The $25 Coffee Mug 
Posted by Carlos on Sep 30, 2016

Your coffee (or tea) could get expensive soon...

Our recent trip to Stockholm and the Nordic Life Science Days conference was quite enlightening, especially as we publicly discuss drug prices (yet again). 

One presentation at NLSD by SwedenBio enlightened us on how a different system and society views drug pricing. From the Swedish socialist perspective, one of their aims (aside from job creation) is to provide their citizens with the latest medical innovations, while balancing that against the need to maintain costs as low as possible. 

So beyond incessant negotiations on drug pricing, what else can government do?

The perspective in Sweden that reducing drug costs will save money. Hence, as a technologically advanced country, it makes sense to invest where and how it can to reduce development costs, thereby reducing their expenses in the future. 

Sweden is taking the approach of digitization of all medical records, and the creation of extensively detailed biobanks. More importantly, these data are now being actively used to help pharma companies recruit clinical trial subjects, accelerating recruitment in an attempt to reduce overall trial cost. 

So it is an interesting situation, in the sense that the payer/government is making investments in tools and technologies which will reduce drug development costs. Assuming those savings are passed on after product approval, the situation could be a win-win for both parties. This is a very long-term, forward-looking approach.

But here in the USA, the land of capitalistic, open markets, we allow companies to charge whatever they want for their products, subject to payer negotiation, of course. Ultimately, the market decides what is a “fair” price or not through demand/supply and price elasticity. 

Drug pricing is always viewed by the public as a negative. Even before the recent EpiPen pricing fiasco, pharmaceutical companies are frequently accused of gouging sick people by overcharging for medications which are not safe, marginally effective, or both. 

We rarely hear about the lives saved or the expensive procedures avoided through the use of medications. But, as we have seen during this election cycle, the press rarely has any interest in reporting anything positive, especially if that positive news comes from large, multinational companies. 

Both innovators and insurers have an obvious antagonistic view on drug prices. Indeed, the tensions between drug innovators and insurers are very real, and very public. Current presidential candidates are weighing in on the issue, targeting pharmaceutical companies by proposing measures to “stop excessive profiteering.” 

Yet, as a society need medicines, much in the same way that we need clear air, clean water, and reasonably fresh food.

But, does government have a role or a responsiblity to ensure that its citizens have access to EpiPen at a reasonable price?  And, how would this differ if the product in question was not a life-saving product? And how do we define “life-saving” anyway?

The Bernie Sanders presidential campaign this year reminded us that Scandinavian-style “safety nets” can be quite appealing. Yes, their taxes are high. And, you will pay relatively high prices for food, beverages, and souvenirs, such as $25 coffee mugs at Starbucks in the Stockholm Airport.

But the taxes collected are used to provide its citizens with education, health care, and many other social benefits which we pay for ourselves. Is this such a bad idea? Or, would we still complain if the EpiPen was available for $69 instead of its new price? 

Drug Pricing Trends

A recent study found that generic drugs are an increasingly important part of Medicaid prescriptions, but a decreasing expense. In other words, Medicaid is paying for more prescriptions filled by generic products, but their overall drug expense is declining because of flat or falling generic drug prices. 

Intuitively, this makes sense. It suggests that the market for generic prescription drugs is working efficiently, with buyers gravitating towards the lowest-cost option without sacrificing product quality, safety, or efficacy. 

However, the study also found that there are pockets of inefficiency in this market, especially for products which have low demand. For example, tetracycline 500 mg capsule prices rose from $0.048 to $8.59 in one year, a 17,000% increase. Prices for several other generic drugs rose 500% or more during this same time period, such as digoxin, clomipramine, and fluconazole. 

At a macro level, the impact of these enormous price increases is negligible to Medicaid. Their prescription volumes are relatively low, and the huge cost increases are “hidden” in the broader context. 

Now from the consumer’s perspective, that’s a different matter. Assuming that is the retail out-of-pocket price, a two-week course of acne treatment jumped from <$2 to nearly $250.  An informal check with our local pharmacy found that a 28-count prescription for tetracycline 500 mg capsules would cost an uninsured individual $376. 

A similar study conducted by the AARP found that from 2010 to 2013, the average annual retail price for a generic product fell from $551 to $283. During the same time period, branded prescription prices rose from $2,068 to $2,960.

Should Payers Invest?

The concept of having payers (private and government) actively invest in technologies which reduce drug development and manufacturing costs is interesting. Governments can do this by re-prioritizing the current NIH/SBIR/STTR grant programs to emphasize drug development cost savings. This will come at the expense of research in other fields. But tough decisions always have to be made in the face of socioeconomic challenges. 

Payers have the ability to make investments as well. For instance, venture capital-like funds can be established with a focus on companies and technologies which reduce drug costs. They can also invest in digitization and biobanking, offering these data to drug developers in exchange for lower prices after approval. 

Ultimately, investing in innovation to solve problems is far more impactful than voting for a candidate or policy which forces companies or individuals to behave in a certain manner. If you don’t think innovation can change behavior, put your mobile phone away for a few hours…

Where and how should governments and payers invest? Here are a few ideas:

Personalized Medicine –  A terrific story in the October issue of Scientific American describes how several hospitals are using pharmacogenomics to improve drug/patient selection, thereby improving efficacy, reducing side effects, and ultimately accelerating and improving patient care. Since these studies involve a blend of branded and generic drugs, government has an opportunity to invest in the development of additional databases, physician and pharmacist training, software, and other tools to expand its usage. Insurers have historically been against these approaches, but this surely must change. 

Biosimilars – This nonsense has dragged on for far too long in the US, and we will not comment further on it except to say that we need to accelerate biosimilar development and commercialization. 

Biobanking – Providing access to human tissue samples from patients can be a great way to screen compounds for efficacy and safety before entering expensive clinical trials. The ethical and privacy issues should not be dismissed, but nor should they hinder progress. 

Venture Funds – Insurance companies, especially property and casualty insurers, have rapidly increased their investments in venture-sized companies, especially in the technology sector. Health insurers are no different, as Aetna, Blue Cross Blue Shield, Kaiser Permanente, and others already have venture arms. We do not know if their objectives are purely ROIC, or if they have strategic goals as well, such as investing in technologies which reduce prescription drug costs. 

What Does The Future Hold? 

One thing that the current US election cycle has tought us is that politicians have no courage when it comes to tackling challenges like this without going after “greedy corporations.” It sounds better to the electorate to position yourself as a politician “fighting for you,” instead of rationally tackling these issues. And why not? The primary objective of every politician is to get elected. And if soundbites enable this, then so be it. 

In the US, private insurers are our best hope for reducing drug costs. They have the capital and the financial influence to use innovation (not haggling) to reduce drug development costs. Consortia of insurers could really cause pharma CEOs to break into a sweat. 

But let us not blame “Big Pharma” either. They have a responsibility to their employees and shareholders to deliver not only innovative, life-saving products, but also returns for their investors. 

So the key will be for our industry and insurers to continue talking, rationally, cordially, and effectively, before we elect national officials who have no problem with having the masses pay $25 for an empty coffee or tea cup.

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