Conference on Drug Pricing Injects New Statistics Into Debate, Few New Insights (Part 1 of 2)

Posted on November 8, 2018 I Written By

Andy Oram is an editor at O'Reilly Media, a highly respected book publisher and technology information provider. An employee of the company since 1992, Andy currently specializes in open source, software engineering, and health IT, but his editorial output has ranged from a legal guide covering intellectual property to a graphic novel about teenage hackers. His articles have appeared often on EMR & EHR and other blogs in the health IT space. Andy also writes often for O'Reilly's Radar site ( and other publications on policy issues related to the Internet and on trends affecting technical innovation and its effects on society. Print publications where his work has appeared include The Economist, Communications of the ACM, Copyright World, the Journal of Information Technology & Politics, Vanguardia Dossier, and Internet Law and Business. Conferences where he has presented talks include O'Reilly's Open Source Convention, FISL (Brazil), FOSDEM, and DebConf.

The price of medications has become a leading social issue, distorting economies around the world and providing easy talking points to politicians of all parties (not that they know how to solve the problem). Last week I attended a conference on the topic at the Petrie-Flom Center for Health Law Policy, Biotechnology, and Bioethics at Harvard Law School.

On one level, the increasing role that drugs play in health care is salutary. Wouldn’t you rather swallow a pill than go in for surgery, with the attendant risks of anesthesia, postoperative pain opiates, and exposure to the increasingly scary bacteria that lurk in hospitals? Wouldn’t you rather put up with a few (usually) minor side effects of medication than the protracted recovery and discomfort of invasive operations? And even when priced in the tens of thousands, drugs are usually cheaper than the therapies they replace.

But drug costs are also deeply disrupting society. They are more and more dominant in the health care costs that take up nearly a fifth of the total output of the U.S., and the outsized demands that medications put on both private and public pocketbooks lead to drug pricing being a rare bipartisan issue.

Michael Caljouw from Blue Cross Blue Shield of Massachusetts pointed out at the conference that in Massachusetts, health care has skyrocketed from 20% to 45% of entire state budget in 20 years, and similar trends are found in other states. He says that an expensive new drug can “blow through” budgets set a year in advance. Bach cited statistics showing the prices for cancer drugs are rising exponentially, while the drugs get only slightly more effective over time.

Drug costs also eat into the limited savings of the elderly, dragging many into bankruptcy or poverty. As reported at the conference by Peter Bach of the Memorial Sloan Kettering Cancer Center, high costs drive away many patients who would benefit from the medications, thus leading to worse health care conditions down the line.

Similar problems can be seen internationally as well.

Petrie-Flom drew together a stellar roster of speakers and panelists for its one-day conference. However, when one shakes out all the statistics and recommendations, the experts turn out to lack answers. Their suggestions look like tinkering around the edges, just as the federal government did over the past year with new rules such as citing prices in drug ads and tweaking the Medicare Part D reimbursement formulas. Thus, I will not tediously cover all the discussions at the conference. I will instead raise some key issues while tapping into these discussions for fodder.

The loudest statement at the conference was the silence of the pharma industry. Representatives of everyone you could imagine with skin in this game appeared on the podium–insurers, clinicians, pharmacy benefit managers, the finance industry, regulators, patent activists, think tanks, and of course lawyers–with one glaring exception: drug manufacturers. I’m sure these companies were invited. But the only biopharmaceutical firm to show up was Gilead Sciences, and the talk given by Amy Flood, senior vice president of public affairs, was not about normal drug development but about the company’s commendable efforts to disseminate an HIV drug through sub-Sahara Afica. Given the intense political, social, and geographic contention over AIDS, her inspiring story had little in the way of models and lessons to offer mainstream drug development. I will cover it later in the section ‘What non-profits can teach us.”

Failure by the vast bulk of the pharma industry to take up the sterling opportunity represented by this conference to present their point of view, to me, comes across as an admission of guilt. Why can’t they face questions from an educated public?

The oncoming sucker punch

A couple days before the conference, Stat published a heart-warming human interest story about a six-year old being treated successfully for a debilitating rare condition, Batten disease. Rather than giving in to genetic fate, the parents pulled together funding and doctors from around the country, pushed the experimental treatment through an extremely fast-track FDA approval, and saw positive results within a year.

The tears tend to dry from one’s eyes–or to flow for different reasons–when one reads the means used to achieve this miracle. The child’s mother is a marketing professional who raised nearly three million dollars through crowdfunding. An article in the November/December issue of MIT Tech Review describes six other families who raised money for personalized genetic treatments. Another article in the same issue–which is devoted to big data and genetic research in medicine–discusses personalized vaccines against cancers, while a third lays out the expenses of in vitro genetic testing. This is not a course of action open to poor, marginalized, uneducated people. Nor is such money likely to turn up for every orphan disease suffered somewhere in the world.

I hope that this six-year-old recovers. And I hope the three-million-dollar research produces advances in gene science that redound to the benefit of other sufferers. But we must all consider how much society can spend on the way to an envisioned utopia where cures are available to all for previously untreatable conditions. As conference speakers pointed out, genetic treatments assume an “N of 1” where each patient gets a unique regimen. This doesn’t scale at all, and certainly doesn’t fit the hoary old pharmaceutical paradigm of giving a monopoly over a treatment for a decade or so in exchange for low-cost generic imitations for all eternity afterward.

Yet government needs to keep funding biotech research, and creating a positive regulatory environment when venture capitalists and other investors will fund the research. Joe Grogan of the Office of Management and Budget, keynoting at the conference, claimed that Germany used to have the pre-eminent biotech industry and let it shrivel up through poor policies. In the same way, biotech could leave the United States for some other country that proves welcoming, probably China.

Dueling models

Some panelists enthusiastically promoted what they openly and officially called Willingness To Pay (WTP) or “what the market will bear” pricing, but which I call “stick it to ’em” pricing. Others called for the price controls that are found in almost every developed country outside the U.S. Various schemes being promoted under the umbrella of “value-based pricing” were generally rejected, probably because they would allow the companies to inflate their prices. However, Jami Taylor of Stanton Park Capital suggested that modern data collection and analytics could support micropricing, matching payment to the outcome for each patient.

Interestingly, nobody believed that drug prices should reflect the costs of producing them. But everybody understood that drug producers must be adequately reimbursed. That is why people from many different perspectives came out in opposition to “charity” and “compassionate” discounts or rebates offered by many pharma companies, sometimes reaching 10% of their total expenditures. In a typical sequence of events, a company enjoying a breakthrough for a serious condition announces some enormous price in the tens or hundreds of thousands of dollars. After public outcry (or to ward off such outcry) they start awarding deep discounts or rebates.

Why are discounts and rebates poor policy? First, they bind the recipients to dependence on the company. This is why, according to Annette Gaudino of the Treatment Action Group, Médecins Sans Frontières rejected a donation from a manufacture of a vaccine.

More subtly, high list prices set a bar for future prices. They allow the companies to jack up prices for brand-name drugs by double digits each year (as shown in a chart by Surya Singh of CVS Health) and to introduce new drugs at inflated prices–only to take off the edge through more discounts and rebates.

Grogan would like Europeans to pay higher prices, following the common perception that US consumers are subsidizing the rest of the world. But other speakers contended that Europeans offer fair compensation that can keep drug companies sustainable. A recent administration proposal to force manufacturers to match foreign drug prices seems to take the same attitude.

Aaron Kesselheim of Harvard Medical School participated in a study that demonstrated the robustness of European price controls in a clever manner. He and colleagues simply examined which drugs were withdrawn from the German market by manufacturers who didn’t want to undergo their rigorous price-setting regime, run by the Institute for Quality and Efficiency in Health Care (IQWiG). The 20% of drugs that were withdrawn were those demonstrated to be ineffective or to be no better than lower-priced alternatives.

Gaudino also tried to slay the opponents of price controls with an onslaught of statistics. She cited a JAMA study finding that bringing a cancer drug to market costs well under one million dollars, less than half of the billions often cited. The non-profit Drugs for Neglected Diseases initiative (DNDi) can produce a new medicine for a total cost of just 110 to 170 million dollars. And the average profit for pharma companies has stayed level at around 20% for decades, far above most industries.

With all these endorsements for price controls, the shadow of possible negative effects on innovation hover over them. In the next part of this article, I’ll examine technical advances that might lower costs.