Brand Name Drugs Costs

In yesterday’s post I discussed that while 88 percent of drugs dispensed in the United States are for generics, which are generally priced competitively with a few exceptions, generic drugs only account for 28 percent of total drug spending. So that means that most of the drug spending in the United States is on branded drugs.

So how do pharmaceutical companies come up with the price of a new drug? According to Professor Darius Lakdawalla of the University of Southern California who studies drug pricing, pharmaceutical companies are,

“just trying to figure out what people are going to be willing to pay for the drug. I mean, it sounds really simple, but it really is, I think, in many cases that simple. They usually talk to insurance companies. They look at what insurance companies are paying for other similar drugs. They're probably talking to physicians to understand how likely they're going to be to use their drug versus any other alternatives on the marketplace.”

So pharmaceutical companies aren’t unlike other companies when they are trying to figure out what to price their product in the market. One major problem that gets in the way of this organic process is that often medical professionals are not being competently educated about the pros and cons of a new drug compared with others already available. For example,

“Doctors sometimes prescribe an expensive drug when a cheaper one is better. Cardiologists continue to prescribe TPA, a drug that dissolves blood clots, for $2,000 a dose, even though studies have shown that streptokinase, at $200 a dose, serves heart attack patients even better.”

And this problem is compounded by the fact that sometimes doctors may be incentivized to prescribe more expensive brand name drugs. A ProPublica analysis found:

“that doctors who receive payments from the medical industry do indeed prescribe drugs differently on average than their colleagues who don't. And the more money they receive, the more brand-name medications they tend to prescribe.”

This is akin to the coach of one basketball team gifting the referee of a basketball game a Ferrari. Maybe the referee will be honest and not influenced by the new car, but all the studies have shown that subconsciously the referee will be biased towards the team that gave him the car. There really is no such thing as a free lunch. However, I am happy that many academic centers have voluntarily banned lobbying from the pharmaceutical industry, including Stanford University in 2006. The Stanford policy:

“prohibits physicians from accepting industry gifts of any size, including drug samples, anywhere on the medical center campus or at off-site clinical facilities where they may practice. Among its other provisions, it bans pharmaceutical, bio-device and related industry representatives from patient care areas and medical school facilities except for in-service training on devices and equipment and by appointment only, as well as allowing industry support of educational activities only under well-regulated conditions.”

ProPublica has a searchable database called Dollars for Docs which lists the payments made to doctors and hospitals by pharmaceutical and medical device companies between August 2013 to December 2014. This can be a useful tool to get a rough estimate how much influence your physician has from industry.
Doctors and other medical professionals need to be informed about the cost of drugs, they need to be educated about the efficacy of expensive, new drugs and this information cannot come from a biased source, such as pharmaceutical sales representatives. I might add that patients can also do research about their own prescriptions. While I’m not suggesting that patients disregard professional medical advice, asking their physician if a more affordable alternative exists can’t hurt.
Often the response to these wildly expensive brand name drugs is to do what many European Union nations do and negotiate, as a country, on the prices of drugs. This is what Norway does:

“The state-run health systems in Norway and many other developed countries drive hard bargains with drug companies: setting price caps, demanding proof of new drugs’ value in comparison to existing ones and sometimes refusing to cover medicines they doubt are worth the cost.”

England’s National Health System also doesn’t cover drugs it deems low-value:

“England’s National Institute for Health and Care Excellence, or NICE, conducts extensive analyses and recommends that the taxpayer-funded health system not cover drugs providing low value.”

Other European countries don’t negotiate prices with drug companies but instead ration the dispensing of prescription drugs.

“In some European countries, including the Netherlands, Denmark and Germany, drugs cost about as much as in the United States. Guido Adriaenssens, who surveys drug prices for the Belgian Consumers Association, said that none of these countries negotiated their prices. But the Netherlands and Denmark control the amounts of drugs that doctors can prescribe, limiting overall costs.”

European countries understand that in order to keep drug prices down on expensive drugs, not all drugs will be covered and not all people who need the drug will be able to get the drug. 

However, I don’t think rationing and price caps is the right solution primarily because right now the United States pays for most of the cost of bringing a drug to market, including research and development, FDA approval, etc. while the rest of the world benefits from the innovations that come out of that process.

We want to bring down prices to people in the United States while not stifling innovation. The best way to do that is to allow the importation of drugs, which is currently banned by the FDA. This will shift the burden to other countries in the world to pay for the cost of developing a drug because right now drug companies are willing to take a hit on margins in other countries because they know they will make up for it with American consumers. Americans should be able to import drugs from Canada, Europe or wherever they see fit. We could also make the FDA approval process for new drugs less cumbersome. That will be discussed in a future post.

Are Generic Drug Prices Really Rising?

There has been a lot of news attention recently about the cost, not only of brand name, recently released revolutionary drugs like Gilead Pharmaceutical’s Harvoni Hepatitis C pill but of overall generic prices. Diane Rehm did a show on the topic called The Debate Over Drug Pricing after Turing Pharmaceuticals increased the price of Daraprim, a generic antiparasitic, from $13.50 to $750 a pill.

However the data actually shows that overall, Americans pay less for generic drugs than in Canada, Germany, Australia, France, Netherlands, Switzerland, and the U.K. A review by the U.S. Department of Health & Human Services concludes,

“In fact, about two-thirds of generic products appear to have experienced price declines in 2014. Although the generic drug market as a whole is quite competitive, some segments of the market have experienced large price increases. These spikes are on one hand troubling in that they disadvantage particular patient groups but also sufficiently limited so they exert no sizable influence on overall drug spending. Some explanations for these occurrences include: small markets with limited entry; the impact of mergers, acquisitions, and market exits; the ability to obtain new market exclusivities; and distribution activities. These problems apply to relatively small segments of the market and, while they lead to increased costs in certain therapeutic areas, they have little influence on overall spending increases.”

So basically, in areas of the generic drug market where there is competition, prices are held low- often much lower than in countries which negotiate drug prices. However, in certain situations, like market areas with a small population of patients, there is no (or not enough) competition to keep specific drug prices in check. That’s what happened with Daraprim, which treats a parasite that infects mainly those with cancer or infected with HIV/AIDS. 

However, if we made it easier for drug manufacturers to enter generic drug markets where there are only one or two competitors this would bring down costs fast in these market segments where generics are still prices too high. Currently the FDA approval process for generic drugs is timely and costly and it’s doesn’t make financial sense for drug manufacturers to go through it to enter a limited market segment. Steps could be taken to shorten the generic drug approval process. Another solution could be allowing the importation of drugs from other countries. So patients could determine whether it’s cheaper to price up the drug at their local pharmacy or to purchase the price from a Canadian pharmacy, for example.

The review by the U.S. Department of Health & Human Services (USDHHS) states that “Use of generic drug leads to substantial cost savings for patients and the health care system, reflected in the fact that 88 percent of dispensed prescriptions are for generic drugs, yet they account for only 28 percent of total drug spending.” As you can deduce from this statement, Americans pay a lot for brand name medications.

There are many reasons for this fact. Once granted a patent, pharmaceutical companies are granted exclusivity for their drug. That means that for a period of time (about 7 years), the pharmaceutical company is the only company that can make or sell that drug. This means that the drug company can set the price. The reason why we grant exclusivity is to encourage pharmaceuticals (and all other inventors) to keep investing time and money into research and development. The reward is exclusivity. Stay tuned for my post on brand name drug costs. You can find it here.

The Placebo Effect

I’ve always been fascinated with the placebo effect. For those that may not be familiar, this effect occurs when a fake treatment or inactive substance is given to a patient and there is an improvement in the patient’s condition. In fact, the most rigorous clinical trials are called “double-blind, placebo controlled.” These studies have some people getting an inactive treatment, or placebo, and others getting an active treatment where neither the patients nor the practitioners know who is getting which treatment. After the data is collected it can be determined how good the active treatment is compared with the inactive treatment. It is interesting that while really good pharmaceutical drugs will be successful in a much greater proportion of patients than the placebo, in virtually every clinical trial there will be patients who notably improve after receiving just a sugar pill, a salt water injection or even a fake surgery.

I remember as a kid that simply driving to the doctor’s office made me feel better. While logically being in a car when sick should have only made me feel worse, the knowledge that I was going to see a doctor made me feel better- even before I stepped into the doctor’s office.

The placebo effect is the topic of last week’s episode, Real Doctors, Fake Medicine of the Only Human podcast. Host Mary Harris interviews Dr. David Kallmes who studied the effectiveness of vertebroplasty, a surgery to repair spinal fractures. His findings, published in the New England Journal of Medicine, found that about 40 percent of both those patients that received the real surgery and those that received a sham surgery experienced immediate pain relief from the procedure.

So while it kind of makes sense that people may experience relief from a sham surgery simply because patients trust their surgeons and whole heartedly believe them, there is also evidence that patients experience an improvement in their symptoms even when a physician tells them that what they are being given is a fake treatment. Mary Harris interviewed Ted Kaptchuk, director of the Center for Placebo Studies at Harvard Medical School, to discuss this phenomenon.

Ted Kaptchuk’s research shows that patients experience relief from their symptoms even when they are told that the treatment is fake. In one study, 27 percent of patients had adequate relief with fake treatment that they were informed by physicians was fake. That’s almost a third of patients!

The research by the Center for Placebo Studies suggests there is a neurobiological effect, a physical effect within the body, which causes patients to experience relief from their symptoms. As Ted Kaptchuk described in more depth in a Science Friday podcast, he hypothesizes simply going to a doctor’s office and having a positive interaction with the physician or the act of taking a pill and then chasing it with water may activate some sort of subconscious response from our bodies that alleviates symptoms. He believes the placebo effect resides in endorphins, the body’s own painkillers and possibly has a genetic connection.

Ted Kaptchuk closes with “what I think I’m doing is quantifying and making the art of medicine a science.” No matter what your position is on the placebo effect, everyone can agree that a supportive, trusting relationship with a medical provider is going to have a positive effect on health outcomes.