making a Lot of Profit with a Drug ≠ Making a Lot of Health with a Drug

The New York Times has a healthcare blog called The Upshot, and Austin Frakt of The Incidental Economist is a regular contributor. He recently wrote an article about drug prices, which is what got me thinking a little more about drug prices and prompted my post last week.

Sidenote: He has not been blogging very regularly anymore on The Incidental Economist, and it feels like a great hole has opened up in the health policy blogosphere. He has a great way of getting interested in a topic and finding all the useful evidence on the subject and then synthesizing it all, and through that process thousands of followers get carried along that journey of learning about an important health policy topic.

I think the topics Dr. Frakt covers in his most recent Upshot article are important, so I want to highlight some of them.

First, there is a link between higher prices and more innovation. Drug company executives aren’t dumb–if there’s a lot of money to be had in a certain drug market, they will put their R&D investments into those areas.

But the potential to make a lot of money with a drug doesn’t always line up with the potential to make a lot of health with a drug. We try to help those two things line up by manually setting patent lengths longer for drugs that will have a greater impact on health, but American politics is messy, so it doesn’t always work out that way. Another way to try to help those two things line up is by using administrative pricing. For example, New York Medicaid, similar to many countries, establishes prices based on a drug’s “therapeutic value.” If there is a high therapeutic value, the drug will be priced higher, and therefore the drug company will make more money if they focus their R&D on areas that are the most likely to increase health.

There is a whole independent nonprofit group dedicated to helping figure out the therapeutic value of drugs, and it’s called the Institute for Clinical and Economic Review (ICER). Some have proposed Medicare use the recommendations from ICER, but these days the trending proposal (which essentially accomplishes the same thing but is more politically palatable) is to instead look at the prices other countries set for drugs (presumably based on therapeutic value assessments) and then set our prices similarly. This is referred to as international reference pricing.

And while I think these proposals make a lot of sense because I, too, want more medications available to help my patients better, from a market perspective, I still have huge reservations to these sorts of administrative pricing proposals. It’s the same argument I end up at every time an administrative pricing proposal comes up: Taking the pricing power away from the collective knowledge of the market and putting it in the hands of a group of experts will never be accurate enough to allow the most efficient use of resources. And, in impossible-to-predict ways, it may create barriers to innovation.

I will talk more about the specific downsides of administrative pricing next week. And, by the way, my purpose here is not to say that administrative pricing is always wrong; rather, my purpose is to say that there are significant unpredictable costs associated with such a policy, and those short- and long-term costs need to be taken into account when deciding which policy would be best.

Maybe This Is Why Drug Prices Are So High?

Communism bread line (the result of administratively set prices)

If you’ve ever taken an Econ 101 class, you will have learned that even monopolies are constrained on how high they can price something. The reason is because if the price is too high, people will just do without the thing, or they’ll substitute something else to fulfill that same job in their life.

Any medication under patent is a monopoly, but nearly all of them have substitutions available or can be lived without. For those drugs not under patent, they can be manufactured by several different companies, so there should be price competition pushing the price down even further.

Then why are drug prices so high?

I am not trying to force-fit my ideas to make them explain everything about the whole world, but let’s just think about value-sensitive decisions in the drug market for a minute.

Value-sensitive decisions come about when people are considering the price and quality of their options and making a reasoned decision about which one is the best value to them. This is what stimulates competition to offer the highest value to people.

Do people make value-sensitive decisions in the drug market?

I’ve prescribed thousands of medications, and not once have I enabled a patient to make a value-sensitive decision.

For example, let’s consider anti-depressants. There are many options. And there are even some decision aids out there (for example, this one created by the Mayo Clinic) to help doctors and patients together choose the one with the best benefits and side effect profile for the individual. So we are looking at the quality of their different options.

But nobody knows the price.

Often doctors will know that a certain med is still under patent and others are generic, but that’s about as good as it gets. I’ve written before about how difficult it is to find the cheapest price for a medication–it was even impossible for me, and I was knowledgeable and highly motivated and spent a lot of time searching.

So here we have a market where the person actually paying for the product usually isn’t the one choosing which one they will buy, which means out-of-pocket costs are often completely forgotten, and neither the consumer nor the one choosing the product for the consumer has any idea about relative prices other than an occasional very general notion.

This sounds like a perfect setup for the suppliers of these products to take advantage of that, doesn’t it? They know setting a high price will make little difference on their sales. For them, given their incentive scheme, setting a high price isn’t greedy; it’s a rational profit-maximizing response to a horrible incentive scheme. And, while setting a super high price, drug manufacturers use other means to try to persuade people to buy their product, whether it’s by advertising to doctors in many creative ways or advertising directly to patients. This advertising arms race inflates prices even more, by the way.

So if we want to get drug prices down, we have a choice between (1) fixing the core cause of the market failure by finding a way to get doctors and patients to know out-of-pocket prices at the time they’re choosing medications or (2) just straight up administratively setting prices. I guess, realistically, there is a third option of getting the insurance companies that are the intermediaries in this market to try to negotiate for better prices on behalf of their enrollees. This can help, but it will not be nearly as effective as value-sensitive decisions on an individual level. And having read The Road to Serfdom recently, the enormous downsides of trying to administratively set prices are fresh in my mind.

I will be very excited the first time I see a politician propose to lower drug prices by helping patients make value-sensitive decisions, but I haven’t seen a proposal like that yet.

Academic Integrity

People in our culture think they can never admit they are wrong. This is especially true of so-called experts in any discipline. I’m not sure if it’s a pride thing, a worry that it will undermine their credibility/reliability as a source of good information, or (maybe more likely) a mix of both.

Politicians have the added consideration that people would be hesitant to vote for someone who admits they were wrong and then changes their position on an issue–it begs the question of what else they are going to change their mind about. Entire parties seem to get locked into this defending-previous-opinions cage even if that previous position doesn’t make sense anymore.

The more intelligent someone is, the better they are at justifying or spinning their position to make it seem like they weren’t wrong.

And I’m tired of it.

The benefit of having the academic integrity, humility, and bravery necessary to admit you were wrong more than compensates in the long run for any possible short-term downsides. Admitting fault acts as a signal to others that even experts are fallible humans, too, and that they, too, are still learning and improving. It shows we are not close-minded and dogmatic. And most importantly, it shows we are seeking truth rather than selfish aims.

Our learning and growth and progress will be stunted if we are ever-defending our errors. So let’s stop.

This is my reminder to do that myself, and it’s my encouragement for everyone involved in politics and policy to do the same. I am committed to being transparent about my areas of ignorance and my wrong assertions and also my biases. And as I work at completing and perfecting my knowledge, I will continue to try to be a reliable source of information by suspending judgment on an issue until I feel like I have understood all aspects of it thoroughly enough to make a sound assessment of it.

NEJM’s Fundamentals of U.S. Health Policy, Part 3: Do We Spend Too Much?

Photo by Scott R on

This next part in The New England Journal of Medicine’s fundamentals of health policy series is written by my favorite health policy writing duo–Drs. Baicker and Chandra. They both do amazing research independently, but when they work together to write an article, it seems to be extra insightful and interesting.

Their task with this article is to help people think deeper than the simplistic sentiment, “The U.S. spends way more than every other country on healthcare; we need to cut back, and any increase in spending is wasteful!”

Key insight: Only looking at the aggregate number obscures many important facts about our healthcare spending; digging a little deeper totally changes the conversation.

Here are my favorite examples of this from their article:

  • As nations grow richer, they spend more on healthcare. So, based on that alone, the U.S. would be expected to spend more than nearly every other country. Of course, this doesn’t explain all the difference between our spending compared to other countries, but it explains a lot of it, and it’s not a bad thing. A related side point they make about this is that it “highlights the challenge of putting all Americans, with very disparate incomes, into a single insurance plan.”
  • Studies that conclude our higher spending is purely due to higher prices (rather than higher quantity) aren’t able to account for all the inter-country differences in quality or intensity of care. This one was news to me, and you’ll see in my prior writings that I didn’t know this. You see, I thought that if a study shows that we generally have the same number of hospitalizations, doctor visits, prescriptions, imaging studies, etc., they would have controlled for differences in what kind of doctor visits (primary care vs. specialist) and scans (a 0.5-Tesla MRI vs. a 3-Tesla MRI) and such were being delivered. But that’s wrong–researchers don’t always have the data they would need to be able to do that. This means we need to look closer at exactly what we’re getting when we are paying a higher price than other nations, which will help us distinguish if it’s just plain overpriced in the U.S. or if it’s a substantially better service.
  • If we look at specific health outcome domains, we find out that we overspend on some of them and actually underspend on others. This means that sometimes increasing spending is actually a good thing, like for vaccines or other preventive care. When we look at spending this way, we can start to evaluate whether reforms’ spending impacts are effective not based on whether they increase or decrease aggregate spending, but instead we can base our assessments on how well they do at reducing overspending on the low-value care and increasing spending on the high-value care.

I hope that helps you think a little differently about (i.e., be a little more critical of) aggregate health spending references like it did for me.

And, to close, here’s a thought-provoking statement they drop in the middle of their article: “The debate about whether health care is a right sidesteps the more difficult and important question of how much health care is a right that should be ensured through public programs.”

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