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.